CM-LIP 1st Ed V1.0 (Full Combined)

CM-LIP: Life Insurance and
Investment-linked Policies
1st Edition • Version 1.0
Nurturing Asia’s Best

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Table Of Contents
PART I
Chapter 1 Risk And Life Insurance 1-1
1. Risk And Insurance

A. Speculative Risks And Pure Risks
2. Requirements Of Insurable Risks
A. The Loss Must Be Significant In Financial Terms
B. The Loss Must Occur By Chance
C. The Loss Must Be Definite
D. The Loss Rate Must Be Measurable
E. The Loss Must Not Be Catastrophic To The Insurer
F. The Loss Must Be Based On Large Number of Insureds
3. Dealing With Risk
A. Avoiding The Risk
B. Controlling The Risk
C. Retaining The Risk
D. Transferring The Risk
4. Types Of Personal Risks That Can Be Insured
A. Risk Of Premature Death
B. Risk Of Outliving Resources Or Longevity Risk
C. Risk Of Poor Health And Disablement
5. Some Basic Life Insurance Terms
6. Insurance and Gambling Compared
7. Hazards
A. Physical Hazard
B. Moral Hazard
8. Concept Of Anti-selection
9. Various Life And Health Insurance Products
A. Life Insurance Products
B. Annuities And Investment Products
Contents
C. Health Insurance Products
10. Life Insurance As A Financial Protection Tool
A. Financial Protection Against Premature Death
B. Financial Protection Against Outliving Resources
C. Financial Protection Against Ill Health And Disablement
D. Financial Protection For Businesses
11. The Importance Of Life Insurance
A. Assist In Making Savings Possible
B. Provides A Safe Investment
C. Encourages Thrift
D. Minimises Worries And Provides Peace Of Mind
12. Pooling Of Risks And The Law Of Large Numbers
13. Principle Of Utmost Good Faith (Uberrima Fides)
A. Insured’s Duty Of Utmost Good Faith
B. Insurer’s Duty Of Disclosure
14. Insurable Interest Requirement
A. Why Is Insurable Interest Necessary?
B. When Must Insurable Interest Exist?
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CM-LIP: Life Insurance And Investment-Linked Policies
C. Insurable Interest Required For Life Insurance Under Insurance Act

15. Principle Of Indemnity And Life Insurance
16. Structure Of The Singapore Insurance Market
A. Buyers
B. Sellers
C. Intermediaries
D. Introducer Of Life Insurance Advisory Services
E. Web Aggregators
17. Other Relevant Organisations
A. Rating Agencies
B. Market Associations
C. Professional Bodies
D. Financial Industry Disputes Resolution Centre (FIDReC)
18. MoneySENSE Programme
19. Singapore Deposit Insurance Corporation (SDIC)
Chapter 2 Setting Life Insurance Premium 2-1
1. Pricing Considerations
A. Mortality And Morbidity Rates
B. Investment Income
C. Expenses
D. Gender
E. Smoking Status
F. Amount Of Sum Assured
G. Frequency Of Premium Payments
H. Suitability Of Frequency And Mode Of Premium Payments
Chapter 3 Classification Of Life Insurance Products 3-1

Contents
1. Ways Of Classifying Life Insurance Products

2. Classification By Statutory Insurance Fund
A. Participating Policies
B. Non-Participating Policies
C. Investment-linked Life Insurance Policies
3. Classification By Product Type
4. Classification By Premium Type
5. Classification By Ownership
A. Single Life Policy
B. Joint Life Policy
C. Third-Party Policy
D. Group Policy
6. Characteristics Of Group Life Insurance
A. Contractual & Voluntary Plans
B. Advantages Of Contractual (Non-Contributory) Plan
C. Advantages Of Voluntary (Contributory) Plan
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Table Of Contents
Chapter 4 Traditional Life Insurance Products 4-1
1. Common Types Of Life Insurance Policies

2. Term Insurance
A. Nature Of Term Insurance
B. Features Of Term Insurance
C. Types Of Term Insurance
D. Renewable And Convertible Options
E. Suitability Of Term Insurance
3. Whole Life Insurance
A. Nature Of Whole Life Insurance
B. Features Of Whole Life Insurance
C. Distinguishing Whole Life Insurance From Term Insurance
D. Non-Forfeiture Options
E. Types Of Whole Life Insurance
F. Suitability Of Whole Life Insurance
4. Endowment Insurance
A. Nature Of Endowment Insurance
B. Features Of Endowment Insurance
C. Types Of Endowment Insurance
D. Suitability Of Endowment Insurance
5. MAS Disclosure Requirements Relating To Life Insurance Policies
6. Guidelines On The Online Distribution Of Life Policies With No Advice
[Guideline No: ID01/17]
Appendices
Chapter 5 Riders (Or Supplementary Benefits) 5-1
1. Riders (Or Supplementary Benefits)

A. Waiver Of Premium Rider
Contents
B. Total And Permanent Disability (TPD) Rider
C. Critical Illness Rider
D. Term Rider
E. Payor Benefit Rider
F. Guaranteed Insurability Option Rider
G. Accidental Death Benefit Rider
H. Accidental Death And Dismemberment / Disablement Rider
I. Hospital Cash (Income) Benefit Rider
J. Conclusion
Appendix 5A
Appendix 5B
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Chapter 6 Participating Life Insurance Policies 6-1
1. What Are Participating Policies?

A. Common Types Of Participating Policies
B. Objective Of Participating Policies And Its Implications
2. Guaranteed And Non-Guaranteed Benefits (Bonuses)
A. Types Of Non-Guaranteed Benefits (Bonuses)
B. Death, Surrender And Paid-Up Values
3. Determination Of Bonuses
A. Risk Sharing Mechanism
B. Bonus Allocation Process
C. Reserving For Future Non-Guaranteed Bonuses
4. Disclosure Requirements Relating To Participating Life Insurance Policies
A. Point-Of-Sale Disclosure – Product Summary
B. Point-Of-Sale Disclosure – Policy Illustration
C. Post-Sales Disclosure – Annual Bonus Update
5. “Your Guide To Participating Policies”
6. Participating Fund Governance
A. Internal Governance Policy On Management Of Participating Fund
B. Information To Be Contained In The Internal Governance Policy
Appendices
Chapter 7 Investment-linked Life Insurance Policies (ILPs): Types, 7-1

Features, Benefits And Risks
1. Introduction
2. What Is An ILP?
3. What Is An Investment-linked Sub-Fund?
4. Purpose Of ILPs
A. Investment
Contents
B. Wealth Accumulation
C. Protection
5. Types Of ILPs
A. By Frequency Of Premium Payment
B. By Product Features
6. Features Of ILPs
A. Protection
B. Top-Ups
C. Sub-Fund Switch
D. Partial / Full Surrender
E. Premium Holiday
F. Riders
7. Key Factors To Consider Before Purchasing An ILP
A. Insurance Protection Needs
B. Risk Profile
C. Personal Investment Objective
D. Time Horizon
8. Are ILPs Suitable For Older People?
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Table Of Contents
9. Investing In ILPs With CPF Savings

10. Differences Between An ILP And A Traditional Life Insurance Policy
A. Bonuses
B. Investment Returns
C. Premium Breakdown
D. Investment Mandate
11. Pricing Of ILP Units
A. Offer And Bid Prices
B. Single Pricing
12. How Much Of The Premium Is Used To Purchase Units?
A. Front-End Loading
B. Back-End Loading
13. How Are Unit Prices Computed?
14. Insurance Protection Features Of ILPs
A. What Types Of Insurance Protection Do ILPs Provide?
B. Effect Of Age On Cost Of Insurance
C. Effect Of Age On Amount Of Premiums To Be Paid
D. How Does The Level Of Protection Affect Cash Values?
15. Investment Returns Of ILPs
A. Are Investment Returns Guaranteed?
B. What Types Of Sub-Funds Do ILPs Offer?
16. Fees And Charges For ILPs
A. Initial Sales Charge Or Bid-Offer Spread
B. Sub-Fund Management Fee
C. Benefit / Insurance Charges
D. Policy Fees
E. Administrative Charges
F. Surrender Charges
G. Premium Holiday Charges
H. Sub-Fund Switching Charges
17. Benefits Of Investing In ILPs
Contents
A. Pooling Or Diversification
B. Flexibility
C. Dollar Cost Averaging
D. Professional Management
E. Affordability
F. Ease Of Administration
G. Choice Of Sub-Funds
H. Potential Returns
I. Guaranteed Insurability
18. Risks Of Investing In ILPs
A. Investment Returns Are Not Guaranteed
B. Insurance Coverage Charges Are Not Guaranteed
C. Units May Be Insufficient To Pay The Insurance Coverage Charges
19. Comparison With Unit Trusts (UTs)
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Chapter 8 Investment-linked Sub-Funds 8-1
1. Purpose And Benefits Of Investment-linked Sub-Funds

2. Structures Of Investment-linked Sub-Funds
A. Accumulation Structures
B. Distribution Structures
3. Definitions Of Investment-linked Sub-Funds
A. Mother Fund
B. Feeder Fund
C. Mirror Fund
D. Portfolios
4. Types Of Investment-linked Sub-Funds
A. Equity Funds
B. Fixed Income Or Bond Funds
C. Cash Funds
D. Managed Funds
E. Property Funds
F. Geographically Specialised Unit Funds
G. Specialised Unit Funds
H. Capital Guaranteed Funds
I. Managed Portfolios
5. Investment Strategy Or Policy
A. Managed Fund
B. Equity Fund
C. Bond Fund
6. Switching Facility
7. Monitoring
Chapter 9 Investment-linked Life Insurance Policies: Computational 9-1

Aspects
Contents
1. Introduction
2. Interpreting The Timeline – Growth Rate
3. Death Benefit
A. Comparison Between DB3 And DB4
4. Allocation Rates – How Premiums Are Allocated To Purchase Units
5. Mortality Charges
A. DB3
B. DB4
6. Computation Of Units To Be Allocated
A. Application Of Premium
B. Top-ups
7. Withdrawal Benefit
8. Surrender Benefit
9. Return On Gross Premium
Appendix 9A
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Table Of Contents
Chapter 10 Annuities And Other Life Insurance Products 10-1
1. What is CPF LIFE?

A. CPF Life Plans
2. How Do Annuities Work?
3. Types Of Annuities
A. Immediate Annuities
B. Deferred Annuities
4. Variations Of Annuity Policies
A. Payout Options
B. Bonus Entitlement
C. Number Of Lives Covered
D. Increasing Rate Annuity
5. Benefits And Limitations Of Annuities
6. Other Life Insurance Products
A. Guaranteed Income
B. Universal Life
Chapter 11 Application And Underwriting 11-1
1. Life Insurance Proposal Form

A. Purposes And Importance Of The Life Insurance Proposal Form
B. Contents Of A Proposal Form
C. Amendment To Proposal Form
2. Basic Principles Of Underwriting
A. Purpose Of Underwriting
B. Factors That Affect The Risk
3. Medical And Non-Medical Proposal Forms
4. Other Sources Of Underwriting Information
A. Attending Physician’s Report
Contents
B. Specialist’s Medical Tests
C. Adviser’s Report
D. Questionnaires
5. Underwriting Decision
6. Commencement Of Risk
7. General Underwriting Principles For Group Life Insurance
A. Group’s Reason For Existence
B. Group Stability
C. Group Size
D. Nature Of Group’s Business
E. Employee Classes
F. Level Of Participation
G. Age And Gender Within The Group
H. Expected Persistency
I. Previous Claims Experience
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Chapter 12 Policy Services 12-1
1. Introduction
2. Premium Payments
A. Frequency Of Premium Payment
B. Methods Of Premium Payment
3. Premium Receipt
A. Conditional Premium Deposit Receipt
B. Official Receipt
4. Premium Notice
5. How Can Advisers Help Their Clients?
6. Why Are Policy Alterations Necessary?
7. Types Of Alteration Of Policy
A. Change Of Address
B. Change Of Name
C. Change In Frequency Of Premium Payment
D. Reduction In Sum Assured
E. Increase In Sum Assured
F. Change In Type Of Policy
G. Change In Term Of Insurance
H. Removal Of Extra Premiums
I. Extra Benefits (Riders)
J. Change Of Insurance Nominees Or Beneficiaries
8. Duplicate Policy
A. Requirements For The Issuance Of A Duplicate Policy
9. Assignment Of Policy
A. What Is An Assignment?
B. Types Of Assignments
C. Statutory Provisions On Assignment Of Policy
D. Execute An Assignment Of Policy To A Targeted Beneficiary
10. Policy Loans
Contents
A. Requirements For Application Of Policy Loans

B. Implications On Policy Owners
11. Withdrawing Cash Bonus
A. Requirements For Application Of Withdrawal Of Cash Bonus
12. Lapsing Of Policies
A. Loss On Lapsation
13. Reinstatement Of Lapsed Policies
A. Health Evidence
B. Effects Of Reinstatement Of Policy
14. Surrendering Of Policy
15. Alternatives To Surrendering Of Policy
A. Documents Required For Surrender Of Policy
16. Effects of Bankruptcy on Life Insurance
A. Statutory Position of Bankruptcy
B. Effects of Bankruptcy on Life Insurance Policies
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Table Of Contents
Chapter 13 Life Insurance Claims 13-1
1. Claims Settlement
A. Proper Claimants
B. Payment Of Claims Without Probate
2. Types Of Claims
A. Death Claims
B. Total And Permanent Disability Claims
C. Maturity Claims
D. Critical Illness Claims
E. Hospital Cash (Income) Claims
F. Accidental Death Benefit Claims
G. Accidental Death And Dismemberment Benefit Claims
H. Annuity Claims
3. Role Of Advisers In Claims Settlement
Chapter 14 The Insurance Contract 14-1
1. Elements Of A Valid Insurance Contract

A. Offer And Acceptance
B. Consideration
C. Capacity To Contract
D. Insurable Interest
E. Parties Of The Same Mind (Consensus Ad Idem)
2. Duty Of Disclosure
A. Prudent Insurer
B. Inducement
3. Warranties And Representations
4. Material Misrepresentation
A. Ambiguous Questions
Contents
B. Proposal Form Versus Policy
C. Unanswered Or Incomplete Answers
5. Doctrines Of Waiver And Estoppel
A. Waiver
B. Estoppel
6. Breach Of Contract
A. Breach By An Insured
B. Options To The Insurer On The Discovery Of A Breach Of Utmost
Good Faith
C. Insurer's Duty Of Utmost Good Faith
7. Vitiating Factors
A. Misrepresentation
B. Duress
C. Undue Influence
D. Illegal Contract
E. Mistake
F. Non Est Factum
8. Contract Provisions In Life Insurance Policies
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A. The Policy Owner’s Rights

B. Heading And Operative Clauses
C. Policy Schedule
D. General Provisions
E. Endorsements
Chapter 15 Law Of Agency 15-1
1. Agency, Principals And Agents

2. Creation Of An Agency
3. Duties Of An Agent
A. Common Law Duties Of An Agent
B. Fiduciary Duties Of An Agent
C. Intermediaries
4. Rights Of An Agent
A. Remuneration
B. Indemnity
5. Agent’s Authority
A. Actual Or Express Authority
B. Implied Authority
C. Usual Authority
D. Apparent Or Ostensible Authority
6. Agent Acts Outside The Authority
7. Ratification Of A Contract
A. Conditions For Ratification
B. Effects Of Ratification
8. Termination Of Agency
Chapter 16 Income Tax And Life Insurance 16-1

Contents
1. Introduction
2. Taxable Income
A. Exemption From Income Tax
3. Statutory Income, Assessable Income And Chargeable Income
A. Statutory Income
B. Assessable Income
C. Chargeable Income
4. Personal Reliefs
A. Earned Income Relief
B. NSman (Self / Wife / Parent) Relief
C. Spouse / Handicapped Spouse Relief
D. Qualifying / Handicapped Child Relief
E. Working Mother’s Child Relief
F. Handicapped Brother / Sister Relief
G. Parent / Handicapped Parent Relief
H. Grandparent Caregiver Relief
I. Life Insurance Relief
J. Central Provident Fund (CPF)/Provident Fund Relief for Employees
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Table Of Contents
K. CPF Relief For Self-Employed Persons

L. Tax Relief for Cash Top-ups To Retirement And Healthcare Savings
M. Course Fees Relief
N. Foreign Domestic Worker Levy Relief
O. Supplementary Retirement Scheme (SRS) Relief
P. Matched Retirement Savings Scheme (MRSS)
Q. Additional MediSave Contribution Scheme (AMCS) For Employees
5. Rebates
A. Parenthood Tax Rebate
6. Who Will Benefit From Income Tax Relief By Taking Up An Insurance
Policy?
7. Tax Benefit For SRS Participants
A. Tax Concession On Withdrawal
B. Tax Benefits For Annuities Purchased Through SRS
Chapter 17 Insurance Nomination, Wills And Trusts 17-1
1. Framework For The Nomination Of Beneficiaries (NOB)

A. Background – Before 1 September 2009
B. After 1 September 2009
C. The Current Statutory Positions On Life Insurance Nomination
D. Leaving The Life Insurance Policy Un-Nominated
2. Aims Of Nomination Framework
3. Scope Of Nomination Framework
A. Cash-Funded Policies
4. Who Can Nominate?
5. Choices Available To Policy Owners
6. Types Of Nominations Allowed Under Various Types Of Policies
A. Insurance Policies Under CPF Investment Scheme
B. Others
Contents
C. When Considering What Type Of Nomination To Make
7. Application To Other Types Of Policies
A. Group Insurance
B. Existing Policies
C. Income Insurance Limited Policies
8. Trust Nomination
A. Making A Trust Nomination
B. Payment Of Proceeds
C. When A Nominee Dies Before The Policy Owner
D. Revoking A Trust Nomination
9. Revocable Nomination
A. Making A Revocable Nomination
D. Changing A Revocable Nomination
E. Execute a Revocable Nomination
10. Differences Between Trust Nomination And Revocable Nomination
11. Nomination Forms
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A. Different Nomination Forms

B. List Of Nomination Forms
C. Checklist For Filling In A Nomination Form
D. Differences Between Trust Nomination Form And Revocable
Nomination Form
12. Priority Of Nominations
A. Conflicts Between Wills And Nominations
13. Wills
A. Purpose Of A Will
B. Who Can Make A Will?
C. Grant Of Probate
D. Who Is An Executor?
14. Trusts
A. What Is A Trust?
B. Types Of Trusts
C. Benefits Of Trusts
D. Trust Versus Will
15. Effects of Death on Life Insurance and Various Distribution Methods
A. Intestate Succession Act 1967
Table 1: Future Value Interest Factors For One Dollar
PART II
Chapter 18 Introduction To Structured Product 18-1
1. What Is A Structured Product?

A. How Does A Structured Product Work?
B. What Is A Wrapper?
C. Why Invest In Structured Products?
Contents
D. Challenges Facing Structured Products

2. Components Of A Structured Product
A. Principal Risk Versus Return Risk
B. Trade-off Between Risk And Return
3. Types Of Structured Products
A. Products Designed To Protect Capital
B. Yield Enhancement Products
C. Participation Products
4. Similarities And Differences Of Structured Products
A. Similarities In Features
B. Differences In Features
C. Differences In Rights
D. Similarities And Differences In Governance
5. Suitability
A. Know Your Clients
B. Know Your Products
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Table Of Contents
Chapter 19 Risk Considerations Of Structured Products 19-1
1. Market Risk
A. General Market Risk
B. Issuer-specific Risk
2. Issuer Or Swap Counterparty Credit Risk
3. Liquidity Risk
4. Foreign Exchange (FX) Risk
5. Structural Risk
A. Safety Of Principal
B. Leverage
C. Investment In Derivatives
D. Investment Concentration
E. Collateral
6. Other Risks
A. Legal And Regulatory
B. Correlation
C. Modelling
D. Early Redemption
E. Examples Of Redemption Amount
Chapter 20 Understanding Derivatives 20-1
1. What Are Derivatives?

A. Practical Example Of Derivative
2. Futures And Forwards
A. Pricing Of Forward Contracts
B. Practical Examples Of Forward Contracts
C. Summary Of Forward Contracts
D. History Of Futures Contracts
E. Pricing Of Futures Contracts
Contents
F. Margin (Futures Contracts)
G. Market Participants
H. Futures Trading Strategies
3. Options And Warrants
A. Risk Profile Of Option / Warrant
B. Plain Vanilla Versus Exotic Option
C. Basic Option Trading Strategies
D. Bullish Option Strategies
E. Bearish Option Strategies
F. Neutral Option Strategies
G. Summary Of Options
4. Swaps
A. Interest Rate Swaps
B. Currency Swaps
C. Credit Default Swap (CDS)
D. Equity Swaps
E. Commodity Swaps
5. Contract For Differences (CFD)
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Chapter 21 Introduction To Structured ILPs 21-1
1. What Is A Structured ILP?

A. Payout Under A Structured ILP
B. Common Terminology
2. Advantages And Disadvantages Of Structured ILPs
A. Advantages Of Investing In Structured ILPs
B. Disadvantages Of Investing In Structured ILPs
C. Risk Considerations For Structured ILPs
D. Examples Of Structured ILPs
3. Who Would Invest In Structured ILPs?
4. When Are Structured ILPs Unsuitable?
5. Governance
A. Legal Structure Of ILP
B. Investment Guidelines For Retail Funds
6. Typical Types Of Documentation And Risks
A. Point-of-sale Disclosure: Product Summary, Benefit Illustration
And Product Highlights Sheet
B. Disclosure At Policy Inception: Policy Document
C. After Sales Disclosure: Policy Statements And Fund Reports
D. Risk Considerations
7. After Sales
A. Valuation
B. Pricing Information
Appendix
Chapter 22 Portfolio Of Investments With An Insurance Element 22-1
1. What Is A Portfolio Of Investments With An Insurance Element?

A. An Example Of Portfolio Bond Marketed In The United Kingdom
Contents
(UK)
2. Advantages And Disadvantages Of Portfolio Of Investments With An
Insurance Element
3. Who Would Invest In Portfolio Of Investments With An Insurance
Element?
4. When Are Portfolio Of Investments With An Insurance Element
Unsuitable?
5. Governance And Typical Documentation
Chapter 23 Case Studies 23-1
1. Case Study 1 – Annual Payout Plan

A. Product Features
B. Selling Points
C. Risk Analysis
D. Performance Under Different Market Conditions
2. Case Study 2 – Lifestyle Plan
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Table Of Contents
A. Product Features
B. Choice Fund - Fund Details
C. Selling Points
D. Risk Analysis (Based On The Choice Fund)
Contents
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Part I Chapter 1. Risk And Life Insurance
PART I CHAPTER 1
RISK AND LIFE INSURANCE
CHAPTER OUTLINE
1. Risk And Insurance

2. Requirements Of Insurable Risks
3. Dealing With Risk
4. Types Of Personal Risks That Can Be Insured
5. Some Basic Life Insurance Terms
6. Insurance And Gambling Compared
7. Hazards
8. Concept Of Anti-Selection
9. Various Life And Health Insurance Products
10. Life Insurance As A Financial Protection Tool
11. The Importance Of Life Insurance
12. Pooling Of Risks & The Law Of Large Numbers
13. Principle Of Utmost Good Faith
14. Insurable Interest Requirement
15. Principle Of Indemnity & Life Insurance
16. Structure Of The Singapore Insurance Market
17. Other Relevant Organisations
18. MoneySENSE Programme
19. Singapore Deposit Insurance Corporation (SDIC)
LEARNING OUTCOMES
After reading this chapter, you should be able to:

 understand risk and insurance
 understand the requirements of insurable risks
 know the methods of dealing with risk
 outline the types of personal risks that can be insured
 define some basic life insurance terms
 compare insurance with gambling
 understand physical hazards and moral hazards
 know the concept of anti-selection
 discuss life and health insurance products
 understand life insurance as a financial protection tool
 explain the importance of life insurance
 know the pooling of risks and the law of large numbers
 discuss the principle of utmost good faith
 understand insurable interest requirement
Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1-1
 understand the principle of indemnity

 explain the structure of the Singapore insurance market
 know other relevant organisations
 know the MoneySENSE programme
 know what is Direct Purchase Insurance (DPI)
 know the Singapore Deposit Insurance Corporation (SDIC)
1-2 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0]
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. RISK AND INSURANCE ................................................................................................ 5
A. Speculative Risks And Pure Risks ........................................................................ 5
2. REQUIREMENTS OF INSURABLE RISKS .................................................................... 5
A. The Loss Must Be Significant In Financial Terms ............................................... 6
B. The Loss Must Occur By Chance.......................................................................... 6
C. The Loss Must Be Definite .................................................................................... 6
D. The Loss Must Be Measurable ............................................................................. 6
E. The Loss Must Not Be Catastrophic To The Insurer ........................................... 6
F. The Loss Must Be Based On Large Number of Insureds .................................... 6
3. DEALING WITH RISK .................................................................................................... 7
A. Avoiding The Risk ................................................................................................. 7
B. Controlling The Risk.............................................................................................. 7
C. Retaining The Risk ................................................................................................ 7
D. Transferring The Risk ............................................................................................ 7
4. TYPES OF PERSONAL RISKS THAT CAN BE INSURED ............................................. 8
A. Risk Of Premature Death ...................................................................................... 8
B. Risk Of Outliving Resources Or Longevity Risk ................................................... 8
C. Risk Of Poor Health And Disablement ................................................................. 8
5. SOME BASIC LIFE INSURANCE TERMS ..................................................................... 9
6. INSURANCE AND GAMBLING COMPARED ............................................................... 9
7. HAZARDS .................................................................................................................... 10
A. Physical Hazard ................................................................................................... 10
B. Moral Hazard ....................................................................................................... 10
8. CONCEPT OF ANTI-SELECTION ................................................................................ 11
9. VARIOUS LIFE AND HEALTH INSURANCE PRODUCTS........................................... 11
A. Life Insurance Products ...................................................................................... 11
B. Annuities And Investment Products .................................................................. 12
C. Health Insurance Products.................................................................................. 12
10. LIFE INSURANCE AS A FINANCIAL PROTECTION TOOL ........................................ 13
A. Financial Protection Against Premature Death.................................................. 13
B. Financial Protection Against Outliving Resources ............................................ 13
C. Financial Protection Against Ill Health And Disablement ................................. 13
D. Financial Protection For Businesses .................................................................. 14
11. THE IMPORTANCE OF LIFE INSURANCE.................................................................. 14
A. Assist In Making Savings Possible ..................................................................... 14
B. Provides A Safe Investment ............................................................................... 15
C. Encourages Thrift ................................................................................................ 15
D. Minimises Worries And Provides Peace Of Mind ............................................. 15
12. POOLING OF RISKS AND THE LAW OF LARGE NUMBERS .................................... 15
13. PRINCIPLE OF UTMOST GOOD FAITH ..................................................................... 16
A. Insured’s Duty Of Utmost Good Faith................................................................ 16
A1. Material Facts................................................................................................... 16
A2. Facts Which Need Not Be Disclosed .............................................................. 17
A3. Duration Of Duty Of Disclosure ...................................................................... 17
B. Insurer’s Duty Of Disclosure ............................................................................... 18
14. INSURABLE INTEREST REQUIREMENT.................................................................... 18
A. Why Is Insurable Interest Necessary? ................................................................ 19

B. When Must Insurable Interest Exist? ................................................................. 20
C. Insurable Interest Required For Life Insurance Under Insurance Act .............. 20
C1. Own Life ........................................................................................................... 20
C2. Spouse ............................................................................................................. 20
C3. Child Or Ward .................................................................................................. 20
C4. Another Person Whom One Is Dependent On ............................................... 20
C5. Trustees & Beneficiaries ................................................................................. 21
C6. Creditors & Debtors ......................................................................................... 21
C7. Key-Person Insurance...................................................................................... 21
15. PRINCIPLE OF INDEMNITY AND LIFE INSURANCE ................................................. 22
16. STRUCTURE OF THE SINGAPORE INSURANCE MARKET ...................................... 23
A. Buyers .................................................................................................................. 23
B. Sellers .................................................................................................................. 23
B1. Sellers – Direct Insurers .................................................................................. 23
B2. Sellers – Reinsurers ......................................................................................... 24
C. Intermediaries ..................................................................................................... 24
D. Introducer Of Life Insurance Advisory Services ................................................ 25
E. Web Aggregators ................................................................................................ 25
17. OTHER RELEVANT ORGANISATIONS ...................................................................... 26
A. Rating Agencies .................................................................................................. 26
B. Market Associations............................................................................................ 26
C. Professional Bodies ............................................................................................ 27
D. Financial Industry Disputes Resolution Centre (FIDReC) .................................. 27
D1. Mission And Background Of FIDReC .............................................................. 27
D2. Jurisdiction Of FIDReC .................................................................................... 28
D3. FIDReC’s Dispute Resolution Process ............................................................ 28
D4. Filing A Complaint ........................................................................................... 29
18. MONEYSENSE PROGRAMME ................................................................................... 29
19. Singapore Deposit Insurance Corporation (SDIC) .................................................... 30
1. RISK AND INSURANCE
1.1 Life insurance products are designed to provide protection against the risk of
financial loss 1. In order to understand insurance and how it works, we need to
understand the concept of risk and which types of risks are insurable. Everyday,
both individuals and businesses are exposed to risks. For example, an
individual who is the breadwinner in the family may meet with a serious
accident while driving his car, leaving the family with no income, if he becomes
disabled and unable to work. A company may suffer business losses when one
of its key employees is stricken with a major illness and is unable to continue
working. As you can see from the above two examples, risk, in the insurance
context, is the possibility of loss, and there is an uncertainty
element to it.
A. Speculative Risks And Pure Risks
1.2 Both individuals and businesses experience two kinds of risks – speculative risk
and pure risk. Speculative risk involves three possible outcomes: loss, gain, or
no change. For example, in purchasing shares of stock, the buyer is speculating
that the value of the stock will rise and that he will earn a profit on his
investment. However, the value can also fall and the buyer will lose some or all
of the money that he has invested. On the other hand, the value of the stock can
also remain the same – the buyer may not lose money, but he may not make a
profit. Insurers will not insure speculative risks.
1.3 Pure risk involves no possibility of gain; either a loss occurs or no loss occurs.
An example of a pure risk is the possibility that an individual may become
disabled. If he is unable to work, he will experience an income disruption
leading to a financial loss. If, on the other hand, he never became disabled, then
he would incur no loss from that risk. This possibility of financial loss without
the possibility of gain – pure risk – is the only kind of risk that can be insured
(provided that it meets certain other requirements) as explained in the next
section. This is because the purpose of insurance is to compensate for financial
loss, not to provide an opportunity for financial gain.
2. REQUIREMENTS OF INSURABLE RISKS
2.1 In addition to the pure risk requirement, there are other requirements that must
be met before a risk can be potentially insurable. The loss must:
(a) be significant in financial terms;
(b) occur by chance;
(c) be definite;
(d) be measurable;
(e) not be catastrophic to the insurer; and
(f) be based on large number of insured.
2.2 Let us now look at the first five of the above requirements in turn.
1
Insurance does not cover non-financial risks, such as choosing a life partner, choosing a new car or
selecting the right school for one’s child.
A. The Loss Must Be Significant In Financial Terms
2.3 Insignificant losses arising from, say, the risk of catching a cold in the rain, are
not normally insured. The administrative expenses of paying benefits when a
very small loss occurs will drive the cost for such insurance protection so high
in relation to the potential loss, that most people will find the protection
financially unattractive.
2.4 On the other hand, some losses will cause financial hardships to most people
and are considered to be insurable. For example, a person injured in an accident
may lose a significant amount of income if he is unable to work. Insurance
coverage is available to protect against such a potential risk.
B. The Loss Must Occur By Chance
2.5 In order for a potential loss to be insurable, the loss must occur by chance. In
order words, it must be random in nature and cannot be predicted in advance.
The loss must be caused either by an unexpected event, such as contracting a
terminal disease, or by an event that is not intentionally caused by the person
covered by the insurance, such as fire. Although death is a certain event, a
person is unable to control the timing of his death, as the event usually occurs
by chance. Hence, death is an insurable event. However, insurers will exclude
suicide coverage within a certain period of the inception of the policy as suicide
is clearly not accidental.
C. The Loss Must Be Definite
2.6 The insurer must be able to determine whether the loss occurred, and if so, how
much money was lost. The amount of loss to be insured can be arrived at, in
the case of general insurance, by appraisal or estimation, or in the case of life
insurance, by prior agreement.
D. The Loss Must Be Measurable
2.7 The loss must be measurable in monetary term.
E. The Loss Must Not Be Catastrophic To The Insurer
2.8 A potential loss is not considered insurable if a single occurrence is likely to

cause or contribute to catastrophic financial damage to the insurer. Such a loss
is not insurable because the insurer cannot responsibly promise to pay benefits
for the loss, e.g. the loss resulting from nuclear risk.
F. The Loss Must Be Based On Large Number of Insureds
2.9 There must also be a large number of exposure units, because pricing is based
on the law of large numbers. For example, a household insurer needs a large
number of flats and buildings to predict the aggregate losses with some
reliability. From this, it can calculate the premiums which are adequate to cover
the losses and expenses of these policies.
3. DEALING WITH RISK
3.1 In order to eliminate or reduce one’s exposure to a specific financial risk, and
depending on the frequency and severity of the losses, one can deal with risk
in one of the following methods:
 avoiding the risk;
 controlling the risk;
 retaining the risk; or
 transferring the risk.
3.2 Let us look at each of the methods in turn.
A. Avoiding The Risk
3.3 This method of managing risk is simply to avoid risk altogether. For example,
we can avoid the risk of personal injury that may result from a car collision by
never driving a car.
B. Controlling The Risk
3.4 Risks can be controlled by taking steps to prevent or reduce losses. An example
will be to undergo a health screening examination yearly, when one reaches a
certain age (e.g. 40 years old), so that one can detect and treat an illness before
it is too late.
C. Retaining The Risk
3.5 This method of managing risk is to accept or retain risk, meaning to assume all
the financial responsibility for the risk. Individuals and businesses sometimes
decide to accept total responsibility for a given financial risk. In this situation,
the person or business is said to self-insure against the risk. For example, an
employer can provide medical expense benefits to its employees, by either
setting aside money to pay their medical expenses, or paying the expenses out
of its current income. In such a case, the employer is said to self-insure the
medical benefit plan.
D. Transferring The Risk
3.6 An individual can transfer risk to another party by shifting the financial
responsibility for that risk to another party, generally in exchange for a fee. The
most common way to transfer risk is to buy insurance. For example, a
breadwinner may transfer his risk of premature death or disability to the insurer
by paying a small, predictable amount of premium to the insurer. In return, the
insurer promises to pay the insured amount upon the happening of the insured
event. In this way, the individual is relieved of the uncertainty of a potentially
much larger financial loss associated with the risk that he faces. He can then go
about doing his daily activities with peace of mind, knowing that if anything
happens to him, his dependants will not suffer any severe financial hardship.
Hence, insurance plays an important function in acting as a risk transfer
mechanism.
4. TYPES OF PERSONAL RISKS THAT CAN BE INSURED
4.1 The three main types of personal risks faced by an individual that can be insured
are:
 premature death;
 outliving resources; and
 poor health and disablement.
4.2 Let us look at each of the above risks in turn.
A. Risk Of Premature Death
4.3 Premature death is defined as the death of a breadwinner as a result of illness

or accident with unfulfilled financial obligations. These obligations can include
dependants to support, a mortgage to be paid off or children to educate. If the
surviving family members receive an insufficient amount of replacement
income from other sources or have insufficient financial assets to replace the
lost income, they will suffer not only emotionally but also financially.
B. Risk Of Outliving Resources Or Longevity Risk
4.4 With advances in medical science and the standard of living, people are living
longer. The average life expectancy of male and female lives as of December
2022 is 80.7 and 85.2 years respectively. The major risk associated with old age
is insufficient capital and income during retirement. Planning for retirement is
something that most people do not take action on until it is too late. This can
pose a problem for the person, as well as society.
C. Risk Of Poor Health And Disablement
4.5 The risk of poor health includes both the payment of catastrophic medical bills
and the loss of earned income. The costs of major surgeries have increased
substantially in recent years. In addition, as life expectancy increases, people
will tend to incur medical expenses as they age. Unless these people have
adequate Health Insurance, private savings and financial assets or other
sources of income to meet these expenditures, they can be financially drained
in the event of a catastrophic illness. Moreover, such illness can result in the
person becoming severely disabled and being unable to work. As such, he will
be losing his income, as well as incurring substantial medical cost for treatment
of his illness.
4.6 All the three personal risks that we have discussed so far can be mitigated to a
certain extent with Life and Health Insurance products. Before we look at the
various products, we will first look at some basic insurance terms.
5. SOME BASIC LIFE INSURANCE TERMS
5.1 A life insurance policy is a contract which the insurer promises to pay a benefit
upon the death of the person who is insured. As such, life insurance provides
financial protection against the economic loss caused by the premature death
of the person being insured. This benefit is commonly known as Death Benefit.
The insurer will pay a lump sum payment of the sum assured, plus bonuses if
applicable, in the event of the life insured’s death.
5.2 The applicant (also known as the proposer)) is the person or business that
applies for an insurance policy. When a policy is issued, the person or business
that owns the insurance policy is known as the policy owner. In most cases, the
applicant is also the policy owner.
5.3 The person who is insured by a life insurance policy is referred to as the life
insured. The policy owner and the life insured may be, and often are, the same
person. If, for example, a person applies for and is issued an insurance policy
on his own life, then he is both the policy owner and the life insured. If, however,
a person’s father applies for and is issued a policy on his juvenile son’s life, then
he is the policy owner and the son is the life insured. When one person
purchases insurance on the life of another person, the policy is known as a
third-party policy.
5.4 If the insured risk (e.g. death) occurs while the insurance policy is in force, the
insurer pays the policy benefit. This policy benefit when paid as a lump sum, is
often referred to as the sum assured 2. This is the amount guaranteed to be paid
out by the insurer in the event of a claim. If the policy is a participating life
insurance policy, non-guarantee bonuses from the insurer’s participative fund
which were declared and accumulated to date, will also be paid in addition to
the sum assured.
Life insurance policy proceeds are usually paid to the policy’s owner, the
deceased life insured’s estate if he is also the policy owner or nominated
beneficiary.
6. INSURANCE AND GAMBLING COMPARED
6.1 There are two important differences between insurance and gambling. Firstly,
gambling creates a new speculative risk, while insurance is a technique for
handling an existing pure risk. Thus, if you bet S$50 on a lottery draw, a new
speculative risk (risk of losing S$50) is created. However, if you pay S$50 a
month to an insurer for life insurance, the risk of premature death is already
present and is transferred to the insurer by a contract. No new risk is created by
the transaction.
6.2 Secondly, the difference between insurance and gambling is that gambling is
socially unproductive, because the winner’s gain comes at the expense of the
2
The sum assured is also called the policy’s face amount or face value because this amount is generally
listed on the face, or first, page of the policy.
loser. In contrast, insurance is always socially productive, because neither the

insurer nor the insured is placed in a position where the gain of the winner
comes at the expense of the loser. The insurer and the insured both have a
common interest in the prevention or delay of a loss. Both parties win if the loss
does not occur. Moreover, gambling transactions never restore the losers to
their former financial position. In contrast, insurance contracts restore the
insureds financially in whole or in part if losses occur.
7. HAZARDS
7.1 As noted earlier, insurers cannot predict when a specific individual will die,
become injured, or suffer from an illness. Insurers, however, have identified a
number of factors that can increase or decrease the likelihood that an individual
will suffer a loss. The most important of these factors are physical hazards and
moral hazards.
A. Physical Hazard
7.2 A physical hazard is a physical characteristic that may increase the likelihood of
loss. For example, a person with a history of heart attacks possesses a physical
hazard that will increase the likelihood of that person dying sooner than that of
a person of the same age and gender without such similar medical history. A
person who is overweight has a physical characteristic that is known to
contribute to health problems, and those health problems may result in the
economic loss associated with higher-than-average medical expenses.
Underwriters of insurers must carefully evaluate the intending insureds to
detect the presence of such physical hazards.
B. Moral Hazard
7.3 Moral hazard is the likelihood that a person may act dishonestly in the insurance
transaction. For example, if an individual applies for a sum assured which is far
in excess of what others in the same financial situation would buy, the insurer
would be concerned about the reason for the high cover. The individual may be
seeking insurance for a dishonest reason. Underwriters also evaluate the moral
hazards presented by individuals in cases where they find that those individuals
have provided false information on their applications for insurance. In these
cases, the applicants could be trying to obtain insurance coverage that they
would not otherwise be able to obtain. When underwriters evaluate
applications for insurance, they take a variety of steps to identify intending
insureds who present these moral hazards.
8. CONCEPT OF ANTI-SELECTION
8.1 When an insurer receives an application for insurance, the insurer must assess
the degree of risk that it will take on if it agrees to issue the policy. An insurer
cannot afford to presume that each proposed risk represents an average
likelihood of loss. Not all individuals of the same gender and age have an equal
likelihood of suffering a loss. Furthermore, those individuals who believe they
have a greater-than-average likelihood of loss tend to seek insurance protection
to a greater extent than do those who believe they have an average or less-
than-average likelihood of loss. This tendency, which is called anti-selection,
adverse selection, or selection against the insurer, means that the insurer will
need to carefully review each application to assess properly the degree of risk
the insurer is assuming for the policies it issues. If the insurer consistently
under-estimates the risks that it assumes, its premium rates will be inadequate
to provide the promised benefits.
8.2 To minimise problems arising from anti-selection, insurers can employ a

number of methods; one of which is effective underwriting. Underwriting or
selection of risks, is the process of identifying and classifying the degree of risk
represented by an intending insured and the insurers’ employees who are
responsible for evaluating proposed risks are called underwriters. Underwriting
involves identifying the risks that an intending insured presents, as well as
classifying the degree of risk that an intending insured represents. The risks can
be classified as standard, sub-standard or declined / postponed.
8.3 The other methods are offering policies with different excesses 3 and offering
policies with pre-existing condition exclusions. These will be covered in a later
chapter of this Study Text.
9. VARIOUS LIFE AND HEALTH INSURANCE PRODUCTS
A. Life Insurance Products
9.1 Life insurance is provided on both an individual and a group basis and is
available under a variety of types of policies. We describe the following major
types of life insurance policies:
 Term Insurance provides a death benefit if the insured dies during a
specified period.
 Whole Life Insurance provides life insurance coverage throughout the
insured’s lifetime and also build up cash values4 which can be used as a
form of savings for the policy owner. A policy’s cash value is a valuable
asset that the policy owner can use in a number of ways. This is further
explained in a later chapter.
3
In an insurance policy, the deductible (also known as “excess”) is the portion of any claim that is not
covered by the insurer. It is the amount of expenses that must be paid out of pocket before an insurer
will cover any expenses. Typically, a general rule is: the higher the deductible, the lower the premium,
and vice versa. Depending on the policy, the deductible may apply per covered incident, or per year. For
policies where incidences are not easy to delimit (for example health insurance), the deductible is
typically applied per year.
 Endowment Insurance provides a policy benefit that is paid either when the
insured dies or on a stated date if the insured lives until then. Endowment
Insurance has some characteristics of both Term Insurance and permanent
life insurance. Like Term Insurance, Endowment Insurance provides life
insurance coverage for only a stated amount for a specific period of time.
Also, like permanent life insurance, Endowment Insurance provides a
savings element.
9.2 All the above policies may also provide the life insured with Total and
Permanent Disability (TPD) Benefits either attached to the basic policy or as a
supplementary benefit.
9.3 Other types of life insurance that are available in the market include Universal
Life Insurance. Universal Life Insurance is a form of “interest sensitive” Whole
Life Insurance that offers a death benefit, and because of its flexible premium
feature, provides the opportunity to build cash values which the policy owner
can borrow from or withdraw. The cash values earn interest at a declared rate,
which may change over time. Notwithstanding that, most Universal Life
Insurance plans guarantee a minimum interest crediting rate. These plans give
the policy owner the flexibility to assist him in meeting his financial goals.
Within certain limits, the policy owner can choose the amount, method and
timing of his premium payments.
B. Annuities And Investment Products

 An Annuity is a series of periodic income payments to a named individual
in exchange for a premium or a series of premiums.
 Investment-linked Life Insurance policies (ILPs) provide a combination of
protection and investment elements. Premiums buy life insurance
protection and investment units in professionally managed investment-
linked sub-funds. Structured ILPs are ILPs where the sub-funds are invested
in structured products and other structured funds.
C. Health Insurance Products
9.4 These products are designed to cover hospital expenses, surgical expenses and
emergency accident outpatient expenses incurred as a result of accident,
sickness or disease commencing or occurring during the period of insurance.
In Singapore, there are private Health Insurance schemes, as well as those
offered by the Central Provident Fund Board. For further details, refer to the
section below, as well as the SCI Health Insurance module.
10. LIFE INSURANCE AS A FINANCIAL PROTECTION TOOL
10.1 Life insurance is an effective mechanism for providing financial protection for
individuals against the personal risks that we have discussed earlier on.
A. Financial Protection Against Premature Death
10.2 Life insurance can be used to fulfil a breadwinner’s financial obligations to his
dependants in the event of his premature death. A Term Insurance or Whole
Life Insurance policy can provide the funds needed to meet the funeral
expenses and to provide a sum of money, to take care of his dependants. Term
Insurance can also be used to pay off any outstanding loan that the client may
have. Endowment Insurance, on the other hand, can be used to accumulate the
funds necessary to finance one’s children’s education in the future.
B. Financial Protection Against Outliving Resources
10.3 Annuity and Endowment Insurance policies can be used to provide the necessary
income that a person will need in his retirement. In fact, Annuities are specially
designed for this purpose. There are many types of Annuity policies designed to
meet the various needs of individuals, as you will see in a later chapter of this
Study Text. An individual can buy an Annuity policy to pay him a regular income
for life. This reduces the risk of one living too long and outliving one’s financial
resources.
10.4 Endowment Insurance, on the other hand, can be arranged to mature at the age
that a person retires. In this way, the person will receive the benefits upon his
retirement, which he can use to purchase an Annuity or to invest elsewhere.
C. Financial Protection Against Ill Health And Disablement
10.5 The risk of ill health can be met by Health Insurance coverage. Some examples of
Health Insurance are listed below.
10.6 Critical Illness Insurance is suitable for providing protection against the
contracting of a covered critical illness under the policy.
10.7 Medical Expense Insurance reimburses the insured for expenses incurred as a
result of an event, illness or accident, and provides inpatient and some outpatient
benefits.
10.8 Hospital Cash (Income) Insurance, on the other hand, will provide the insured with
a fixed amount of daily allowance benefit for each day of his hospital stay,
irrespective of other expenses incurred for medical treatment during his
hospitalisation. There is also no restriction on the use of the benefits payable
under this plan. Hence, the insured can use it to meet any of his needs.
10.9 Disability Income Insurance is a form of income-protection insurance which helps

to replace a portion of the insured’s income that he loses if he becomes totally
disabled and unable to work due to an accident or sickness.
10.10 Long-Term Care Insurance is a product that is designed to meet some or all of the
costs of care to the insured who, as a result of accident, sickness, frailty or a
combination of these, is physically impaired to the extent that he is no longer able
to function independently. Instead, he has to depend on others to help him
perform most basic activities of daily living.
D. Financial Protection For Businesses
10.11 Financial protection principles apply to businesses, as well as individuals. This

is especially true for small businesses where the business owner’s wealth is tied
up in the business and its continued success is dependent on their skills and
application. For many businesses, especially these smaller ones, the success of
the business may depend on certain key individuals. To protect the business
against financial losses arising out of the loss of contribution by these key
individuals due to sickness, disability or death, the business owner can
purchase Key-Person Insurance. A business can also purchase life insurance to
provide benefits for its employees. Another key application of life insurance in
business setting is to use it as a funding vehicle for buy-sell agreements in
business succession planning.
11. THE IMPORTANCE OF LIFE INSURANCE
11.1 Aside from the advantage of providing financial protection for individuals,
families and businesses; life insurance benefits policy owners in other
important ways such as the following:
A. Assist In Making Savings Possible
11.2 Although one may prefer to save rather than purchase life insurance, saving
involves time, resources and discipline. A savings programme can yield only a
small amount at the start, whereas an insurance policy guarantees the full face
value or other benefit from its beginning. Hence, it can protect the policy owner
against failure through early death or incapacity to have sufficient working time
to save adequately through other means. Thus, if one is able to save S$500
annually, it will take nearly 20 years to accumulate a fund of approximately
S$15,000 assuming that the accumulations are safely invested annually at 4%
compound interest. Even at that, an individual’s ability to accumulate such a
savings fund is contingent upon his survival for the full period, and this may be
defeated by death or disability before the savings have reached any appreciable
sum.
11.3 To depend entirely on saving as a means of providing for the future could prove
disastrous financially. It is generally accepted that the first requisite in providing
for the future support of dependants is reasonable certainty. Life insurance
provides protection against the possible failure to continue the annual
accumulations of the savings fund because of early death or disability.
B. Provides A Safe Investment
11.4 Life insurance can, with careful selection, be a reasonable, long-term savings
instrument. Life insurance policies and annuities can be safe investments, but
life insurance policies also make it possible for the policy owner to arrange for
the safeguarding of the policy death benefits and values.
C. Encourages Thrift
11.5 Life Insurance can constitute an excellent means of encouraging thrift for many
persons. Many individuals who may not otherwise save regularly will
nevertheless regularly pay premiums on a life insurance policy. If the policy is
of the type that has a cash value this can constitute a type of semi-compulsory
savings plan.
D. Minimises Worries And Provides Peace Of Mind
11.6 If the breadwinner has adequate amounts of life insurance, he is less likely to
worry about the financial security of his dependants in the event of premature
death; an individual insured for disability income protection does not have to
worry about the loss of earnings if a serious illness or accident occurs. Worry
and fear are also reduced after a loss occurs, because the insureds know that
he has the insurance that will pay for the loss.
12. POOLING OF RISKS AND THE LAW OF LARGE NUMBERS
12.1 You may wonder how insurers can accept so many risks. Well, the answer lies
in a concept called risk pooling. An insurer accepts the risk of financial loss of a
large number of people, but only a small percentage of these people will
actually suffer an insured financial loss at any given period. Contributions, in
the form of premiums from the many policy owners, go into this pool. From the
pool, payments are made to compensate the losses of the few. Pooling brings
together a large number of exposures of similar risk characteristics, thereby
allowing the application of the law of large numbers to predict the frequency
(probable number of losses) and severity of losses (probable size of the losses).
12.2 The law of large numbers, which is a fundamental mathematical principle of

insurance, states that the greater the number of insured persons, the more the
actual loss experience will tend towards the expected loss experience. With the
increasing number of insured persons, risk and uncertainty will diminish. Thus,
the larger the insured group, the more predictable will be the loss experience
for the insured group as a whole.
12.3 To illustrate the law of large numbers, consider the flip of a coin, which can
result in a head or a tail. Flipping a coin 30 times may result in any combination
of heads and tails; there may be 19 heads and 11 tails or any other combination.
Based on simple mathematics, you would expect to get the same number of
heads and tails, because the chance of getting either is 50%.
12.4 However, flipping the coin just 30 times may not give us the 50/50 split that we
would expect. Flipping the coin 30,000 times, we would almost certainly see a
result of approximately 15,000 heads and 15,000 tails. The law of large
numbers, therefore, operates to give a result which is in keeping with the
underlying probability (in this example, 50% heads and 50% tails).
12.5 When the insurer applies the law of large numbers to life insurance, it enables
them to predict fairly confidently, the final cost of claims in any one year. This
is because insurers provide cover against a large number of similar risks, and
the final number of actual loss events tends to be very close to the expected
number, provided that the conditions under which the original data were
gathered remain constant. This enables the insurer to calculate likely losses and
so confidently charge a fixed premium.
13. PRINCIPLE OF UTMOST GOOD FAITH
A. Insured’s Duty Of Utmost Good Faith
13.1 In ordinary contracts, the contracting parties are not required to reveal all they
know about a proposed agreement, as those contracts are subject to the principle
of ordinary good faith. A common law principle application to most of these
contracts is caveat emptor (let the buyer beware).
13.2 Insurance contracts, however, have always been subject to the more stringent
principle of utmost good faith. A life insurance contract is a contract of “utmost
good faith” or “uberrima fides”. When issuing a life insurance contract, the
insurer must rely on the truthfulness and integrity of the proposer. This is because
the proposer knows everything about the risk to be insured, whereas the insurer
knows only what the proposer chooses to disclose to the insurer. In return, the
proposer must rely on the insurer’s promise and ability to pay future claims.
13.3 The principle of utmost good faith expects the proposers of life insurance policies
to:
 disclose all material facts (see explanation below) which they are aware of
or ought to have been aware of, even if no question is specifically asked in
the proposal (or application) form; and
 not to make any misstatement of material facts.
13.4 The fact that the questions in the proposal form have been truthfully answered is
not sufficient. The proposer must volunteer information on material facts, even if
not asked in the proposal form. This is an obligation, not a matter of choice.
A1. Material Facts
13.5 Material facts are facts that can cause an underwriter to deal with a case
differently if the information was disclosed at the time of application of the
insurance policy. For example, a proposer has undergone some medical tests
prior to applying for a life insurance policy. Though the medical test results,
which have yet to be released, may or may not reveal any irregularities, it is still
the responsibility of the proposer to inform the insurer of such tests done prior
to the insurance application as such facts will influence the risk assessment of
the underwriter whether to accept or decline an insurance application. Failure
to do so will give the insurer the right to void the insurance policy from
inception (upon discovery) due to the non-disclosure of material facts to the
insurer.
13.6 Another example such as an insured’s occupational exposure to hazards will

also have to be disclosed. Other examples of material facts thus include the
insured’s insurance history, the insured’s claims history, the insured’s previous
criminal convictions, as well as other instances of moral hazard.
A2. Facts Which Need Not Be Disclosed
13.7 There is no duty for the proposer to disclose:

 facts which the insurer already knows [e.g. an insurer should know about
outbreak of civil unrest in a certain country, or Influenza A (H1N1) in various
parts of the world];
 facts which the insurer ought to know;
 facts about which the insurer waives information;
 facts which can be discovered, where enough information has been given
to provoke enquiry by the insurer (e.g. in answering a proposal form
question on other existing life insurance policies taken out with the same
insurer, the proposer states as “refer to details in your company’s records”,
instead of writing down all the policy details as requested in the proposal
form); and
 facts which lessen the risk (e.g. a person applying for Personal Accident
Insurance does not like to take part in hazardous activities).
A3. Duration Of Duty Of Disclosure
13.8 We have looked at the duty to disclose material facts. Let us now look at when
this duty arises.
13.9 The duty of disclosure arises from the beginning of negotiations until the time
that the insurance contract takes effect (the inception of the policy) and at other
specific times after inception. The duty arises both under common law and
under the policy terms. Let us take a look at the duty of disclosure at each stage
of the insurance contract.
A3A. At Inception
13.10 Under common law, the duty of disclosure starts at the beginning of
negotiations and ends at the formation of the insurance contract. Sometimes, a
policy wording will extend this duty so that it is continuous throughout the
policy period.
A3B. On Renewal
13.11 On the renewal of a policy, the duty of disclosure by the insured is revived for
general insurance. There is no such duty of disclosure for life insurance policies,
as they are not renewable annually, but which are issued for a specific number
of years or for life. For such policies, if the insured wishes to continue paying
premiums, the insurer is obliged to accept them. There is, therefore, no duty of
disclosure at so-called “renewal” since no new contract is formed.
A3C. On Alteration
13.12 During the currency of the insurance contract, it may be necessary to change
the terms of the policy. The insured may wish to increase the sum assured or
change the description of the property. In these cases, the duty of disclosure is
revived as a new contract is being formed.
B. Insurer’s Duty Of Disclosure
13.13 The insurer also has a duty of disclosure to the insured. In order to fulfil this
duty, the insurer must also exercise utmost good faith by, for example:
 notifying an insured of a possible entitlement to a premium discount
resulting from a good previous insurance history;
 only taking on risks which the insurer is licensed to accept, i.e. avoid
unenforceable contracts; and
 ensuring that statements made are true, as misleading an insured about
policy cover is a breach of utmost good faith.
14. INSURABLE INTEREST REQUIREMENT
14.1 We noted at the beginning of this chapter that only pure risks are insurable;
insurance is intended to compensate an individual or a business for a financial
loss, not to provide an opportunity for gain. At one time, people used insurance
policies as a means of making wagers. For example, they purchased insurance
policies on the lives of people who were completely unrelated to them and, in
that way, created a possibility of financial gain for themselves if such insured
people died.
14.2 The practice of purchasing insurance as a wager is now considered to be

against public policy. In most countries, legislation has been put in place
requiring that, when an insurance policy is issued, the policy owner must have
an insurable interest in the risk that is insured – the policy owner must be likely
to suffer a genuine loss or detriment should the event insured against occur.
14.3 The presence of insurable interest must be established for every life insurance
policy to ensure that the insurance contract is not formed as an illegal wagering
agreement. If the insurable interest requirement is not met when a policy is
issued, the policy is not valid. The presence of an insurable interest for life
insurance can usually be found by applying the following general rule:
An insured interest exists when the policy owner is likely to benefit if the
insured continues to live and is likely to suffer some loss or detriment if
the insured dies.
14.4 To understand how insurable interest requirements are met, we need to

consider two possible situations: (1) an individual purchases insurance on his
own life; and (2) an individual purchases insurance on another person’s life. In
both cases, the applicant for life insurance must name a beneficiary. Let’s look
at each of these situations.
14.5 All persons are considered to have an insurable interest in their own lives. A
person is always considered to have more to gain by living than by dying.
Therefore, an insurable interest between the policy owner and the insured is
presumed when a person seeks to purchase insurance on his own life.
14.6 Certain family relationships, e.g. parents and their children are assumed by law
to create an insurable interest between a life insured and a policy owner or
beneficiary.
14.7 An insurable interest is not presumed when the policy owner or beneficiary is
more distantly related to the life insured than the relatives described above or
when the parties are not related by blood or marriage, e.g. friends. In these
cases, a financial interest in the continued life of the life insured must be
demonstrated in order to satisfy the insurable interest requirement. For
instance, if Mr. Tan obtains a S$30,000 personal loan from a bank, the bank
would have a financial interest and, consequently, an insurable interest in Mr.
Tan’s life. If Mr. Tan should die before repaying the loan, the bank could lose
some or all of the money that it lent him. Similar examples of financial interest
can be found in other business relationships.
14.8 The insurable interest requirement must be met before a life insurance policy
will be issued. After the life insurance policy is in force, the presence or absence
of insurable interest is no longer relevant. Therefore, a beneficiary need not
provide evidence of insurable interest in order to receive the benefits of a life
insurance policy.
14.9 The Insurable Interest Requirement in Health Insurance. The insurable interest
requirement also must be met when a Health Insurance policy is issued. For
Health Insurance purposes, the insurable interest requirement is met if the
applicant could demonstrate a genuine risk of economic loss should the
proposed insured require medical care or become disabled. Because of the
nature of Health Insurance, applicants rarely seek Health Insurance on someone
in whom they have no insurable interest. Typically, people seek Health
Insurance for themselves and for their dependents. As a contract of indemnity,
a Health Insurance policy provides coverage to pay for medical expenses that
the insured has incurred or to replace a disabled insured’s lost income.
Applicants are generally considered to have an insurable interest in their own
health. Additionally, for Disability Income Insurance purposes, businesses have
an insurable interest in the health of their key employees.
A. Why Is Insurable Interest Necessary?
14.10 To sum up, insurable interest is required for life insurance contracts for the
following reasons: firstly, it excludes the possibility of gambling (i.e. minimise
problems of moral hazard in insurance). Secondly, the proposer is expected to
safeguard the subject matter (i.e. the proposer is interested in its preservation).
14.11 Without insurable interest, any life insurance is more or less a gamble, since
the policy owner (policyholder) will not actually be at risk with the insured peril
or event.
B. When Must Insurable Interest Exist?
14.12 In most General Insurance policies, insurable interest must be present at both the
inception of the insurance contract and at the time of loss. However, as far as
Marine Cargo Insurance is concerned, there is no need for insurable interest to be
present at the inception of the insurance contract. Rather, insurable interest must
exist only at the time of loss.
14.13 In contrast, as laid out in Section 146 of the Insurance Act 1966, in life insurance,
there must be an insurable interest, or a presumed insurable interest, present at
the inception of the insurance contract, but it need not be present at the time of
the life insured’s death. A beneficiary, therefore, need not provide evidence of
insurable interest in order to receive the benefits of a life insurance policy.
C. Insurable Interest Required For Life Insurance Under Insurance Act
C1. Own Life
14.14 Section 146(1)(b)(i) of the Insurance Act 1966 provides that a person may take out
a policy on his own life.
14.15 Although legally there is no limit to the amount of insurance that an individual
can take up on his life, in practice, the insurer usually limits the amount of sum
assured to a sum that matches reasonably with the life insured’s financial status
and earning power, so that he can afford to pay the premium during the term
of his life insurance policy. This will also reduce the risk of moral hazard and
fraud.
C2. Spouse
14.16 According to Section 146(1)(b)(ii) of the Insurance Act 1966, husbands and wives
may effect policies on each other’s lives provided they are married at the time the
policy is effected. Hence, a husband can buy a policy on the wife’s life and vice
versa.
C3. Child Or Ward
14.17 Under Section 146(1)(b)(iii) of the Insurance Act 1966, it states that a person may
effect insurance on his child’s or ward’s life if the child or ward is under the age of
18 years at the time the policy is effected.
C4. Another Person Whom One Is Dependent On
14.18 According to Section 146(1)(b)(iv) of the Insurance Act 1966, a person may effect
insurance on a person whom he is wholly or partly dependent at the time of
application for the insurance policy.
C5. Trustees & Beneficiaries
14.19 Before the Nomination of Beneficiaries (NOB) framework came into effect on 1
September 2009, policies issued under trust are void contracts as no insurable
interest exists between the trustee (holder of property on behalf of
beneficiaries) and the settlor or grantor (the person who creates the trust), as
well as the beneficiaries (persons who will receive the policy proceeds).
14.20 On 1 September 2009, the Insurance Act 1966 was revised and new Sections
146(3b) and (3c) were added to allow trustees and beneficiaries of a trust to
purchase policies on the life of the settlor. However, there are several conditions
that need to be satisfied. They are as follows:
(1) the life insured must be the settlor or a beneficiary of the trust;
(2) the proposer is the trustee of the trust;
(3) any beneficiary of the trust –
(i) has an insurable interest in the life of the settlor / relevant beneficiary at
the time the insurance is effected; or
(ii) is –
(a) the settlor / relevant beneficiary’s spouse at the time the insurance is
effected;
(b) the settlor / relevant beneficiary’s child or ward under the age of 18
years at the time the insurance is effected; or
(c) any other person whom the settlor / relevant beneficiary is wholly or
partly dependant on and;
(4) the settlor / relevant beneficiary consents in writing to the effecting of the
insurance before it is effected.
C6. Creditors & Debtors
14.21 It has been well established that a creditor has an insurable interest in the life of
his debtor. When a creditor who pays the premiums for a policy insures the
debtor’s life, his insurable interest is not limited solely to the amount of the
indebtedness. He can insure his debtor’s life for a sum assured estimated to be
sufficient to reimburse him at the debtor’s death for the premiums paid plus the
debt and the interest on both.
C7. Key-Person Insurance
14.22 A key-person or key-man refers to an employee who is vital to the continued

profitability of a business. Examples of a key-person can be a sales executive with
valuable foreign contacts, or an inventor who creates new products. The loss of
such a key-person can seriously affect the business profitability.
14.23 Hence, a business enterprise will have an insurable interest in the life of such a
key-person. Therefore, it is common for a business enterprise to effect insurance
on the life of a key-person. The business enterprise is the proposer, and it has to
show that its insurable interest in the key-person (life insured) warrants the level
of cover required. The sum assured should be that required to compensate for the
loss of profits on the death of the key-person and, in particular, to cover the
expenses of recruiting, hiring and training a successor. This is why an underwriter
usually request for such evidence like a Key-Person Insurance questionnaire, as
well as the profit and loss statements of the company in the past three years, for
the assessment of Key-Person Insurance applications.
15. PRINCIPLE OF INDEMNITY AND LIFE INSURANCE
15.1 As a representative, you must always uphold the highest standards of integrity
and professionalism, and give advice to your clients that is fair and objective,
and in the clients’ best interests at all times.
15.2 As mentioned earlier, insurance seeks to compensate an insured only for the loss
that he has sustained. Insurance is not intended to enable him to profit from the
misfortune. This is in accordance with the principle of indemnity which states that
the financial position of an insured is to be restored approximately to the position
that existed immediately prior to the occurrence of the loss. The purposes of
employing this principle in insurance are to prevent the insureds from profiting
from insurance and at the same time to reduce moral hazard that can be exercised
by some insureds.
15.3 For an indemnity principle to work, a number of factors will need to be considered.
Amongst these are: the insured must show that he has suffered a loss in monetary
terms. Losses based only on factors such as sentimental value cannot be included.
Secondly, the insured must establish the extent and value of his loss. Thirdly, the
insured is not entitled to recover more than the amount of the loss from a single
loss, irrespective of the number of policies that he has in respect of the same
property.
15.4 The principle of indemnity applies to General Insurance as well as Health

Insurance. However, it does not apply to Life Insurance and Personal Accident
Insurance. It is because we cannot price the value of a human life. Neither can we
depreciate a human value. In life insurance, therefore, insurers use the sum
assured that an insured wants to purchase, provided that the amount is
reasonable. Personal Accident Insurance is another line of insurance where
insurers do not use the principle of indemnity Instead, they provide an agreed
amount, e.g. S$600 per week for loss of income or S$200,000 for loss of one limb.
Note that, however, in Life and Personal Accident Insurance, the principle of
indemnity is not totally overlooked, in the sense that the financial benefits are kept
approximately in line with the insured’s likely earnings that he could have made
if having not suffered from the loss. For this, insurers often exercise the following
underwriting practices:
(a) Insured’s ability to afford premiums. In theory, Life Insurance and Personal
Accident policies can have an unlimited sum assured. In practice, however,
the sum assured tends to be restricted by the ability or willingness of an
insured to pay the required premium. The sum assured, thus, reflects the
insured’s current wealth and future earnings power; and
(b) Direct action by the insurer. A sum assured which seems to be well in excess
of reasonable and customary amounts, say, based on the age and occupation
of the insured, may put the insurers on alert for the risk of fraud. Also, in
Personal Accident Insurance, any such a policy granting weekly benefits far
in excess of the insured’s normal earnings could catch the insurer’s attention.
16. STRUCTURE OF THE SINGAPORE INSURANCE MARKET
16.1 We will now briefly introduce the structure of the Singapore insurance market.
Like any other market, the Singapore insurance market comprises:
 buyers;
 sellers; and
 intermediaries.
A. Buyers
16.2 The buyers of insurance are those who need insurance as follows:
 individuals (including sole proprietors);
 commercial enterprises (such as multinational corporations, small and
medium enterprises, partnerships, companies, etc.); and
 government (including its various agencies, ministries and statutory
boards).
B. Sellers
16.3 Sellers may include direct insurers (which include: life insurers, general
insurers, and composite insurers), reinsurers (which include life reinsurers,
general reinsurers and composite reinsurers); captive insurers and Lloyd’s Asia
Scheme. In the context of life insurance, we will briefly explain the following
sellers:
 Direct Insurers; and
 Reinsurers.
B1. Sellers – Direct Insurers
16.4 These are the insurance companies which exist primarily to provide insurance
products to buyers in Singapore. All insurance companies carrying on any class
of insurance business in Singapore must be licensed under the Insurance Act
1966 for that class of business and are supervised by the Monetary Authority of
Singapore (MAS). The direct insurance companies in Singapore sell ordinary
life or general business (or both in the case of composite insurance companies).
The principal function of these direct insurers, also termed as primary insurers,
is to accept the transfer of risks from their personal or commercial customers
at appropriate premiums.
16.5 Insurance companies may be organised as private companies or public

companies or co-operatives. Co-operatives are business organisations owned
by the members who use their services. When a co-operative is set up to
provide for the insurance needs of its members, all policy owners of the
insurance co-operative become its members and co-owners of the company.

Co-operative societies are licensed insurers registered under the Co-operative
Societies Act 1979.
B2. Sellers – Reinsurers
16.6 Just as people transfer risk by buying insurance, insurers may also transfer risk
by buying insurance from other insurers. For example, one insurer may buy
insurance from another to cover part or all of a risk that the first company will
not or cannot undertake itself. The process of transferring risk from one insurer
to another is called reinsurance. The company seeking reinsurance is the ceding
company. The company accepting the risk is called the reinsurer. Reinsurers
that desire to carry on reinsurance business in Singapore must also be
authorised under the Insurance Act 1966 and they may be life reinsurers or
general reinsurers (or both in the case of composite reinsurers).
16.7 Note that reinsurers only have insurers as customers; they do not take on
business from individuals or other commercial enterprises.
C. Intermediaries
16.8 Insurance can be purchased direct from the insurer or it can be purchased via
intermediaries.
16.9 An insurance intermediary means a person who, as an agent for one or more
insurers or as an agent for insureds or intending insureds, arranges contracts
of insurance in Singapore, and includes an insurance agent or an insurance
broker. In legal terms every intermediary is an agent, i.e. one who is authorised
by a party, called the principal, to bring that principal into a contractual
relationship with another party. In the next section, we will describe the various
types of intermediaries or representatives selling or advising on life insurance
products in Singapore.
16.10 In Singapore, intermediaries selling life and health insurance products are
termed as representatives and they can be representatives of either life
insurance companies (insurers) or banks or other financial institutions or
financial adviser firms. The licensing of financial advisers and their
representatives is governed by the Financial Advisers Act (FAA) 2001. The
various types of representatives are further explained as follows:
(a) Representative Of A Life Insurance Company (Insurer)

He represents one insurer only and can advise the customer on the
products of that insurer. He may also advise the customer on the products
of other financial institutions, as long as the insurer has an agreement to
distribute those products.
(b) Representative Of A Bank Or Other Financial Institution

He represents one bank or one other financial institution only and can
advise the customer on the products of one or more insurers with whom
the bank or financial institution has an agreement to distribute those
products.
The representative has to tell the customer the insurer from which he can
provide the products. Financial institutions include insurance brokers,
securities firms, and finance companies.
(c) Representative Of A Licensed And Exempt Financial Adviser (FA) Firm

He represents one FA firm only, and can advise the customer on the
products of one or more insurers with whom the FA firm has an agreement
to distribute those products. All FA firms are licensed by the MAS.
FA firms that meet certain conditions of the FAA may qualify to be

"Independent Financial Adviser" (IFA) firms. Some of those conditions in
the FAA Guidelines will mean that the IFA representative can provide and
advise on the products of at least four insurers. He will clearly show the
customer that he does not have financial or commercial links with these
insurers that can influence his recommendations for the customer.
For the purpose of this Study Text, we use the term “advisers”
interchangeably with “representatives”.
D. Introducer Of Life Insurance Advisory Services
16.11 FAs may appoint introducers to introduce their services to the consumer.
Introducers may be a corporation or an individual person. The introducer must
clearly tell the consumer whether he is paid by the FA, and how much, for
making the introduction, if he is asked.
16.12 The introducer is not authorised to give product advice, provide any product
recommendations, or market or arrange any contract of insurance.
E. Web Aggregators
16.13 A web aggregator is intended as a way to leverage on technology to make it

easier for consumers to compare products. Web aggregators compile and
provide information about insurance policies of various insurance companies
on a website. Web aggregators are different from other distribution channels,
as they are designed to be a self-help tool for the customers.
16.14 As per Section 39(8) of the Insurance Act 1966, “web aggregator” means an
Internet portal or domain on the Internet which the Authority (i.e. MAS), or such
person as the Authority may appoint, create, develop and operate for the
purposes of publishing certain information from time to time. The purpose of
such information in the internet portal is to assist any person in the purchase of
a policy.
16.15 Section 39 of the Insurance Act 1966 also stipulates that the Authority may, by
regulations made or written notice, require a licensed insurer or class of
licensed insurers to provide to the Authority, such information as the Authority
may require for the purposes of the web aggregator.
16.16 Personal lines, such as Health Insurance, Travel Insurance and Private Motor
Car Insurance are usually displayed and promoted by the web aggregators such
as Singsaver at https://insurance.singsaver.com.sg/home, Moneysmart at
https://www.moneysmart.sg/insurance etc. These web aggregators tend to be
personal insurance comparison sites designed to make it easier for customers
to shop for and compare selected insurers’ quotes and terms for Motor, Travel,
Health Insurance, etc. Certain web aggregators work directly with the major
insurers and intermediaries in Singapore, so that products can be easily bought
at one place.
17. OTHER RELEVANT ORGANISATIONS
A. Rating Agencies
17.1 Rating agencies play an increasingly important role in the capital markets today,
by providing an independent assessment and opinion on the overall financial
capacity or credit worthiness of financial institutions that issue a broad range
of capital market instruments, such as debt obligations, securities, etc. These
ratings typically categorise the financial institutions into different bands
represented by letter grades (e.g. AAA, AA, A, BBB, BB, etc.) that reflect the
rating agency’s opinion on the relative credit worthiness of institution, in terms
of likelihood of default, credit stability, ability or willingness to meet its financial
obligations, etc.
17.2 In the case of insurance ratings, the rating will typically reflect an independent
assessment of the insurer’s financial strength and ability to meet its ongoing
insurance policy and contract obligations. Such ratings may help an insurance
or reinsurance buyer or broker to make an informed decision on their choice of
insurance or reinsurance carrier.
17.3 Rating agencies are increasingly incorporating sustainability and

environmental, social and governance (ESG) issues as far as rating
methodologies are concerned.
B. Market Associations
17.4 Just as there are trade associations representing companies in other markets,
there are trade associations in Singapore representing the insurance companies
and intermediaries. The main function of such associations is to protect,
promote and advance the common interest of their members.
17.5 Examples of such associations are:
Association Representing
Association of Financial Advisers (Singapore) financial advisers
[AFA(S)]
General Insurance Association of Singapore (GIA) direct general
insurers
Life Insurance Association of Singapore (LIA) direct life insurers
Loss Adjusters Association (Singapore) (LAAS) loss adjusters
Reinsurance Broker’s Association (Singapore) reinsurance brokers
(RBAS)
Singapore Insurance Brokers’ Association (SIBA) general insurance
brokers
Singapore Reinsurers’ Association (SRA) general, life and
composite reinsurers
Singapore Fintech Association (SFA) FinTech community
C. Professional Bodies
17.6 A professional body is usually a non-profit organisation that exists to further

the interests of a particular profession, by representing the views of that
profession and its members in matters of public and professional interests.
Examples of insurance-related professional bodies are:
 Association of Singapore Insurance Agents (ASIA);
 Financial Planning Association of Singapore (FPAS);
 Financial Services Managers Association (FSMA);
 Insurance and Financial Practitioners Association of Singapore (IFPAS);
 Singapore Actuarial Society (SAS);
 Singapore Insurance Institute (SII); and
 The Association of Financial Advisers (AFAS).
D. Financial Industry Disputes Resolution Centre (FIDReC)
17.7 In this section, we will briefly touch on the role of FIDReC, including the set-up
of FIDReC and its dispute resolution process.
D1. Mission And Background Of FIDReC
17.8 FIDreC was launched in August 2005, as part of an initiative by the Monetary
Authority of Singapore (MAS) to create a one-stop centre for the resolution of
all retail disputes with financial institutions.
17.9 FIDReC’s mission is to provide an affordable alternative dispute resolution

scheme that is independent and impartial, so as to encourage and assist in the
resolution of disputes between consumers and financial institutions in an
amicable and fair manner. Disputes lodged with FIDReC are usually resolved
within 6 months, without the involvement of external lawyers.
D2. Jurisdiction Of FIDReC
17.10 The jurisdiction of FIDReC in adjudicating disputes between consumers and

financial institutions is as follows:
(a) For claims between insureds and insurance companies: up to S$100,000 per
claim.
(b) For disputes between banks and consumers, capital market disputes and all
other disputes: up to S$100,000 per claim.
17.11 Generally, FIDReC only handles disputes between financial institutions who are
its subscribers and consumers. The financial institution must also have had the
opportunity to resolve the dispute with the consumer first.
17.12 The following qualify as consumers:
(a) Individuals or sole proprietors who have a customer relationship with a

financial institution;
(b) Persons who have a beneficial interest in the activity;
(c) A trustee or personal representative;
(d) An insured; or
(e) Third parties who have third-party coverage under an insurance contract.
17.13 The following complaints cannot be brought before FIDReC:

 Commercial decisions;
 Pricing policies and other policies such as interest rates and fees;
 Cases under investigation by any law enforcement agency;
 Cases concerning principal agent issues;
 Complaints that are more than 6 months after the financial institution's final
reply;
 Complaints that have been settled between the consumer and the financial
institution; and
 Cases that have been subjected to a court hearing and for which a court
judgment or order has been passed.
D3. FIDReC’s Dispute Resolution Process
17.14 The dispute resolution process of FIDReC comprises: Complaint Filing (1st
Stage) Mediation (2nd Stage) and Adjudication (3rd Stage).
(a) Complaint Filing (1st Stage)

Consumer lodges complaint at FIDReC and Case Manager verifies if the
complaint is within FIDReC’s jurisdiction.
(b) Mediation (2nd Stage)

When a complaint is first received, the Case Manager will arrange
mediation to facilitate discussions between disputants with the objective of
reaching a settlement. This service is free of charge for consumers.
However, the financial institution must pay a fee of S$50 for the cost of
mediation per claim (excluding GST).
(c) Adjudication (3rd Stage)

Where the dispute is not settled by mediation, the consumer can choose to
allow an Adjudicator to decide the case on the facts and merits. Under the
FIDReC scheme, the cost of adjudication per claim is S$50 for the consumer
(excluding GST) and S$500 for the financial institution (excluding GST).
D4. Filing A Complaint
17.15 The process of initiating a complaint with FIDReC is simple:

(a) Any consumer who has a dispute that he has not been able to resolve with
a financial institution can file a complaint free of charge with FIDReC either
in person or via fax, post or e-mail.
(b) On receipt, a Case Manager will process the complaint. If the complaint is
within FIDReC's jurisdiction, the Case Manager will take it up with the
financial institution concerned, and will facilitate a resolution of the dispute
if possible through case management and mediation. This service is free of
charge to consumers.
(c) If a resolution cannot be reached, the consumer may then choose to take
his complaint further by referring the dispute to the Adjudicator or a Panel
of Adjudicators for adjudication. The consumer needs to pay an
adjudication case fee when his case proceeds to adjudication.
17.16 The decision of the Adjudicator or Panel is final and binding on the financial
institution, but not on the consumer. If the consumer is not satisfied with the
decision, he has the option to continue to pursue the complaint through other
channels or means such as litigation.
18. MONEYSENSE PROGRAMME
18.1 As a representative, you must always uphold the highest standards of integrity
and professionalism, and give advice to your clients that is fair and objective,
and in the clients’ best interests at all times.
18.2 MoneySense is Singapore’s national financial education programme, started in

2003. Our aim is to help Singaporeans to manage their money well, and make
sound financial decisions on their own. The MoneySENSE programme covers
three tiers of financial literacy:
 Tier I - Basic Money Management - covers skills in budgeting and saving,
and the responsible use of credit;
 Tier II - Financial Planning - equips Singaporeans with the skills and

knowledge to plan for their long-term financial needs; and
 Tier III - Investment Know-How - imparts knowledge about the different
investment products and skills for investing.
18.3 Listed below are a number of consumer guides that are produced under the
MoneySENSE programme:
 Your Guide To Health Insurance;
 Your Guide To Life Insurance;
 Your Guide To Investment-Linked Insurance Plans;
 Your Guide To Participating Policies; and
 Your Guide To The Nomination Of Insurance Nominees 2015.
18.4 The MoneySenseCore Financial Capabilities Framework identifies five core

financial capabilities. The capabilities aim to help individuals apply their
knowledge and skills across the different tiers of financial literacy when making
financial decisions. The five core financial capabilities are as follows:
 Understanding money is about having the numeracy skills to evaluate the

costs and benefits of options available. It is also about understanding how
economic conditions can affect a person.
 Understanding yourself, your rights and responsibilities is about knowing

how personal circumstances, like how much a person earns, his or her age,
the number of children he or she has, affect his or her financial decisions.
It is also important to know your rights and responsibilities as a consumer
of financial products and services.
 Managing everyday money is about being able to budget, to live within

one’s means and to use credit facilities responsibly (e.g. for major items like
buying a home).
 Planning ahead is about being able to put together a financial plan to help
one manage one’s resources (e.g. income, debt, savings and investments)
prudently.
 Selecting financial products is about understanding the purpose, features,

risks and costs of common financial products (e.g. debit and credit cards,
loans, insurance, and investments), the key factors to consider and
questions to ask before deciding whether to take up a product.
18.5 Details of these Consumer Guides, including others can be viewed at the
websites of MoneySENSE and/or LIA.
19. SINGAPORE DEPOSIT INSURANCE CORPORATION (SDIC)
19.1 SDIC is a company limited by guarantee (CLG) under the Companies Act, and it
is set up by an act of parliament and has been designated to be the deposit
insurance and policy owners’ protection fund agency under the Deposit
Insurance and Policy Owners’ Protection Schemes Act 2011(DI-PPF Act 2011).
19.2 Singapore Deposit Insurance Corporation Limited (SDIC) covers individuals and
other non-bank depositors with insured deposits placed with a Deposit
Insurance (DI) Scheme member. Other non-bank depositors include sole
proprietorships, companies, associations and societies. All these persons
would be insured depositors.
19.3 For further details of the DI Scheme, refer to the SDIC website at:
www.sdic.org.sg.
CHAPTER
01
RISK AND LIFE INSURANCE
IMPORTANT CONCEPTS DEFINITIONS/EXPLANATIONS

Risk Risk is the possibility of loss, and there is an uncertainty element to it.
Speculative risk Speculative risk involves three possible outcomes: loss, gain, or no change.
Pure risk Pure risk involves no possibility of gain; either a loss occurs or no loss occurs.
This is the only kind of risk that can be insured (provided that it meets certain other
requirements)
Requirements of insurable • Loss must be significant in financial terms.
risks • Loss must occur by chance.
• Loss must be definite.
• Loss must be measurable.
• Loss must not be catastrophic to the insurer.
• Loss must be based on large number of insured.
Dealing with risk For example, we can avoid the risk of personal injury that may result from a car
• Avoiding the risk collision by never driving a car.
Dealing with risk An example will be to undergo a health screening examination yearly, when one
• Controlling the risk reaches a certain age (e.g. 40 years old), so that one can detect and treat an illness
before it is too late.
Dealing with risk For example, an employer can provide medical expense benefits to its employees,
• Retaining the risk by either setting aside money to pay their medical expenses, or paying the
expenses out of its current income.
Dealing with risk For example, a breadwinner may transfer his risk of premature death or disability
• Transferring the risk to the insurer by paying a small, predictable amount of premium to the insurer.
Personal risks that can be • Risk of premature death.
insured • Risk of outliving resources or longevity risk.
• Risk of poor health and disablement.
Life insurance policy A life insurance policy is a contract which the insurer promises to pay a benefit
upon the death of the person who is insured. As such, life insurance provides
financial protection against the economic loss caused by the premature death
of the person being insured. This benefit is commonly known as Death Benefit.
The insurer will pay a lump sum payment of the sum assured, plus bonuses if
applicable, in the event of the life insured’s death.
Applicant of a life The applicant (also known as the proposer) is the person or business that applies
insurance policy for an insurance policy.
Policy owner of a life When a policy is issued, the person or business that owns the insurance policy is
insurance policy known as the policy owner.
Life insured of a life The person who is insured by a life insurance policy is referred to as the life insured.
insurance policy
Beneficiary of a life The person or party whom the policy owner named to receive the policy benefit.
insurance policy
Third-party policy When one person purchases insurance on the life of another person.
Physical hazard A physical hazard is a physical characteristic that may increase the likelihood of loss.
For example, a person with a history of heart attacks possesses a physical hazard
that will increase the likelihood of that person dying sooner than that of a person of
the same age and gender without such similar medical history.
Moral hazard Moral hazard is the likelihood that a person may act dishonestly in the insurance
transaction. For example, if an individual applies for a sum assured which is far in
excess of what others in the same financial situation would buy, the insurer would
be concerned about the reason for the high cover.
1
Anti-selection Individuals who believe they have a greater-than-average likelihood of loss tend to
seek insurance protection to a greater extent than do those who believe they have
an average or less-than-average likelihood of loss.
Methods to minimise anti- • Underwriting or selection of risks.
selection • Offering policies with different excesses.
• Offering policies with pre-existing condition exclusions.
Term insurance Provides a death benefit if the insured dies during a specified period.
Whole life insurance Whole Life Insurance provides life insurance coverage throughout the insured’s
lifetime and also builds up cash values which can be used as a form of savings for
the policy owner.
Endowment insurance Endowment insurance provides a policy benefit that is paid either when the insured
dies or on a stated date if the insured lives until then.
Universal life insurance Universal life insurance is a form of “interest sensitive” whole life insurance that
offers a death benefit, and because of its flexible premium feature, provides
the opportunity to build cash values which the policy owner can borrow from or
withdraw.
Annuity An annuity is a series of periodic income payments to a named individual in
exchange for a premium or a series of premiums.
Investment-linked Life ILPs provide a combination of protection and investment elements.
Insurance policies (ILPs)
Health insurance products These products are designed to cover hospital expenses, surgical expenses and
emergency accident outpatient expenses incurred as a result of accident, sickness
or disease commencing or occurring during the period of insurance.
Life insurance as a • Financial protection against premature death.
financial protection tool • Financial protection against outliving resources.
• Financial protection against ill health and disablement.
» Critical illness insurance.
» Medical expense insurance.
» Hospital cash (income) insurance.
» Disability income insurance.
» Long-term care insurance.
• Financial protection for businesses
Other uses of life • Assist in making savings possible.
insurance • Provides a safe investment.
• Encourages thrift.
• Minimises worries and provides peace of mind.
Risk pooling Pooling brings together a large number of exposures of similar risk characteristics,
thereby allowing the application of the law of large numbers to predict the
frequency (probable number of losses) and severity of losses (probable size of the
losses).
How insurers can accept An insurer accepts the risk of financial loss of a large number of people, but only a
so many risks? small percentage of these people will actually suffer an insured financial loss at any
given period.
Law of large numbers - With the increasing number of insured persons, risk and uncertainty will diminish.
insurance Thus, the larger the insured group, the more predictable will be the loss experience
for the insured group as a whole.
Principle of utmost good • Disclose all material facts (see explanation below) which they are aware of or
faith ought to have been aware of, even if no question is specifically asked in the
(Uberrima Fides) proposal (or application) form; and
• Not to make any mis-statement of material facts.
Material facts Material facts are facts that can cause an underwriter to deal with a case differently
if the information was disclosed at the time of application of the insurance policy.
2
Facts which need not be • Facts which the insurer already knows [e.g. An insurer should know about
disclosed outbreak of civil unrest in a certain country, or influenza A (H1N1) in various
parts of the world];
• Facts which the insurer ought to know;
• Facts about which the insurer waives information;
• Facts which can be discovered, where enough information has been given to
provoke enquiry by the insurer (e.g. In answering a proposal form question
on other existing life insurance policies taken out with the same insurer, the
proposer states as “refer to details in your company’s records”, instead of
writing down all the policy details as requested in the proposal form); and
• Facts which lessen the risk (e.g. A person applying for Personal Accident
Insurance does not like to take part in hazardous activities).
Duty of disclosure – at Under common law, the duty of disclosure starts at the beginning of negotiations
inception and ends at the formation of the insurance contract.
Duty of disclosure – on On the renewal of a policy, the duty of disclosure by the insured is revived for
renewal general insurance. There is no such duty of disclosure for life insurance policies,
as they are not renewable annually, but which are issued for a specific number of
years or for life.
Duty of disclosure – on During the currency of the insurance contract, it may be necessary to change
alteration the terms of the policy. In these cases, the duty of disclosure is revived as a new
contract is being formed.
Insurer’s duty of disclosure • Notifying an insured of a possible entitlement to a premium discount resulting
from a good previous insurance history;
• Only taking on risks which the insurer is licensed to accept, i.e. Avoid
unenforceable contracts; and
• Ensuring that statements made are true, as misleading an insured about policy
cover is a breach of utmost good faith.
When does insurable An insured interest exists when the policy owner is likely to benefit if the insured
interest exist? continues to live and is likely to suffer some loss or detriment if the insured dies.
Insurable interest If the insurable interest requirement is not met when a policy is issued, the policy is
requirement not met. not valid.
Why is insurable interest • Excludes the possibility of gambling (i.e. minimise problems of moral hazard in
necessary? insurance).
• The proposer is expected to safeguard the subject matter (i.e. the proposer is
interested in its preservation).
Insurable interest in life There must be an insurable interest, or a presumed insurable interest, present at
insurance the inception of the insurance contract, but it need not be present at the time of the
life insured’s death. A beneficiary, therefore, need not provide evidence of insurable
interest in order to receive the benefits of a life insurance policy.
Insurable interest in • Insurable interest must be present at both the inception of the insurance
general insurance contract and at the time of loss.
• For Marine Cargo Insurance, there is no need for insurable interest to be
present at the inception of the insurance contract. Rather, insurable interest
must exist only at the time of loss.
Principle of indemnity • States that the financial position of an insured is to be restored approximately
to the position that existed immediately prior to the occurrence of the loss.
• The principle of indemnity applies to General Insurance as well as Health
Insurance. However, it does not apply to Life Insurance and Personal Accident
Insurance. It is because we cannot price the value of a human life.
Buyers of insurance • Individuals (including sole proprietors);
• Commercial enterprises (such as multinational corporations, small and medium
enterprises, partnerships, companies, etc.); and
• Government (including its various agencies, ministries and statutory boards).
3
Sellers of insurance • Direct insurers (which include: life insurers, general insurers, and composite
insurers).
• Reinsurers (which include life reinsurers, general reinsurers and composite
reinsurers).
• Captive insurers
• Lloyd’s Asia Scheme.
Intermediaries An insurance intermediary means a person who, as an agent for one or more
insurers or as an agent for insureds or intending insureds, arranges contracts of
insurance in Singapore, and includes an insurance agent or an insurance broker.
• Representative Of A Life Insurance Company (Insurer).
• Representative Of A Bank Or Other Financial Institution.
• Representative Of A Licensed And Exempt Financial Adviser (FA) Firm.
Introducer of life The introducer is not authorised to give advice, provide any recommendations, or
insurance advisory market or arrange any contract of insurance.
services
Web aggregator Web aggregators compile and provide information about insurance policies of
various insurance companies on a website.
Rating agencies Rating agencies play an increasingly important role in the capital markets today, by
providing an independent assessment and opinion on the overall financial capacity
or credit worthiness of financial institutions that issue a broad range of capital
market instruments, such as debt obligations, securities, etc.
Rating agencies are increasingly incorporating sustainability and environmental,
social and governance (ESG) issues as far as rating methodologies are concerned.
Market associations The main function of such associations is to protect, promote and advance the
common interest of their members.
Professional bodies A professional body is usually a non-profit organisation that exists to further the
interests of a particular profession, by representing the views of that profession and
its members in matters of public and professional interests.
Financial Industry Disputes • A one-stop centre for the resolution of all retail disputes with financial
Resolution Centre (FIDReC) institutions.
• FIDReC’s mission is to provide an affordable alternative dispute resolution
scheme that is independent and impartial, so as to encourage and assist in
the resolution of disputes between consumers and financial institutions in an
amicable and fair manner
Jurisdiction of FIDReC • For claims between insureds and insurance companies: up to S$100,000 per
claim.
• For disputes between banks and consumers, capital market disputes and all
other disputes: up to S$100,000 per claim.
Dispute resolution process • Complaint Filing (1st Stage)
of FIDReC Consumer lodges complaint at FIDReC and Case Manager verifies if the complaint is
within FIDReC’s jurisdiction.
• Mediation (2nd Stage)
When a complaint is first received, the Case Manager will arrange mediation
to facilitate discussions between disputants with the objective of reaching a
settlement. This service is free of charge for consumers. However, the financial
institution must pay a fee of S$50 for the cost of mediation per claim (excluding
GST).
• Adjudication (3rd Stage)
Where the dispute is not settled by mediation, the consumer can choose to allow an
Adjudicator to decide the case on the facts and merits. Under the FIDReC scheme,
the cost of adjudication per claim is S$50 for the consumer (excluding GST) and
S$500 for the financial institution (excluding GST).
Three tires of financial • Tier I - Basic Money Management.
literacy – MoneySENSE • Tier II - Financial Planning.
programme • Tier III - Investment Know-How.
4
Part I Chapter 2. Setting Life Insurance Premium
PART I CHAPTER 2
SETTING LIFE INSURANCE PREMIUM
CHAPTER OUTLINE
1. Pricing Considerations
LEARNING OUTCOMES

 know who calculates the premiums for life insurance policies
 explain all the factors that will affect the premiums of life insurance policies
CONTENTS
CHAPTER OUTLINE ......................................................................................................... 1
1. PRICING CONSIDERATIONS....................................................................................... 3
A. Mortality And Morbidity Rates ............................................................................... 3
A1. Mortality Rate ................................................................................................... 3
A2. Morbidity Rate.................................................................................................. 4
B. Investment Income .................................................................................................. 4
C. Expenses .................................................................................................................. 5
D. Gender………………………………………………………………………………………..5
E. Smoking Status........................................................................................................ 6
F. Amount Of Sum Assured ........................................................................................ 6
G. Frequency Of Premium Payments ......................................................................... 7
H. Suitability Of Frequency And Mode Of Premium Payments ................................ 8
1. PRICING CONSIDERATIONS
1.1 The premiums of life insurance policies are calculated by professionals called
Actuaries. The job of the actuary is to set the premiums, such that they are
sufficient to cover the claims that the insurer must pay, and the costs of doing
business, which will include profits to the insurer. In addition, they have to make
sure that the premiums are not too high, such that they are not competitive with
that of the other life insurers.
1.2 When setting the premiums, the actuaries will take into consideration the
following factors:
 Mortality and Morbidity Rates;
 Investment Income;
 Expenses;
 Gender;
 Smoking Status;
 Amount of Sum Assured; and
 Frequency of Premium Payments.
A. Mortality And Morbidity Rates
A1. Mortality Rate
1.3 The first factor that an actuary considers when determining the premium rate to
be charged for a life insurance product is to find the mortality rate. He will predict
ahead of time the average number of people who will die each year at each age,
based on the large number of people and deaths recorded by the life insurer over
the years. As this record has been kept by the life insurer for many years, of people
of all ages over a long period of time, it enables the actuary to make reliable
predictions. This is an example of the Law of Large Numbers in action which
forms the basis of insurance. In other words, when the actuary calculates the
mortality rate, he is not concerned with how long an individual may live, but
rather, how many individuals in a large group may die in a given period of time.
1.4 Having decided on the number of deaths, the actuary then divides it by the total
number of people of that age to arrive at the mortality rate. He then compiles the
mortality rates into a table categorised by age. This table is called the Mortality
Table. A Mortality Table, thus, represents a record of mortality observed in the
past and is arranged so as to show the probabilities of death and survival at each
separate age. It shows a hypothetical group of individuals beginning with a certain
age and traces the history of the entire group year by year until all have died.
Figure 2.1 shows an abridged version of a mortality table.
Figure 2.1: Mortality Table For 100,000 People

Age Number Living Number Age Number Living Number
Dying Dying
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
1.5 Looking at the age of 10 years, the table above tells us that 98,509 of the original
group of 100,000 are still living. Of those still living, 119 will die within the year.
So, in order to provide a death benefit of S$10,000 to each beneficiary of those
who will be dying, the insurer needs a total of S$1,190,000 (S$10,000 x 119 =
S$1,190,000).
1.6 In order to accumulate this S$1,190,000, each of the 98,509 persons living at the
beginning of the year will have to pay S$12.08 (S$1,190,000 ÷ 98,509). This will be
the premium rate that the insurer will charge for pure death protection for
proposers who are buying insurance policies at the age of 10 years.
A2. Morbidity Rate
1.7 Morbidity rate is primarily used to determine the premiums for Health Insurance,
such as Critical Illness or Dread Disease Insurance. It is the rate at which sickness,
injury and failure of health occur among a defined group of people. Like the
mortality rates, insurers compile the morbidity rates into morbidity tables
according to age. Although morbidity is the main consideration in determining
the premium rates for Health Insurance, the actuary will also take into
consideration the mortality rate.
B. Investment Income
1.8 Premiums are the main source of money used to pay death benefits. However,
with the level premiums that are used for most life insurance policies, not all of
the premiums which the insurer receives each year are needed to pay death
benefits in that year. Some life insureds live for many years and pay premiums to
keep their policies in force throughout those years. These premiums are invested
by the insurer to earn investment returns.
1.9 When the actuary calculates the price of insurance, he estimates the amount of
money that the insurer expects to earn on its investments. Investments help to
reduce the amount of money that the insurer has to charge for the insurance, i.e.
the insurer reduces the price of insurance by the investment income that it expects
to earn. The insurer usually assumes a moderate rate of investment return on the
premiums which it has invested. Some investments may earn more, while some
may earn less than the assumed rate of interest. Whatever the investment
experience, premium calculations are made in the expectation that the insurer will
earn the assumed rate of interest. So, the higher the assumed rate of interest, the
lower will be the premiums charged to policy owners.
1.10 When an insurer uses just the rate of mortality/morbidity and investment income
to calculate the premiums, it is actually calculating the net premiums. The net
premium is the amount needed just to pay for the insurance protection.
C. Expenses
1.11 However, an insurer must also collect sufficient premiums to pay for its expenses.
Like any business, an insurer incurs costs when carrying out its business.
Generally, there are two types of costs. The first category includes the salaries for
staff, commissions for representatives of financial advisers, rents,
advertisements, taxes, and other costs of running the business.
1.12 The second category is the lapse rate of policies. Sometimes, a policy lapses
(terminates for non-payment of premiums) before the insurer has collected
enough premiums to cover the costs associated with underwriting and issuing the
policy. As such, the actuary includes an amount in the product’s price to
compensate the insurer for the losses associated with lapses. In general, the
higher the anticipated lapse rate in the early years of the policy, the higher will be
the amount that must be added to the product’s price, to allow the insurer to
recover its expenses. The cost of this early lapse rate, together with the costs
incurred under the first category, increases the price of insurance.
1.13 The total amount added to the net premium to cover all of the insurer’s expenses
(and to provide for a margin of profit) is called the loading. Once the loading is
added to the net premium, the result is the gross premium (see Figure 2.2). This
is the premium that the proposer is required to pay.
Figure 2.2: Determining The Gross Premium
NET PREMIUM
(Rate of Mortality /
Morbidity
+
LOADING
EXPENSES = GROSS PREMIUM
and Investment
Income)
D. Gender
1.14 Generally, the premium rates for females are lower than those for males where
life insurance is concerned. This is because statistics show that females, on
average, tend to live longer than males of the same age. Hence, most insurers
charge lower premium rates for females. The common practice is to use the
reduction in age method. For example, a 24-year-old female life insured may be
charged the premium rate of a 21-year-old male, effectively a discount of three
years in age.
1.15 Where Health Insurance is concerned, however, the premium rates for female
lives tend to be higher than those for male lives. This is because statistics show
that women above the age of 65 years require hospitalisation more often and have
more surgeries and medical treatments than men.
E. Smoking Status
1.16 Besides the gender, insurers also give discounts for non-smokers, as statistics
show that they tend to enjoy better health and, thus, also enjoy a longer life span
as compared to those who smoke. Figure 2.3 is an example of the discounts
enjoyed by non-smokers.
Figure 2.3: Non-smoker Discount

Age Next Birthday (Years) Discount Per S$1,000 Sum Assured
17 – 30 S$0.40
31 - 40 S$0.70
41 - 50 S$1.00
> 50 S$1.80
F. Amount Of Sum Assured
1.17 For ease of calculation, insurers usually set a premium rate for life insurance
policies. For example, the annual premium rate may be S$18.96 per S$1,000 of
sum assured for a 25-year-old male. So if the policy is for S$100,000, the premium
can easily be calculated as S$100,000 x 18.96 ÷ 1,000 = S$1,896.
1.18 However, some of the administrative expenses involved in the issuing and
servicing of an insurance policy are fixed and independent of the sum assured.
For example, printing and sending a policy costs the same whether the policy sum
assured is S$50,000 or S$500,000. So charging a premium that increases in
proportion to the sum assured may result in charging the policy owner too much
for the administrative expenses.
1.19 Hence, insurers sometimes give a discount for a larger policy. This is usually done
by way of a reduction to the premium rate to be charged. Using the example of
the annual premium rate for a 25-year-old man above, assume that buying a
S$250,000 policy gets a S$1 discount from the annual premium rate. Therefore,
the discounted rate is S$(18.96 – 1) = S$17.96. The premium payable is then
S$4,490 (S$250,000 x 17.96 ÷ 1,000) per annum. Without such discount, he will
have to pay S$4,740 (S$250,000 x 18.96 ÷ 1,000) per annum. Thus, he enjoys a
discount of S$250 per annum.
G. Frequency Of Premium Payments
(a) Regular Premiums

The premiums for most life insurance products are calculated on an annual
basis, payable annually in advance, and are level, i.e. the policy owner will
pay a fixed amount annually (year after year). However, insurers do allow
their policy owners to pay by other frequencies, such as semi-annually,
quarterly, monthly or in one lump sum (single premium).
By allowing the more frequent payments, the insurer would lose the
interest that it could have earned should the policy owner have paid the
premium on an annual basis. In addition, it would incur expenses for
processing the additional number of payments each year. As such, insurers
would cost in these two factors when computing the other frequent modes
of premium payments. For example, some insurers charge an additional
2% of annual premium if policy owners choose to pay monthly rather than
yearly premiums.
(b) Single Premiums

Insurers also allow payment by single premium, i.e. payment in one lump
sum. With such payment, the insurer has the full premium amount for
investment upfront. This enables the insurer to earn higher investment
returns. Hence, all other things being equal, the single premium is likely to
be lower than the sum of all future regular premiums.
(c) Recurrent Single Premiums

Besides payment by single premium, insurers sometimes allow policy
owners to pay by recurrent single premiums. This applies usually to
investment linked policies. This option is similar in concept to the regular
premium option in that the policy owner may make single premium
payments on a regular basis. However, unlike regular premium policies, the
policy owner has the flexibility of discontinuing future premium payments
without affecting the policy (i.e. it will be treated as a fully paid-up policy).
Under current CPF rules, only Single Premium or Recurrent Single Premium
policies may be purchased using CPF monies. (Other restrictions also
apply.)
(d) Yearly Renewable Premium

There is another type of premium payment where the policy owner pays
for only one year of coverage each year and renews the policy each year.
These premiums may be subject to an increase in premium payment upon
renewal of the insurance policy, owing to the increase in age and, therefore,
the increase in mortality risk.
(e) Limited Premium

Some insurers also permit limited premium for selected policies. The policy
owner will only need to pay premiums for a specified period (e.g. 20 years)
or up to a specified age (e.g. the age of 60 years). The premium payable will
be higher than the normal regular premium policy, because the same cost
is being spread over a shorter period.
H. Suitability Of Frequency And Mode Of Premium Payments
1.20 The important factors which you must consider when advising your client on the
frequency and mode of premium payment are his budget and the amount of
coverage that he requires, i.e. premium affordability and product suitability.
1.21 Unless the client has sufficient money set aside to buy insurance policies, you
should not advise him to pay by a single premium, as otherwise the amount of
coverage that he can buy may be less than he needs.
1.22 However, as the premiums for Mortgage Reducing Term Insurance policies are
low, you may advise him to pay the premium as a single lump sum. In this way,
there will be no chance of the policy lapsing due to non-payment of premium. The
policy could then fulfil the purpose for which it was originally taken out (in this
case to settle any outstanding housing loan with the bank).
1.23 Regular premiums are more suitable for Whole Life Insurance and Endowment
Insurance policies, as the premiums for these policies are higher compared to
Term Insurance policies for the same sum assured, and paying by single premium
will require comparatively larger amounts of money. Besides, as this type of
policy acquires cash value, the policy can remain in force by activating one of the
non-forfeiture options, if necessary. However, if the client has a lump sum of
money and wishes to invest in insurance, then a single premium Endowment
Insurance policy may be suitable for him.
1.24 Yearly renewable premium is applicable only to Yearly Renewable Term

Insurance policies. The premium increases yearly or every few years based on the
insured’s attained age. Although the premiums may initially be lower than a
corresponding Term Insurance policy, they will increase significantly as the
insured gets older. You should not recommend this type of policy without
pointing this out to your client.
1.25 A Term Insurance policy with a longer term and with a renewable option attached
to it may be a better choice than a Yearly Renewable Term Insurance policy.
1.26 Table 2.1 shows a summary table of the different types of premium payments and
their frequencies.
Table 2.1: Summary table of the different frequency of premium payments.

Different modes of premium Frequency of premium payments
payments
Regular premiums - Such premiums for most life insurance
products are calculated on an annual
basis, payable annually in advance, and
are level.
- However, insurers do allow their policy
owners to pay by other frequencies,
such as semi-annually, quarterly,
monthly or in one lump sum (single
premium).
Single premiums - Payment is in one lump sum.
- With such payment, the insurer has the
full premium amount for investment
upfront.
Recurrent single premiums - Similar in concept to the regular
premium option.
- But unlike regular premium policies,
the policy owner has the flexibility of
discontinuing future premium
payments without affecting the policy
(i.e. it will be treated as a fully paid-up
policy).
Yearly renewable premiums - Policy owner pays for only one year of
coverage each year and renews the
policy each year.
Limited premiums - Policy owner will only need to pay
premiums for a specified period (e.g. 20
years) or up to a specified age (e.g. the
age of 60 years).
- Premium payable will be higher than
the normal regular premium policy
since the same cost is being spread
over a shorter period.
CHAPTER
02
SET TING LIFE INSURANCE PREMIUM

Actuaries • The premiums of life insurance policies are calculated by professionals called
Actuaries.
• The job of the actuary is to set the premiums, such that they are sufficient to
cover the claims that the insurer must pay, and the costs of doing business,
which will include profits to the insurer.
• In addition, they have to make sure that the premiums are not too high, such
that they are not competitive with that of the other life insurers.
Considerations when • Mortality and morbidity rates.
setting premiums • Investment income.
• Expenses.
• Gender.
• Smoking status.
• Amount of sum assured.
• Frequency of premium payments.
Mortality rate • When the actuary calculates the mortality rate, he is not concerned with how
long an individual may live, but rather, how many individuals in a large group
may die in a given period of time.
• Having decided on the number of deaths, the actuary then divides it by the total
number of people of that age to arrive at the mortality rate.
Morbidity rate Morbidity rate is primarily used to determine the premiums for Health Insurance,
such as Critical Illness or Dread Disease Insurance.
Net premium • The net premium is the amount needed just to pay for the insurance protection.
• An insurer uses just the rate of mortality/morbidity and investment income to
calculate the premiums.
Expenses • First category includes the salaries for staff, commissions for representatives of
financial advisers, rents, advertisements, taxes, and other costs of running the
business.
• Second category is the lapse rate of policies.
5
Frequency of premium
payments Different modes of
Frequency of premium payments
premium payments
Regular premiums • Such premiums for most life insurance products
are calculated on an annual basis, payable
annually in advance, and are level.
• However, insurers do allow their policy owners
to pay by other frequencies, such as semi-
annually, quarterly, monthly or in one lump sum
(single premium).
Single premiums • Payment is in one lump sum.
• With such payment, the insurer has the full
premium amount for investment upfront.
Recurrent single • Similar in concept to the regular premium
premiums option.
• But unlike regular premium policies, the policy
owner has the flexibility of discontinuing future
premium payments without affecting the policy
(i.e. it will be treated as a fully paid-up policy).
Yearly renewable • Policy owner pays for only one year of coverage
premiums each year and renews the policy each year.
Limited premiums • Policy owner will only need to pay premiums
for a specified period (e.g. 20 years) or up to a
specified age (e.g. the age of 60 years).
• Premium payable will be higher than the normal
regular premium policy since the same cost is
being spread over a shorter period.
6
Part I Chapter 3. Classification Of Life Insurance
PART I CHAPTER 3
CLASSIFICATION OF LIFE INSURANCE
PRODUCTS
CHAPTER OUTLINE
1. Ways Of Classifying Life Insurance Products

2. Classification By Statutory Insurance Fund
3. Classification By Product Type
4. Classification By Premium Type
5. Classification By Ownership
6. Characteristics Of Group Insurance
LEARNING OUTCOMES

 describe the four ways of classifying life insurance products
 know the characteristics of Group Insurance
 differentiate between Individual Insurance and Group Insurance
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. WAYS OF CLASSIFYING LIFE INSURANCE PRODUCTS .............................................. 3
2. CLASSIFICATION BY STATUTORY INSURANCE FUND ............................................... 3
A. Participating Policies .................................................................................................. 3
B. Non-Participating Policies .......................................................................................... 3
C. Investment-linked Life Insurance Policies ................................................................. 4
3. CLASSIFICATION BY PRODUCT TYPE .......................................................................... 4
4. CLASSIFICATION BY PREMIUM TYPE .......................................................................... 5
5. CLASSIFICATION BY OWNERSHIP................................................................................ 5
A. Single Life Policy ........................................................................................................ 6
B. Joint Life Policy .......................................................................................................... 6
C. Third-Party Policy ....................................................................................................... 6
D. Group Policy ............................................................................................................... 7
6. CHARACTERISTICS OF GROUP LIFE INSURANCE ....................................................... 7
A. Contractual & Voluntary Plans .................................................................................. 8
B. Advantages Of Contractual (Non-Contributory) Plan ............................................... 9
C. Advantages Of Voluntary (Contributory) Plan .......................................................... 9
1. WAYS OF CLASSIFYING LIFE INSURANCE PRODUCTS
1.1 There are many types of life insurance products available in the market. These
products vary in many ways, such as their features and the benefits provided
by them. Generally, they can be classified by way of:
 statutory insurance fund;
 product type;
 premium type; and/or
 ownership.
1.2 Let us look at each of the above classifications in turn.
2. CLASSIFICATION BY STATUTORY INSURANCE FUND
2.1 According to Section 16 of the Insurance Act 1966, insurers who are licensed to
carry on insurance business are required to maintain insurance funds in respect
of their insurance business. This is to ensure that the assets and liabilities of the
shareholders and those relating to the insurance businesses are kept separate.
2.2 Life insurance companies generally establish and maintain separate insurance
funds for the following types of life insurance policies:
 Participating;
 Non-participating; and
 Investment-linked.
2.3 Participating and non-participating life insurance policies may be maintained in

the same life insurance fund, but it is more common to have separate insurance
funds, unless the volume of non-participating business is comparatively small.
However, a separate insurance fund must be established and maintained for
Investment-linked Life Insurance policies.
A. Participating Policies
2.4 Participating policies refer to life insurance products that share in the profits or
surplus of the life insurance fund. Such products are also known as with-profits
policies, and the policy owners receive from the insurer bonuses and / or
dividends as declared from time to time.
B. Non-Participating Policies
2.5 Non-participating policies, on the other hand, refer to life insurance products
that do not share in the profits or surplus of the insurance fund, i.e. the policy
owners of such products are not entitled to any bonus or dividend payment by
the insurer. Such products are also known as without-profits policies. Examples
of non-participating policies include:
 Universal Life Insurance policies; and
 Term Insurance policies.
Note: Whole Life and Endowment Insurance policies are offered in both
participating and non-participating forms.
C. Investment-linked Life Insurance Policies
2.6 These are primarily investment products with an insurance protection element.
They differ from the traditional life insurance products (i.e. Term, Whole Life
and Endowment Insurance policies) in that they allow the policy owners to
combine insurance protection with investment funds managed by the insurers
or third-party fund managers.
2.7 The insurers are required to keep the assets and liabilities of the various life
insurance funds separate from each other.
3. CLASSIFICATION BY PRODUCT TYPE
3.1 Life insurance products can also be classified according to product type, i.e. in
accordance with the purpose served by the products. Table 3.1 shows the
various products and the purposes served by them.
Table 3.1: Product Types And Their Purpose

Product Type Purpose Served
Term Insurance Policies Provide death cover for a fixed term.
Whole Life Insurance Provide death cover for whole of the insured’s
Policies life.
Endowment Insurance Provide death cover for a fixed term and a lump
Policies sum at the end of the term.
Investment-linked Life Provide mainly for investing in sub funds, unit
Insurance Policies (ILPs) trusts or similar investments with insurance
protection.
Universal Life Insurance Provides flexible death cover, premium and
premium payment period.
Annuities Provide retirement income.
Critical Illness Insurance Protects against contracting one of the covered
critical illnesses.
Long-Term Care Protects against being unable to perform a
Insurance specific number of Activities of Daily Living
(ADLs) [usually 3 out 6 ADLs]
Medical Expense Protects against risk of ill health and
Insurance hospitalisation.
Disability Income Protects against risk of loss of income if a person
Insurance is disabled.
3.2 Critical Illness Insurance, Medical Expense Insurance, Disability Income

Insurance and Long-Term Care Insurance are types of Health Insurance. We will
briefly describe these products. For further details, do refer to the Health
Insurance Study Text published by the SCI. The LIA’s publication: “Your Guide
to Life Insurance” defines these health insurance products as the following:
3.3 Critical Illness Insurance - Will pay out a lump sum when the policy owner is
diagnosed with a major illness. Some types of such policy have death cover as
well. The illnesses that are covered vary, but usually include: heart attack of
specified severity; stroke; coronary artery by-pass surgery; kidney failure; and
major cancers.
3.4 Medical Expense Insurance – Basic Medical Expense Insurance, also known as
Hospital and Surgical Insurance or Hospital Income Insurance, provides
benefits for certain medical costs that result from accidents and sicknesses.
Hospital and Surgical Insurance will reimburse the in-patient expenses that the
policy owner has to pay while in hospital, depending on the limits in the policy.
Hospital Income Insurance will pay a fixed daily amount of benefit based on the
number of days that the policy owner is an in-patient. This will depend on the
limits in the policy. Major medical insurance covers the expenses arising from
a period longer than the limits in basic Hospital and Surgical Insurance.
3.5 Disability Income Insurance – This is an income-protection product, as it helps

to replace part of the policy owner’s income if he becomes totally or partially
disabled and cannot work as a result of an accident or sickness, under certain
conditions.
3.6 Long-Term Care Insurance – Long-Term Care Insurance is designed to meet

some or all of the costs of daily living of a person who, as a result of accident,
sickness or old age, is physically disabled to the extent that he cannot take care
of himself. He has to depend on others to help him carry out the most basic
activities of daily living, such as feeding, bathing, moving around the home and
so on.
3.7 For details of the other products in Table 3.1, do refer to subsequent chapters
of this Study Text.
4. CLASSIFICATION BY PREMIUM TYPE
4.1 Life insurance products can also be classified according to the frequency of
premium payments. This includes:
 Single Premium policy;
 Recurrent Single Premium policy;
 Regular Premium policy;
 Yearly Renewable Premium policy; or
 Limited Premium Payment policy.
5. CLASSIFICATION BY OWNERSHIP
5.1 Life insurance policies can be issued in a number of ways and can also be
classified according to ownership of the policy. The different classifications are:
 Single Life policy;
 Joint Life policy;
 Third-party policy; and
 Group policy.
A. Single Life Policy
5.2 This is the most common type of life insurance policy issued, as most policies
are taken on the proposer’s own life, i.e. the policy owner and the life insured
are the same person. As the policy covers only one life, hence, the name of this
policy is called Single Life policy.
B. Joint Life Policy
5.3 Generally, this policy provides cover for two lives (usually limited to only husband
and wife). Note that, although the vast majority of joint life policies have two lives
insured, it is theoretically possible to have more if insurable interest exists. It can
be issued in either of the following ways:
 First-to-die Life Insurance; or
 Last Survivor Life Insurance.
5.4 The First-to-die Life Insurance policy pays on the death of one of the lives insured.
The death benefit is paid to the surviving life insured and the policy cover ends.
An example of this type of policy is a Joint Mortgage Decreasing Term Insurance
policy, usually taken at the request of the bank, as a collateral security for the
housing loan which the bank has granted.
5.5 The Last Survivor Life Insurance (also known as Second-to-die Life Insurance)
policy, on the other hand, only pays out the death benefit when both the lives
insured have died i.e. on the second death. The premiums for this type of policy
may be payable only until the first life insured dies or until the death of both lives
insured. However, this type of policy is not common in Singapore.
C. Third-Party Policy
5.6 This policy also involves two persons. It is usually issued to the husband on the
wife’s life and vice versa, or the parent on the child’s life. The differences
between this and the joint life policy are that:
 one of the parties may not be covered under the policy, e.g. the husband
applies and owns the policy, but the insurance cover is on the wife’s life;
and
 the cover for the two parties differs, e.g. a father purchases a S$10,000
Endowment Insurance policy on his child’s life and attaches
a payor’s benefit rider to it. In this case, both the father and
child are covered under the policy. Should anything happen
to the child, the sum assured of S$10,000 will be paid, but should anything
happen to the father, only the future premiums due under the policy are
waived until the child reaches a specified age (e.g. 21 years old).
D. Group Policy
5.7 As the name implies, this is a policy which covers a large number of lives. It is
usually issued to employers covering the employees’ lives.
5.8 Group policies differ from individual policies in numerous ways and they also
have certain advantages over individual policies. As it is important to
understand these differences, some key aspects of Group Insurance are
discussed in the next section.
6. CHARACTERISTICS OF GROUP LIFE INSURANCE
6.1 Group Insurance provides coverage to many people under one group policy.
The requirement is that several people must first be members of a group, before
they become eligible to purchase the insurance. The group must have been
formed for some purposes other than to obtain insurance. Examples are
companies, trade unions, professional associations and social recreation clubs.
6.2 Characteristics of Group Insurance include:

(a) Master Contract – Group Insurance is issued under a single contract called
the “master contract” which is kept by the policy owner. Unlike individual
life insurance, when an insured member of the contract dies or leaves the
group, only this member’s coverage is terminated. The plan itself will still
carry on because it belongs to the holder of the master contract.
(b) Minimal Underwriting Requirements – It is generally made available to the
participating employees (in active employment) with simpler medical
underwriting if the group size is large. In some cases, the underwriter may
require the employee to complete only a health declaration form. Medical
examination is required only where the sum assured exceeds the “free
cover limit”.
(c) Experience rating – It is usually underwritten based on the past claims
experience if the insured group is considered to be large enough. Such a
practice is called experience rating.
(d) Cost Effective – It provides low-cost protection resulting from savings in
administrative costs, since only one policy is issued with a larger group of
individuals being covered and less documentation involved. There is also a
better spread of risk.
(e) Plan Continuation – The plan is usually renewable by the employer on a
yearly basis. At the end of each policy period, your corporate client may
wish to review the plan to assess the level of the coverage and its cost. You
have to advise your client on this aspect.
6.3 There are quite a number of differences between Individual Insurance and
Group Insurance. Table 3.2 shows the differences between them.
Table 3.2: Differences Between Individual Insurance And Group Insurance

Individual Insurance Group Insurance
Only the individual who has applied Only members who belong to the
for the coverage is covered. group are covered (members’
dependants may also be covered.)
Each individual insured gets a policy Only a master contract is issued for the
contract. group, although the number of
insured persons (e.g. employees) is
more than one.
Individual insured has the right to Insured members may or may not
select the amount of coverage that have the right to decide on the amount
he wants to be covered for. of coverage that they want to be
covered for. In the employer-paid plan
/ compulsory plan, the sum assured is
determined by the employer and it can
be a flat amount or a multiple of the
employee’s basic monthly salary,
depending on the staff rank or
category.
Individual’s health and financial Group as a whole is evaluated
status are evaluated. depending on the gender and age
distribution of the group; premiums
are often subject to experience rating,
especially when the group of insured
lives is sizeable.
Coverage continues until individual Coverage for the individual member
chooses to terminate it before or stops when he leaves the group.
upon policy expiry or maturity. However, the plan continues for the
remaining members.
Cost of coverage is higher because of Cost of coverage is lower because of
individual underwriting and higher group underwriting (only limited
administrative costs involved. evidence of insurability is usually
required) and lower administrative
costs and less documentation
involved.
6.4 Since 1 October 2001, all representatives have been required to perform fact-
finding when selling group products to their corporate clients.
A. Contractual & Voluntary Plans
6.5 Group Insurance policies can be issued on a contractual or voluntary basis. For
a contractual (non-contributory) plan, all the eligible employees will be
contractually covered under the plan, and the premiums are paid by the
employer. On the other hand, a voluntary (contributory) plan does not require
full participation from the employees who are expected to pay part of the
premiums. However, the insurer will normally require a minimum number of
employees participating in the plan. The advantages of both types of plans are
described below:
B. Advantages Of Contractual (Non-Contributory) Plan

(i) There is ease of administration, since there is no payroll deduction to
monitor.
(ii) There is lower cost owing to less administrative work involved and the
greater pooling effect of risks as a result of many lives insured.
(iii) The employer retains greater control in the benefit structures and coverage
provisions.
C. Advantages Of Voluntary (Contributory) Plan

(i) Employer
Participating employees assume part of the costs of the benefits provided
under the plan.
(ii) Employees
It gives the participating employees some control over the plan. They can
obtain coverage at a lower premium rate as compared to that of buying it
individually.
CHAPTER
03
CL ASSIFICATION OF LIFE INSURANCE PRODUCTS

Participating Policies Life insurance products that share in the profits or surplus of the life insurance
fund. Such products are also known as with-profits policies, and the policy owners
receive from the insurer bonuses and / or dividends as declared from time to time.
Non-Participating Policies Life insurance products that do not share in the profits or surplus of the insurance
fund, i.e. the policy owners of such products are not entitled to any bonus or
dividend payment by the insurer. Such products are also known as without-profits
policies.
Investment-linked Life These are primarily investment products with an insurance protection element.
Insurance Policies They differ from the traditional life insurance products (i.e. Term, Whole Life and
Endowment Insurance policies) in that they allow the policy owners to combine
insurance protection with investment funds managed by the insurers or third-party
fund managers.
Term Insurance Policies Provide death cover for a fixed term.
Whole Life Insurance Provide death cover for whole of the insured’s life.
Policies
Endowment Insurance Provide death cover for a fixed term and a lump sum at the end of the term.
Policies
Investment-linked Life Provide mainly for investing in sub funds, unit trusts or similar investments with
Insurance Policies (ILPs) insurance protection.
Universal Life Insurance Provides flexible death cover, premium and premium payment period.
Annuities Provide retirement income.
Critical Illness Insurance Protects against contracting one of the covered critical illnesses.
Long-Term Care Insurance Protects against being unable to perform a specific number of Activities of Daily
Living (ADLs) [usually 3 out 6 ADLs].
Medical Expense Insurance Protects against risk of ill health and hospitalisation.
Disability Income Protects against risk of loss of income if a person is disabled.
Insurance
Single Life Policy The most common type of life insurance policy issued, as most policies are taken
on the proposer’s own life, i.e. the policy owner and the life insured are the same
person. As the policy covers only one life, hence, the name of this policy is called
Single Life policy.
Joint Life Policy This policy provides cover for two lives (usually limited to only husband and wife).
First-to-die Life Insurance The policy pays on the death of one of the lives insured. The death benefit is paid to
policy the surviving life insured and the policy cover ends.
Last Survivor Life Also known as Second-to-die Life Insurance policy. This policy only pays out the
Insurance policy death benefit when both the lives insured have died i.e. on the second death. The
premiums for this type of policy may be payable only until the first life insured dies
or until the death of both lives insured.
Third-Party Policy This policy also involves two persons. It is usually issued to the husband on the
wife’s life and vice versa, or the parent on the child’s life.
The difference between this policy and the joint life policy is that:
• one of the parties may not be covered under the policy
• the cover for the two parties differs
7
Group Policy This is a policy which covers a large number of lives. It is usually issued to
employers covering the employees’ lives.
Contractual (non- It is a type of Group Insurance policy where all the eligible employees will be
contributory) plan contractually covered under the plan, and the premiums are paid by the employer.
Advantages:
• Ease of administration
• Lower cost
• Employer retains greater control in the benefit structures and coverage
provisions.
Voluntary (contributory) It is a type of Group Insurance policy. It does not require full participation from the
plan employees who are expected to pay part of the premiums. However, the insurer will
normally require a minimum number of employees participating in the plan.
Advantages:
• For employers – Participating employees assume part of the costs of the
benefits provided under the plan.
• For employees – Gives participating employees some control over the plan and
can obtain coverage at a lower premium rate as compared to that of buying it
individually.
Differences between
contractual and voluntary Individual Insurance Group Insurance
plans
Only the individual who Only members who belong to the group are
has applied for the covered (members’ dependants may also be
coverage is covered. covered.)
Each individual insured Only a master contract is issued for the group,
gets a policy contract. although the number of insured persons (e.g.
employees) is more than one.
Individual insured has Insured members may or may not have the
the right to select the right to decide on the amount of coverage that
amount of coverage that they want to be covered for. In the employer-
he wants to be covered paid plan / compulsory plan, the sum assured is
for. determined by the employer and it can be a flat
amount or a multiple of the employee’s basic
monthly salary, depending on the staff rank or
category.
Individual’s health and Group as a whole is evaluated depending on
financial status are the gender and age distribution of the group;
evaluated. premiums are often subject to experience rating,
especially when the group of insured lives is
sizeable.
Coverage continues until Coverage for the individual member stops
individual chooses to when he leaves the group. However, the plan
terminate it before or continues for the remaining members.
upon policy expiry or
maturity.
Cost of coverage Cost of coverage is lower because of group
is higher because underwriting (only limited evidence of
of individual insurability is usually required) and lower
underwriting and higher administrative costs and less documentation
administrative costs involved.
involved.
8
Part I Chapter 4. Traditional Life Insurance Products
PART I CHAPTER 4
TRADITIONAL LIFE INSURANCE PRODUCTS
CHAPTER OUTLINE
1. Common Types Of Life Insurance Policies

2. Term Insurance
3. Whole Life Insurance
4. Endowment Insurance
5. MAS Disclosure Requirements Relating To Life Insurance Policies
6. Guidelines On The Online Distribution Of Life Policies With No Advice [Guideline
No: ID01/17]
Appendix 4A: Comparison Of The Three Basic Life Insurance Policies: Term, Whole Life
And Endowment Insurance
Appendix 4B: Guidelines On The Online Distribution Of Life Policies With No Advice
LEARNING OUTCOMES

 know the common types of life insurance policies
 explain Term Insurance including its nature, features, types and suitability
 explain Whole Life Insurance including its nature, features, types and suitability
 explain Endowment Insurance including its nature, features, types and suitability
 know the MAS disclosure requirements relating to life insurance policies
 compare Term Insurance, Whole Life Insurance and Endowment Insurance
 understand the requirements of the Guidelines On The Online Distribution Of Life
Policies With No Advise [Guideline No: ID01/17], as well as who it applies to
CONTENTS
CHAPTER OUTLINE ......................................................................................................... 1
1. COMMON TYPES OF LIFE INSURANCE POLICIES .................................................... 3
2. TERM INSURANCE...................................................................................................... 3
A. Nature Of Term Insurance ..................................................................................... 3
B. Features Of Term Insurance .................................................................................. 3
C. Types Of Term Insurance ....................................................................................... 4
C1. Level Term Insurance ...................................................................................... 5
C2. Decreasing Term Insurance ............................................................................ 5
C3. Increasing Term Insurance .............................................................................. 7
D. Renewable And Convertible Options .................................................................... 7
D1. Renewable Option ........................................................................................... 7
D2. Convertible Option .......................................................................................... 9
E. Suitability Of Term Insurance ...............................................................................11
3. WHOLE LIFE INSURANCE..........................................................................................12
A. Nature Of Whole Life Insurance ...........................................................................12
B. Features Of Whole Life Insurance ........................................................................12
C. Distinguishing Whole Life Insurance From Term Insurance...............................13
C1. Whole Life Insurance Offers Lifetime Coverage ...........................................13
C2. Whole Life Insurance Contains A Cash Value Element.................................13
D. Non-Forfeiture Options .........................................................................................14
D1. Surrendering The Policy For Its Cash Value..................................................15
D2. Use The Cash Value To Purchase Paid-Up Whole Life Insurance ................15
D3. Use The Cash Value To Purchase Extended Term Insurance ......................15
E. Types Of Whole Life Insurance .............................................................................16
E1. Ordinary Whole Life Insurance.......................................................................16
E2. Limited Premium Payment Whole Life Insurance .........................................16
F. Suitability Of Whole Life Insurance ......................................................................18
4. ENDOWMENT INSURANCE ......................................................................................18
A. Nature Of Endowment Insurance .........................................................................18
B. Features Of Endowment Insurance ......................................................................19
C. Types Of Endowment Insurance ..........................................................................20
C1. Anticipated Endowment Insurance ................................................................20
D. Suitability Of Endowment Insurance ...................................................................21
D1. Children’s Education ......................................................................................21
D2. Saving / Investment Purposes .......................................................................22
5. MAS DISCLOSURE REQUIREMENTS RELATING TO LIFE INSURANCE POLICIES 22
6. GUIDELINES ON THE ONLINE DISTRIBUTION OF LIFE POLICIES WITH NO ADVICE
[GUIDELINE NO: ID01/17] ..........................................................................................23
Appendix 4A ...................................................................................................................24
Appendix 4B ...................................................................................................................26
Annex A ..........................................................................................................................31
Annex B ..........................................................................................................................31
1. COMMON TYPES OF LIFE INSURANCE POLICIES
1.1 Generally, the traditional life insurance policies that are being sold in the market
are Term Insurance, Whole Life Insurance and Endowment Insurance.
Investment-linked life policies, which started gaining popularity in Singapore in
the early 1990s, offer the potential of higher returns, though with higher risk, as
compared to traditional life insurance policies. Investment-linked life policies
will be explained in later chapters in this Study Text.
1.2 In this chapter, we will focus on Term Insurance, Whole Life Insurance and
Endowment Insurance policies.
2. TERM INSURANCE
A. Nature Of Term Insurance
2.1 Term Insurance provides life insurance cover for a specific period of time, called
the policy term. People usually buy Term Insurance when they need temporary
insurance protection, i.e. the buyers are not looking for insurance for their entire
life. Once the policy expires, the cover will cease and the insured will receive
nothing. The sum assured (or death benefit) of the policy is payable to the
beneficiaries only if the life insured dies during the policy term. That is why
Term Insurance is also known as temporary insurance. (By contrast, there is
“permanent insurance”, which refers to Whole Life Insurance and Endowment
Insurance). Figure 4.1 gives a simple illustration of how a Term Insurance policy
works.
Figure 4.1: How Does A Term Insurance Policy Work?

Inception Policy
Of Policy Expiry Date
Nothing is
payable if the life
insured is alive at
the end of the
policy term.
Policy Term
2.2 There may be insurance buyers who may want to continue their insurance
coverage beyond the length of the policy’s original term. That is the reason why
insurers offer renewal and convertible options in their Term Insurance policies.
These are explained further in this Study Text.
B. Features Of Term Insurance
2.3 Term Insurance has the following features:

 covers the insured against death during the policy term;
 a Term Insurance policy is only issued on a non-participating basis, so no
bonus is payable on death;
 duration of cover is only for the period specified at the inception of the
policy. It can be for one year, or as long as several years, or until the insured
reaches a specified age (e.g. age of 60 years). Once the policy expires, the
cover ceases. In other words, if the insured survives to the end of the policy
term, no benefit is payable;
 policy lapses (or ceases) if the premium is not paid within the grace period;
 most insurers offer a Total and Permanent Disability benefit (TPD) (which
can be paid out in a lump sum or in instalments) as part of its basic policy
or attach it as a supplementary benefit. In addition, certain riders (e.g.
Accidental Death Benefit riders) are allowed to be attached to the policy;
 no accumulation of cash value (cash value refers to the amount of money
that a policy owner will get if he surrenders his policy. For details, do refer
to a later section in this chapter). The insured receives nothing if the policy
is cancelled and terminated before the term ends, i.e. there is no savings /
investment element in a Term Insurance policy;
 no policy loan feature (i.e. using the cash value of the policy as a collateral
to take up a loan from the insurer), since it does not accumulate any cash
value;
 no automatic premium loan (APL). Automatic premium loan is a type of
non-forfeiture option 1 to keep a policy in force in the event of a default of
premium payment by a policy owner;
 since there is no APL, in the event of lapsation, there is no non-forfeiture
option1 to prevent the policy from lapsing;
 the premium cost is the lowest compared to other types of life insurance
for coverage over the same term, as it provides only life insurance
protection, and there are no savings or investment elements. Usually, a
fixed amount is payable throughout the premium payment term, except for
Increasing Term and Renewable Term Insurance. Both lump sum (single
premium) and regular premium options are allowed;
 upon death, the death benefit is paid in a lump sum;
 upon total and permanent disability, the sum assured is either paid in a
lump sum or in instalments,
2.4 An example of a Term Insurance policy is the CPF Dependants’ Protection

Scheme (DPS). The DPS covers death and TPD and is renewable yearly up to
the age of 65 years.
C. Types Of Term Insurance
2.5 Term Insurance can be divided into three main types, namely Level Term,
Decreasing Term and Increasing Term. We will explain the various types of
Term Insurance in greater detail in the sections below.
1
Non-forfeiture options are the various ways in which a policy owner is allowed to use the cash value
under his policy if he is unable or does not wish to pay up the premium due on his policy.
C1. Level Term Insurance
2.6 Level Term Insurance is the simplest and most straightforward type of life
insurance policy. It is called a Level Term policy because both the death benefit
and the premium remain level throughout the policy term. Level term is
designed to meet a constant need. Figure 4.2 is a graphical representation of a
10-year S$100,000 Level Term Insurance policy.
Figure 4.2: 10-Year S$100,000 Level Term Insurance Policy

End of
Death Benefit payable Coverage
S$100,000
Nothing is
Sum payable if the
Assured life insured
survives till
the end of the
policy term.
S$0
Policy Term 10 years
2.7 Over the course of a 10-year Level Term Insurance policy, the death benefit
remains level at S$100,000. Once the policy term ends, nothing is payable.
2.8 A common usage of Level Term Insurance is Key-Person Protection, where a

company will take out a Level Term Insurance policy on the life of one or more
of its key employees. The beneficiary is the company, as the proceeds are to
compensate the company for loss of profits, cost of rehiring and training, etc.
in the event of death or incapacity of the employee.
C2. Decreasing Term Insurance
2.9 As the name implies, a Decreasing Term Insurance policy provides a

diminishing amount of cover over the term of the policy. The death benefit
begins at a certain amount and then gradually decreases over the term of
coverage according to the stated method that is described in the policy. For
example, the benefit of a 5-year Decreasing Term Insurance policy may be
S$50,000 for the first year of coverage, decreasing by S$10,000 on each policy
anniversary 2, until it reaches S$0 at the expiry of the fifth year.
2.10 Insurers do offer different types of Decreasing Term Insurance, such as

Mortgage Insurance, Credit Life Insurance, and Family Income Insurance, etc.
Let us explore Mortgage Decreasing Term Insurance further.
2.11 In a Mortgage Decreasing Term Insurance, at any point in time, the death
benefit is designed to be equal to the remaining balance on the loan. As the
balance on the loan gets smaller, the death benefit will also get smaller.
2
Policy anniversary is the anniversary of the date on which coverage under the policy became effective.
Both the expiration date and the coverage start date are usually stated prominently in the policy.
2.12 However, it is important to note that the sum assured on each policy
anniversary under a Mortgage Decreasing Term Insurance is based on what the
remaining balance on the loan would be assuming a particular mortgage
interest rate (insurers will usually offer a choice) and assuming that loan
repayments are made on schedule. The sum assured on each policy
anniversary is fixed, using these assumptions, when the policy is taken out.
2.13 This means that, if anything causes the actual remaining loan balance to be
different from what was initially expected, the sum assured will not be equal to
the remaining loan balance. This happens quite often: for example, when
mortgage interest rates change or loan repayment instalment amounts are
changed. Therefore, when the death benefit is paid out, it may not equal the
remaining loan balance; it may be more or it may be less.
2.14 Mortgage Decreasing Term Insurance can also be issued on a joint-life, first-to-
die basis. This policy is suitable for a husband and wife who are jointly servicing
their housing loan. As the sum assured under this policy is paid only once, it
means that you should advise those clients who are buying Joint-Mortgage
Decreasing Term Insurance policies to insure the full amount of their
outstanding housing loan (to cover the unfortunate case where both die, for
example, in a car accident).
2.15 The premium for a Decreasing Term Insurance policy is usually level and ceases
a few years before the expiry of the policy. This is because the coverage towards
the end of the policy term will be reduced considerably, and the policy owner
may find that it is not worth paying the premium for the low coverage. Thus,
most insurers structure the premium payment period this way to prevent the
policy owner from terminating the policy. Figure 4.3 is a graphical
representation of a 10-year S$100,000 Decreasing Term Insurance policy where
the sum assured decreases by a fixed amount each year.
Figure 4.3: A 10-Year S$100,000 Decreasing Term Insurance Policy
S$100,000
Death Benefit
Sum Assured
S$0
C3. Increasing Term Insurance
2.16 This type of Term Insurance is not common in Singapore. Its purpose is to
protect the death benefit against the effect of inflation 3. As the name implies,
an Increasing Term Insurance policy provides a death benefit that starts from
one amount and increases by some specified amount or percentage at stated
intervals over the policy term. For example, the amount can increase by 5% per
annum or 30% every three years. The premium also increases with each
increase in sum assured.
2.17 Figure 4.4 is a graphical representation of a 10-year S$100,000 Increasing Term

Insurance policy which starts at S$100,000 and increases by 5% of the original
sum assured on each policy anniversary date throughout the term of the policy.
Figure 4.4: A 10-Year S$100,000 Increasing Term Insurance Policy

Period Of Benefit Payment
S$145,000
Death Benefit increasing at 5%
per annum
Sum
Assured
S$100,000
Policy Term 10 years
D. Renewable And Convertible Options
2.18 As mentioned earlier in the chapter, quite often those who buy Term Insurance
may want to continue their insurance coverage beyond the length of the
policy’s original term. For this reason, most insurers offer renewable and
convertible options which an insured can request to be included in his Term
Insurance policy, subject to an additional premium.
D1. Renewable Option
2.19 This option gives the life insured the right to renew his policy at the end of the
policy term, without evidence of insurability. Most insurers offer this type of
policy on a short-term basis. Renewal is allowed, as long as the expiry date of
the policy does not exceed a specified age (usually the age of 60 years). Often,
the policy is automatically renewed, as long as the life insured pays the
increased premium.
3
Inflation causes a depreciation of insurance protection value. At an annual inflation rate of 3%,
something that costs you S$200 to buy today would cost S$232 in five years’ time. Another way to look
at this would be, at the annual inflation rate of 3%, the value of S$200 would have dwindled to just S$172
in five years’ time.
Similarly, if you are covered for S$100,000 in Term Insurance today, it would have devalued by the time
the claim is payable. So for coverage of the same insurance value today, you would need to be insured
for a higher value now.
2.20 Upon renewal, the policy will have the same policy term and death benefit as
the original policy. Figure 4.5 shows how a renewable option works.
Figure 4.5: Renewing A 5-Year Renewable Term Insurance Policy
Original Policy Policy Expiry New Policy

Inception Date Date Expiry Date
1/1/2005 31/12/2009 31/12/2014
policy owner renewed the policy
2.21 Although the death benefit and policy term remain unchanged upon renewal,
the life insured is required to pay a higher premium based on his attained age
(i.e. the age at which he renews his policy). Most insurers would include a table
of renewal premium in the policy which you should highlight and explain to
your client when you deliver the policy to him. However, the premium remains
level during each individual policy term.
2.22 The renewal premium will be much higher than the current premium. This is
partly because the insured is now older, so the mortality cost is higher, and the
premium cost is spread over the term of the renewal, which may be the same
as, or shorter than, the original term of the policy. So a higher cost is being
spread over an equal or shorter period, resulting in a higher premium.
2.23 Another important reason for the steep increase in premium is that experience
shows that people in good health tend not to renew their policy each time a
premium increase takes effect. However, those in poor health tend to take
advantage of the right to renew. This selection against the insurer (also known
as anti-selection or adverse selection) tends to increase with the age of the life
insured, as people tend to have more medical problems as they grow older.
2.24 The result is that the mortality experience among the surviving policy owners
becomes increasingly unfavourable to the insurer. Hence, the premium has to
be increased to cover this higher risk to the insurer. The advantage of
renewability is that it protects the insurability of the life insured, so that he is
able to enjoy the insurance coverage in the future. However, the disadvantage
is that the premium becomes much higher in proportion to the insurance
coverage in the later years.
2.25 If the policy owner knows how long he is likely to need term cover for, it is better
to buy a normal Term Insurance policy with level premiums than to buy a
shorter policy with the intention of renewing one or more times, even though
the premiums are initially higher. This avoids situations where the policy owner
finds that the large increase in premium on renewal makes maintaining the
coverage unaffordable.
D1A. Yearly Renewable Term Insurance

2.26 One popular type of renewable Term Insurance is called Yearly Renewable Term
(YRT) Insurance which gives the policy owner the right to renew the policy each
year until the life insured reaches the specified age without evidence of
insurability. There are, however, conditions attached to this renewability privilege.
2.27 Firstly, when a YRT policy is renewed, the premium increases. When renewed, the
premium of a YRT policy is based on the attained age of the life insured. Each time
when the policy is renewed, the life insured is older, so the mortality risk is greater
and, therefore, the coverage becomes more costly.
2.28 Secondly, renewal of a YRT policy cannot go on indefinitely, or the insurer will
suffer adverse selection. Since an ageing life insured is more in need of the
coverage, the policy owner will want to renew it for continuing protection. Some
insurers will try to cover this risk in the renewal premium for advanced ages,
resulting in very high premiums at those ages.
2.29 To discourage anti-selection, insurers may rely on one of the following measures:
 limit the policy owner’s right to renew the policy by cutting off renewal
when the life insured reaches a certain age; or
 limit the number of renewals permitted.
2.30 In view of the high premium charged at older ages, this type of policy is more
suitable for people who are young and who do not depend on the policy for
coverage at the higher ages. Hence, you should avoid advising older clients to
purchase this type of policy.
D2. Convertible Option
2.31 This option gives the life insured the right to change, or to convert his Term
Insurance policy into a permanent policy (e.g. Whole Life Insurance policy), as
specified by the insurer, without evidence of insurability. What this means is
that, even if the health of the person insured by a Term Insurance policy has
deteriorated to the point that he would otherwise be uninsurable, the insured
could still obtain permanent insurance coverage, because evidence of
insurability is not required at the time of conversion. The premium that the
policy owner is charged for the permanent coverage cannot be based on any
increase in the insured’s mortality risk, except for an increase in the insured’s
age.
2.32 Most insurers allow the policy owner to convert his Term Insurance policy at
any time during the policy term, or before the life insured reaches a specified
age (usually the age of 60 years), depending on whichever is the earlier.
2.33 As in the case of the renewal provision, the conversion privilege can lead to
some anti-selection; those in poor health are more likely to convert their
coverage, because they may not be able to obtain other life insurance. As a
result, insurers usually charge a higher premium rate for a convertible Term
Insurance policy than they charge for a comparable non-convertible Term
Insurance policy. In addition, insurers usually limit the conversion privilege in
some way. For instance, some policies do not permit conversion after the life
insured has attained a specific age, such as 55 or 65 years, or after the Term
Insurance policy has been in force for a specified time. For example, a 10-year
Term Insurance policy may permit conversion only during the first seven or
eight years of the term. Conversion may also be limited to an amount that is
only a percentage of the original face value. For example, a 10-year Term
Insurance policy may permit conversion of 100% of the face value only within
the first five years of the term, and a smaller percentage, such as 50% of the
face value, if the policy is converted during the last five years of the 10-year
term.
2.34 When a Term Insurance policy is converted to permanent insurance, the new
premium rate is higher than the premium rate that the policy owner paid for the
Term Insurance policy. This is because of the anti-selection risk, the older age
and the fact that the premium must cover the certain event of death occurring
during the policy term. The specific amount of the premium charged for the
permanent insurance coverage that is provided following conversion depends
on the effective date of the permanent insurance policy. The effective date of
the permanent coverage is the date that the Term Insurance policy is converted
to a permanent plan of insurance, known as an attained age conversion.
D2A. Attained Age Conversion

2.35 When term coverage is converted to permanent insurance under an attained age
conversion, the renewal premium rate is based on the insured’s age when the
coverage is converted. For example, suppose John was 35 years old when he
bought a 5-year convertible Term Insurance policy on his life. Four years later,
John decided to convert the Term Insurance policy to a Whole Life Insurance
policy. The effective date of his permanent coverage is the date that the
conversion takes place. Consequently, the premium rate that John is charged for
the Whole Life Insurance policy will be the rate charged for insureds who are of
the age of 39 years, his attained age at the time of conversion.
D2B. Conditions On Conversion

2.36 In most instances, the insurer will impose some conditions on conversion as
follows:
 the request for conversion must be done in writing on a form as prescribed
by the insurer, and accompanied by the premium payment for the new
policy based on the life insured’s attained age (assuming attained age
conversion);
 the sum assured for the new policy must be equal to or less than that of the
existing Term Insurance policy; and
 the new policy will include all the limitations and exclusions as originally
applicable to the Term Insurance policy. For example, if the life insured’s
diving activities have been excluded under the Term Insurance policy, the
new policy that he has taken up will be issued with this exclusion as well,
unless he can provide evidence that he has discontinued his diving
activities.
2.37 Despite the limitations and conditions imposed by the insurer, the convertible
option is useful, because it gives the life insured the assurance that he will be
able to obtain some form of permanent insurance in future, regardless of
changes in health. It is especially suitable for clients who prefer Whole Life
Insurance, but do not have the budget at the time of purchase. Advising such
clients to purchase a convertible Term Insurance policy will guarantee that they
will be able to obtain the permanent insurance that they desire, once their
financial position allows them to do so.
E. Suitability Of Term Insurance
2.38 Term Insurance is suitable when either the need for protection is:
 purely temporary; or
 permanent, but the insured temporarily cannot afford the premiums for
permanent insurance.
2.39 In the first case, Term Insurance is the complete answer, but it should be
renewable in the event that the temporary need should extend over a longer
period than was originally anticipated. Theoretically, the policy need not be
convertible, but since relatively few people carry an adequate amount of
permanent insurance and since the loss of insurability is a constant threat, it is
advisable to obtain a policy with the conversion privilege.
2.40 The second broad use of Term Insurance requires that the policy be convertible.
The conversion privilege is the bridge that spans the gap between the need for
permanent insurance and the financial ability to meet the need. In this case,
since the insured’s financial situation might persist longer than anticipated, the
policy should be renewable, as well as convertible.
2.41 Examples of temporary needs that can, and should, be met through Term
Insurance are encountered daily. One of the most obvious situations is the need
to protect, say, a mortgage loan. A mortgage Term Insurance policy in the
amount of the loan payable to the lender not only protects the lender against
possible loss of principal, but also relieves the insured’s estate of the burden or
repaying the loan if the insured dies. If a business firm is investing a
considerable sum on a project, the success of which depends on the talents and
abilities of one individual or a few individuals, Term Insurance on the
appropriate person or persons, through the purchase of Key-Person Insurance,
will protect the firm’s investment. A parent with young children is likely to need
more insurance, while the children are dependent than he will need when they
have grown up and become self-sufficient. The additional insurance during the
child-raising period can be, and usually is, provided through Term Insurance.
Sometimes, Decreasing Term Insurance is added to a plan of permanent
insurance to cater for a reducing need for cover as financial commitments
reduce.
3. WHOLE LIFE INSURANCE
A. Nature Of Whole Life Insurance
3.1 In contrast with Term Insurance, which pays benefits only if the insured dies
during a specified period of years, Whole Life Insurance provides for the
payment of the policy’s face value (plus bonuses, if applicable) upon the death
of the insured, regardless of when death occurs. It is this characteristic –
protection for the whole of life – that gives the insurance its name. The
expression does not refer to the term over which the premiums are paid, only
to the duration of the protection. If the premiums are to be paid throughout the
life insured’s lifetime, the insurance is known as Ordinary Whole Life; if
premiums are to be paid only during a specified period, the insurance is termed
limited-payment life. These two types of Whole Life Insurance will be explained
in detail in a later section of this chapter. Most insurers also offer Total and
Permanent Disablement (TPD) benefit either as part of the Whole Life Insurance
policy or as a rider. This benefit is payable if the insured is disabled and unable
to work, subject to the definition of TPD being met, and provided that his policy
remains in force. More details on TPD is discussed in the next chapter.
3.2 Figure 4.6 shows how a Whole Life Insurance policy works.
Figure 4.6: How Does A Whole Life Insurance Policy Work?
Inception
Death benefit is paid
Of policy
when death / TPD
occurs. Policy
terminates once the
death benefit is fully
paid out.
Whole Life
B. Features Of Whole Life Insurance
3.3 Whole Life Insurance has the following common features:

 covers the insured against death. Duration of cover is for life. It continues
as long as the policy is in force. Any death benefit that is payable goes to
the policy beneficiaries;
 in addition to the death benefit, Whole Life Insurance often has a TPD
benefit as part of the basic policy or attached to the policy as a
supplementary benefit. Upon TPD, the life insured will receive a TPD
benefit, usually of the same amount as the death benefit, either in a lump
sum or in instalments, as stated in the policy. This TPD benefit is usually
capped at S$2,000,000 per insurer;
 although a Whole Life Insurance policy emphasises protection, it also has
some form of savings element in addition to the death benefit. This savings
element is known as “cash value”, meaning that the insured can encash the
Whole Life Insurance policy by surrendering it after a specified period of
time (usually three years) (to be explained in a later section of this chapter).
This cash value usually builds up after a minimum period (usually at least
three years);
 riders are usually allowed to be attached to the policy;
 the premium is higher than that of a similar Term Insurance policy in view
of the longer term of coverage and the certainty that death will occur during
the lifetime of the policy (unless it is terminated early). The premium is
usually a fixed amount payable throughout the premium payment term on
a regular basis. However, lump sum payment (single premium) may also
be allowed;
 premiums can be payable either throughout the policy term (Ordinary
Whole Life Insurance), or for a limited number of years (Limited Premium
Payment Whole Life Insurance). These two types of Whole Life Insurance
will be explained in a later section of this chapter;
 upon death, the death benefit is paid in one lump sum;
 upon total and permanent disability, the total and permanent disability
benefit is paid either in a lump sum (if it is below a specified amount) or in
instalments,
 can be issued as a participating or non-participating policy. For a
participating Whole Life Insurance policy, the death benefit and TPD benefit
will include bonuses in addition to the sum assured. (In some participating
products, bonuses will be paid out over the lifetime of the policy instead of
adding bonuses to the sum assured.) For a non-participating Whole Life
Insurance policy, only the stated sum assured is payable when death or TPD
occurs – no bonuses are added (and no bonuses are paid).
C. Distinguishing Whole Life Insurance From Term Insurance
3.4 Two primary features distinguish Whole Life Insurance from Term Insurance:
C1. Whole Life Insurance Offers Lifetime Coverage
3.5 Term Insurance provides protection for a certain period of time and provides no
benefits after that period ends. In contrast, Whole Life Insurance provides
protection for the entire lifetime of the insured (so long as the policy remains in
force, of course).
C2. Whole Life Insurance Contains A Cash Value Element
3.6 The biggest difference between the Term Insurance and Whole Life Insurance is
the fact that with the latter, a cash value is generated. The underlying reasons are
beyond the scope of this Study Text, but it is important to understand that the
cash value arises as a result of level premiums being charged for what is a certain
event (the death of the insured). It is not a feature that can be added or removed
by adjusting the amount of the premium. (This is also why it is not possible to add
a cash value feature to a pure Term Insurance policy simply by increasing the
premium – if this was done it would become an Endowment Insurance policy.)
3.7 The result of having a cash value is that the Whole Life Insurance policy not only
provides lifetime insurance protection, but also creates a savings vehicle.
Individuals can use the cash value of a Whole Life Insurance policy to set aside
funds for retirement, emergencies, and countless other purposes. The cash value
is part of the policy, and as such belongs to the policy owner and may be used in
various ways to benefit the owner. The cash value grows over time, until at some
advanced age it equals the sum assured.
3.8 From the example in Figure 4.7, you will notice that the cash value grows
gradually over the years until it equals the death benefit at the age of 100 years.
(This age might differ slightly from one insurer to another, but there will always
be an age where the cash value equals the death benefit.) This is called the
maturity of the contract. A policy matures when its cash value equals its death
benefit. This is also called the endowment of the policy.
3.9 Although not many policy owners will reach this age, the significance of the
endowment of the contract is that at this point the insurer will pay out the sum
assured to the policy owner (even though the policy owner is still alive), no further
premiums will be payable and the policy will terminate.
Figure 4.7: Whole Life Insurance With Cash Values

S$100,000 Age 45 Years
Death Benefit
S$100,000
Cash Values
Dollars
Premium
S$0
Age of Insured
D. Non-Forfeiture Options
3.10 The cash value built up in a Whole Life Insurance policy provides flexibility that is
not found in Term Insurance policies. Certain options, called non-forfeiture
options, are offered to policyholders when there are cash values.
3.11 There are three traditional options:

 surrender the policy for its cash value;
 use the cash value to purchase paid-up insurance; and
 use the cash value to purchase extended term insurance.
3.12 It is the cash value that drives these three options. The greater the cash value, the
greater the surrender value, the paid-up insurance, or the term of years that the
Extended Term Insurance remains in effect. All three options are spelled out in the
policy under the non-forfeiture options section. The three options are further
explained below:
D1. Surrendering The Policy For Its Cash Value
3.13 The cash surrender option is the right to discontinue life insurance in force in
return for its net cash value4. The policy lists the guaranteed cash values at each
policy anniversary, assuming all the premiums have been paid. This option makes
sense when the need for any additional coverage under this policy has ceased. In
that event, the protection terminates and the insurer has no further obligation
under the policy. While this option provides a ready source of cash to meet a
financial emergency or to take advantage of a business opportunity, it should be
exercised with restraint, since the policy is terminated and will no longer provide
life cover. Although the policy owner can try to buy another policy in the future,
he might find that his health condition is such that he might no longer be able to
buy a policy at standard terms.
D2. Use The Cash Value To Purchase Paid-Up Whole Life Insurance
3.14 The second option, paid-up insurance, permits the policy owner to take a reduced
amount of paid-up Whole Life Insurance, payable upon the same conditions as
the original policy. The amount of the paid-up insurance is the amount that can
be purchased at the life insured’s attained age by the net cash value applied as a
single premium. No further premiums are payable under this paid-up plan, as the
name implies. The protection continues in the reduced amount until the insured’s
death, unless the reduced policy is surrendered for cash.
D3. Use The Cash Value To Purchase Extended Term Insurance
3.15 The third option provides paid-up Term Insurance in an amount equal to the
original face value of the policy, increased by any bonus additions or deposits,
and decreased by any policy indebtedness. This Extended Term Insurance is most
appropriate for a situation where the need for the protection will end in the future,
but the policy owner will prefer not to pay any more premiums.
3.16 The length of the term is what can be purchased at the insured’s attained age,
with the net cash value applied as a net single premium. If the insured fails to elect
an option within a specified period after default of premiums, this option
automatically goes into effect.
3.17 If the financial status of the policy owner makes it impractical to continue the
premium payments, or if the need for insurance protection undergoes a change,
the policy owner may wish to elect one of the surrender options. After his
dependants have become self-supporting, for example, the policy owner may
elect to discontinue premium payments and continue the protection on a reduced
4
Net Cash Value is represented by cash value less any policy owner loans and accrued interest, plus any
bonus accumulations.
scale for the remainder of the insured person’s life. If, on the other hand, the need
for insurance continues, he may elect to eliminate the premium payments, but
continue the full amount of protection for a limited period. The elimination of fixed
payments may be particularly attractive, as the life insured approaches retirement
and anticipates a reduction in income.
3.18 Example: Mr Tan, aged 50 years, has a S$300,000 policy with a S$66,000 cash
value. He has the following non-forfeiture options:
 to surrender the policy for S$66,000 cash; or
 to continue the S$300,000 coverage for 16.5 years as paid-up Term
Insurance with no more premium payments; or
 to reduce the coverage to S$184,000 of paid-up Whole Life Insurance
coverage with no more premium payments.
E. Types Of Whole Life Insurance
3.19 The common types of Whole Life Insurance policies are:

 Ordinary Whole Life Insurance; and
 Limited Premium Payment Whole Life Insurance.
E1. Ordinary Whole Life Insurance
3.20 Ordinary Whole Life Insurance is a type of Whole Life Insurance for which
premiums are based on the assumption that they will be paid until the insured’s
death. However, in an increasing number of cases, life insurance is purchased
with no intention on the policy owner’s part to pay premiums as long as the
insured lives. In many cases the plan may be to eventually surrender the insurance
to get cash, or for an annuity or for a reduced amount of insurance. Ordinary
Whole Life Insurance should not be envisioned as a type of insurance where the
policy owner is irrevocably committed to pay premiums as long as the insured
lives or even into the insured’s extreme old age. Rather, it should be viewed as a
type of policy that provides permanent protection with some degree of flexibility,
to meet changing needs and circumstances for both long-lived persons and those
with average-duration lifetimes. It is the most basic lifelong policy offered by any
life insurance company. Ordinary Whole Life Insurance is an appropriate
foundation for many insurance programmes, and in an adequate amount that it
can well serve as the entire programme.
3.21 Ordinary Whole Life Insurance provides life cover and the premium payable is a
fixed amount payable until the death of the life insured.
E2. Limited Premium Payment Whole Life Insurance
3.22 Limited premium payment Whole Life Insurance is a type of Whole Life
Insurance for which premiums are limited by contract to a specified number of
years. The extreme end of the limited-payment policies spectrum is the single-
premium Whole Life Insurance policy. However, few people can afford the
premium or are willing to pay that much in advance.
3.23 The limit in limited premium payment policies may be expressed as the number
of annual premiums or as the age beyond which premiums will not be required.
Policies in which the premiums are limited by number usually stipulate 1, 5, 7,
10, 15, 20, 25, or 30 annual payments, although some insurers are willing to
issue policies calling for any desired number of premiums. The greater the
number of premiums payable, naturally, the more closely the contract
approaches the ordinary whole life design. For those who prefer to limit their
premium payments to a period measured by a terminal age, insurers make
policies available that are paid up at a specified age – typically, 60, 65, or 70
years of age. The objective is to enable the insured to pay for the policy during
his working lifetime. Many insurers issue policies for which premiums are
payable to an advanced age, such as 85 years old, but, for all practical purposes,
these policies can be regarded as the equivalent of an ordinary Whole Life
Insurance policy.
3.24 Since the value of a limited premium payment Whole Life Insurance policy at
the date of issue is precisely the same as that of a policy purchased on the
ordinary life basis, and since it is presumed that there will be fewer premium
payments under the limited premium payment policy, it follows that each
premium must be larger than the comparable premium under an ordinary life
contract. Moreover, the fewer the guaranteed premiums specified or the shorter
the premium-paying period, the higher the premium will be. However, the
higher premiums result in greater cash and other surrender values. Thus, the
limited premium payment policy will provide a larger fund for use in an
emergency, and will accumulate a larger fund for retirement purposes than will
an ordinary whole life contract issued at the same age. On the other hand, if
death takes place within the first several years after issue of the contract, the
total premiums paid under the limited premium payment policy will exceed
those paid under an ordinary Whole Life Insurance policy.
3.25 This type of policy is designed for people who desire to have the lifetime
protection offered by a Whole Life Insurance policy, but who do not like the idea
of paying premiums for their entire lives. Under this policy, the policy owner can
pay the premiums for a specified number of years (e.g. 20 years) or up to a
specified age (e.g. the age of 55 years of the life insured). However, the insurance
cover continues until the death of the life insured.
3.26 Table 4.1 gives a comparison of the two types of policies.
Table 4.1: Comparison Between Ordinary Whole Life Insurance

And Limited Premium Payment Whole Life Insurance
Criteria Ordinary Whole Life Limited Premium Payment
Insurance Whole Life Insurance
Premium Lower Higher
Premium Payment Term Payable for life Can be arranged to be fully
paid up during one’s
working years
Sum Assured (based on Higher Lower
the same amount of
premium, age and gender)
Cash Value Builds up slowly Builds up quickly
F. Suitability Of Whole Life Insurance
3.27 At this point, the purposes served by Whole Life Insurance should be clear. In
summary, the Whole Life Insurance policy:
 Provides protection against long-term or permanent needs; and
 Accumulates a savings fund that can be used for general purposes, or to
meet specific objectives.
3.28 The protection function is particularly applicable to a surviving spouse’s need for
a life income, terminal-illness and funeral expenses, expenses of estate
administration, philanthropic bequests, and the needs of dependants other than
the surviving spouse. The general savings feature of the Whole Life Insurance
policy is useful in a financial emergency, or as a source of funds to take advantage
of an unusual business or investment opportunity. The policy owner may use the
policy for the specific purpose of accumulating funds for his children’s university
education, to set a child up in business, to pay for a child’s wedding, or to
supplement the life insured’s retirement income. One point to note about the cash
value. The annual declaration rate of policy bonus or surplus is not guaranteed,
but once it is declared it will become vested in the policy. Hence, this makes a
whole life policy one of the rare truly compound interest saving product.
4. ENDOWMENT INSURANCE
A. Nature Of Endowment Insurance
4.1 Endowment Insurance is another type of life insurance. It is designed to pay out
the death benefit when the life insured dies during the policy term, or the
maturity value, which will be equal to the death benefit, if he survives to the
end of the policy term. It combines insurance protection with a savings element
for the policy owner. However, unlike a Whole Life Insurance policy, an
Endowment Insurance policy has a fixed maturity date. The maturity date is
when the policy term expires and the full maturity value will be paid out to the
policy owner if he survives to maturity.
4.2 Endowment Insurance policies can be thought of as a variation of Whole Life

Insurance, because like a Whole Life Insurance policy, they provide level death
benefits and cash values that increase with duration.
4.3 A Whole Life Insurance policy sometimes provides a survivorship benefit at the
age of 100 years equal to the death benefit that would have been payable
immediately prior to the insured reaching that age (see Table 4.1). Endowment
Insurance policies merely make the same full survivorship benefit payable at
younger ages. Among the wide variety of Endowment Insurance available are
10-, 15-, 20-, 25-, 30-, 35- and 40-year Endowment Insurance (or longer), or
Endowment Insurance with the maturity date being a specific age of the life
insured, such as 55, 60, 65 years old, or older.
4.4 The Endowment Insurance policy is designed to provide a death benefit equal
to the target accumulation amount during the accumulation period. Purchasing
an Endowment Insurance policy with a face value equal to the desired
accumulation amount assures that the funds will be available, regardless of

whether or not the life insured survives to the target date. The policy is popular
with purchasers who are beyond the chronological midpoint of their careers
and seek accumulation of assets for retirement or other objectives. As Dr
Solomon S. Huebner often pointed out, young people prefer Term Insurance;
with more experience and age, purchasers prefer Whole Life because of its level
premiums; the mature market prefers Endowment Insurance with the earlier
cash value accumulations that they can use during their own lifetimes.
4.5 Similar to Whole Life Insurance policies, Endowment Insurance policies can
also be issued as participating or non-participating policies. For a participating
Endowment Insurance policy, the maturity value will include all the attaching
bonuses declared on it. For a non-participating policy, only the maturity value
will be payable at the expiry of the policy term.
4.6 Figure 4.8 illustrates how an Endowment Insurance policy works.
Figure 4.8: How Does An Endowment Insurance Policy Work?

Inception Maturity
Death Benefit is Date
of policy
payable when
Maturity
death / TPD
value is paid
occurs to the insured
if he is alive at
the end of the
policy term.
Policy Term
B. Features Of Endowment Insurance
4.7 An Endowment Insurance policy has the following common features:

 duration of cover is only for the period specified at the inception of the
policy. Both death and TPD are usually covered under the policy. Insurers
usually include TPD benefit as part of the basic policy or may attach it as a
supplementary benefit. On death or TPD during the policy term, the death /
TPD benefit is paid out and the policy ceases. The policy is said to mature
when the specified period ends. At this point the cover ceases, the maturity
value (i.e. the sum assured) is paid to the policy owner and the policy
terminates;
 upon death or maturity, the sum assured is paid in one lump sum;
 upon TPD, the sum assured is either paid in one lump sum or in
instalments, e.g. 10% - 1st year, 20% - 2nd year, 30% - 3rd year and 40% -
4th year;
 riders are allowed to be attached to the policy;
 cash value builds up quickly and is payable should the policy owner decide
to cash in (surrender / terminate) his policy after a number of years for
regular premium policies. For single premium policies, cash value is
immediately present;
 non-forfeiture options, including automatic premium loan (APL), are

available once the policy acquires cash value;
 policy lapses if the premium is not paid within the grace period of 30 or 31
days. Once the policy has acquired cash value, the APL will be effected and
the policy will not lapse, as long as there is sufficient cash value to cover
the premiums due. The policy owner can also avoid having his policy lapse
by activating other non-forfeiture options, such as a reduced paid-up policy
or Extended Term Insurance;
 policy loans are allowed once the policy acquires cash value. This feature
enables the policy owner, in temporary need of cash, to borrow against the
policy’s cash surrender value. Interest will be charged on the loan (the
interest rate is set by the insurer);
 premium is usually higher than Term Insurance and Whole Life Insurance
policies in view of its high savings / investment element. Usually a fixed
amount is payable on a regular basis throughout the premium payment
term. Lump sum payment (single premium) is also allowed. Premiums can
be payable for either the full policy term or only for a limited number of
years; and
 can be issued on a participating or non-participating basis. Bonuses are
available for participating Endowment Insurance. With a participating
Endowment Insurance, the death benefit, TPD benefit and maturity benefit
will include both the sum assured, as well as the accumulated bonuses. For
a non-participating Endowment Insurance, the death benefit, TPD benefit
and maturity benefit will be the original sum assured.
C. Types Of Endowment Insurance
4.8 There are various types of Endowment Insurance. The common one is
Anticipated Endowment Insurance.
C1. Anticipated Endowment Insurance
4.9 An Anticipated Endowment Insurance policy is very similar to a regular

participating Endowment Insurance policy, except that it provides cash
payments (a percentage of the sum assured) to the policy owner at specific
intervals (can be annually, every two, three or five years) spread over the term
of the policy. Example 4.1 shows how this policy works.
Example 4.1: How Does An Anticipated Endowment Insurance Policy Work?
Mr Goh has taken out an 18-year S$25,000 Anticipated Endowment Insurance

policy. He will receive payments from the policy every three years as follows:
Policy Year End Percentage Of Sum Cash Payment

Assured Payable
3 10 S$2,500
6 10 S$2,500
9 10 S$2,500
12 10 S$2,500
15 10 S$2,500
18 (maturity date) 50 S$12,500
Total S$25,000
Note: Bonuses are paid on the maturity date together with the last instalment
payment.
4.10 One unique feature of this policy is that the death benefit is not typically affected
by the cash payments. In other words, should the life insured die after receiving
any of the cash payments, the full sum assured plus bonuses would still be paid
to the beneficiaries. Thus, using the same example above, if Mr Goh were to
die on the 10th year, the beneficiary would still receive S$25,000 plus attaching
bonuses.
4.11 Another unique feature of this policy is that the cash payments can be left with
the insurer to accumulate interest, so as to increase the cash value of the policy
upon maturity.
4.12 Refer to Appendix 4A for the comparison of the three traditional life insurance
policies (Term Insurance, Whole Life Insurance and Endowment Insurance).
D. Suitability Of Endowment Insurance
4.13 Endowment Insurance policies are suitable for providing for children’s
education, and for saving / investment purposes.
D1. Children’s Education
4.14 Endowment Insurance policies are very often used to provide for one’s
children’s education. Very often, the cover is on the child’s life with the parent
or guardian as the policy owner. The benefits under this policy are payable in
the same manner as a regular Endowment Insurance policy, i.e. upon death or
TPD of the child, or upon maturity of the policy. Some companies allow the
maturity benefits to be withdrawn in four annual instalments to coincide with
the payment of the course fees to the university.
D2. Saving / Investment Purposes
4.15 Endowment Insurance is especially useful as a savings / investment plan in view

of its fast build-up of cash value. It enables the policy owner to save for specific
purposes (e.g. buying a house, provide for retirement etc.) and, at the same
time, protecting his dependants against the financial effects in the event of his
premature death Though the return of the endowment policy is not extra
ordinary, endowment policy is a good product to ring fence against the policy
owner’s creditor if it is trust nominated to the beneficiary.
5. MAS DISCLOSURE REQUIREMENTS RELATING TO LIFE INSURANCE POLICIES
5.1 The MAS Notice On Recommendations On Investment Products [Notice No:

FAA-N16] stipulates that the representative must furnish the client with a copy
of the Cover Page, Product Summary, Policy Illustration, Bundled Product
Disclosure Document and Product Highlights Sheet (only for ILPs) as prepared
and provided by the direct life insurer, when making a recommendation for a
life policy (including a bundled product). The details of the Notice are explained
in the Rules And Regulations For Financial Advisory Services Study Text
published by the SCI. It is also be available on the MAS website at:
www.mas.gov.sg
5.2 The following definitions are extracted directly from Notice No: MAS 318
(Market Conduct Standards For Direct Life Insurer As a Product Provider) from
the MAS website:
(a) “cover page”, in relation to a life policy, means a document highlighting
the key information from the policy illustration and the product summary,
which is prepared by a direct life insurer pursuant to this Notice No: MAS
318;
(b) “product summary”, in relation to a life policy, means a summary setting
out the principal features of the life policy, which is prepared by a direct life
insurer pursuant to this Notice No: MAS 318;
(c) “policy illustration”, in relation to a life policy, means an illustration setting
out the projected benefits payable under the life policy, which is prepared
by a direct life insurer pursuant to this Notice No: MAS 318;
(d) “bundled product disclosure document”, in relation to a bundled product,
means a document highlighting the principal features of the bundled
product and contrasting that against the most comparable term life
insurance product, which is prepared by a direct life insurer pursuant to this
Notice No: MAS 318; and
(e) “product highlights sheet”, in relation to an investment-linked policy,
means a product highlights sheet prepared by a direct life insurer in
accordance with the Notice on Investment-Linked Policies [MAS Notice
307].
5.3 LIA has also published a set of guidelines which stipulates that the
representative must furnish the client with a copy of “Your Guide To Life
Insurance Policies” at the point of sale of the policy.
5.4 For participating policies, MAS and LIA have also published guidelines that detail
additional disclosure requirements. These guidelines will be covered in a later
chapter of this Study Text.
6. GUIDELINES ON THE ONLINE DISTRIBUTION OF LIFE POLICIES WITH NO

ADVICE [GUIDELINE NO: ID01/17]
6.1 The write-up on Guidelines On The Online Distribution Of Life Policies With No
Advice [Guideline No: ID01/17] had been extracted in whole (from MAS website)
and reproduced as Appendix 4B of this chapter.
APPENDIX 4A
Comparison Of The Three Basic Life Insurance Policies:

Term, Whole Life And Endowment Insurance
NO. CRITERIA TERM INSURANCE WHOLE LIFE INSURANCE ENDOWMENT

INSURANCE
1. Variations  Level Term  Ordinary Whole Life  Ordinary
 Increasing Term  Limited Premium Endowment
 Decreasing Term Payment Whole Life  Anticipated
Endowment
2. Coverage  Death  Death  Death
 TPD*  TPD*  TPD*
(*either as part of the basic policy or being attached to these policies as a rider.)
3. Duration For the term of the For the term of the policy For the term of the
of Cover policy (in this case, whole of policy (but no cover in
life) the case of Pure
Endowment
4. Premium Lowest Higher than Term but Highest
lower than Endowment
Payable during the  Payable during the  Payable during the
policy term policy term; or policy term or
 Payable for a limited  Payable for a
number of years limited number of
years
Non-payment of  Non-payment of  Non-payment of
premium results in premium results in premium results in
lapsation of policy lapsation of policy lapsation of policy
 Automatic Premium  Automatic Premium
Loan (APL) is activated Loan (APL) is
if premium is not paid activated if
after the policy has premium is not paid
acquired cash value after the policy has
acquired cash value
Premium is usually Premium is usually level Premium is usually
level throughout the throughout the premium level throughout the
policy term, except payment term policy term
for Renewable and
Increasing Term
Insurance
Both single and Both single and regular Both single and
regular premiums premiums are allowed regular premiums are
are allowed allowed
5. Riders Only certain riders Most riders are allowed Most riders are
are allowed to be to be attached to the allowed to be attached
attached to the policy to the policy
policy
6. Cash Value Not available  Available  Available
 Builds up slowly  Builds up quickly
7. Non- Not available Available after policy Available after policy
forfeiture acquires cash value acquires cash value
Option
NO. CRITERIA TERM INSURANCE WHOLE LIFE INSURANCE ENDOWMENT

INSURANCE
8. Policy Not available Available after policy Available after policy
Loan acquires cash value acquires cash value
9. Bonus Not available Available for with-profits Available for with-
policy only profits policy only
10. Death Benefit paid in one Benefit paid in one lump Benefit paid in one
Benefit lump sum sum lump sum
11. TPD Sum assured paid in Sum assured paid in Sum assured paid in
Benefit lump sum or in lump sum or in lump sum or in
instalments instalments instalments
12. Maturity Not available Sometimes an amount Benefit paid in one
Benefit (If equal to the death benefit lump sum
life insured is payable when the
survives to insured reaches a pre-
the end of determined advanced age
policy (e.g. 100 years old)
term)
APPENDIX 4B
Guideline No.: ID 01/17
Issued Date: 31 March 2017
Last revised on 29 June 2018
GUIDELINES ON THE ONLINE DISTRIBUTION OF LIFE POLICIES WITH NO ADVICE
Purpose of these Guidelines
1 A direct life insurer may offer all types of life policies on the online direct channel
with no advice provided. These Guidelines apply to all direct insurers licensed under
section 8 of the Insurance Act (Cap. 142) (“the Act”) to carry on life business.
2 These Guidelines set out the Authority’s expectations on the safeguards that direct
life insurers should put in place for the online distribution of life policies without the
provision of advice.
3 These Guidelines should be read in conjunction with the provisions of the Act, as
well as written directions, notices, codes and other guidelines that the Authority may
issue from time to time.
4 The Guidelines shall take effect on 31 March 2017.
Definitions
5 For the purposes of these Guidelines, unless the context otherwise requires:
“advice” means a recommendation made with respect to any investment product,

after taking into account a client’s investment objectives, financial situation and
particular needs;
“conditional acceptance”, in relation to a life policy, refers to any additional

conditions or exclusions imposed by a direct life insurer in respect of the
application for a life policy;
"direct life insurer" means a direct insurer licensed under section 8 of the Act to
carry on life business;
“direct purchase insurance products” has the same meaning as in paragraph 4 of

MAS Notice 321 on Direct Purchase Insurance Products;
[Amended on 29 June 2018]
“life policy” has the same meaning as in the First Schedule to the Act;
Guidelines on the Online Distribution of Life Policies with No Advice
“online direct channel”, in relation to a life policy, means any web portal or
application in the internet created, developed and maintained or operated by any
direct life insurer, on which a client may purchase a life policy.
6 The terms used in these Guidelines, except where expressly defined in these
Guidelines or the context otherwise requires, have the same respective meanings in the
Act and the subsidiary legislations made thereunder.
Offer of equivalent Direct Purchase Insurance products (“DPIs”)
7 Before a direct life insurer offers a specific life policy online, it should first
determine if it offers an equivalent DPI. If an equivalent DPI is currently available, the
direct life insurer should also make available that DPI on its online direct channel. To
illustrate, a direct life insurer which intends to offer a whole life product on its online
direct channel is expected to also make available its Whole Life DPI on its online direct
channel.
8 The Authority has not required all direct life insurers to offer DPIs online,
recognising that not all direct life insurers have an online platform for the distribution
of life policies. However, where a direct life insurer has an online platform to distribute
life policies, it should also offer the equivalent DPI online to its clients.
Provision of key information
9 A direct life insurer should put in place the following safeguards at the point of a
client’s application for the purchase of a life policy via the online direct channel:
(a) Provision of product information: To assist a client in making an informed

decision, the direct life insurer should provide the client with an online copy
of, or access to, the following before the client completes the purchase of a
life policy via the online direct channel:
i. the documents set out in paragraph 3A of the MAS Notice 318 on Market
Conduct Standards for Direct Life Insurers as a Product Provider (as may
be amended from time to time), including the cover page, policy
illustration product summary, bundled product disclosure document,
and product highlights sheet in respect of that life policy (where a cover
page, policy illustration, product summary, bundled product disclosure
document, and product highlights sheet are available for that policy);
and
ii. full policy wordings of the relevant life policy;
The direct life insurer should also obtain the client’s acknowledgement that
he has completed the items set out in Annex A.
(b) Acknowledgement of conditional acceptance: The direct life insurer should

highlight to a client any conditions, including special exclusions or additional
premium loadings imposed by the direct life insurer as a result of
underwriting the policy application. Where the client intends to purchase a
life policy with a conditional acceptance, the direct life insurer should require
the client to acknowledge that he has read and understood these conditions
before purchasing the life policy. Examples of conditional acceptance include
instances where the direct life insurer’s acceptance of a client’s policy is
contingent upon exclusion of the client’s pre-existing medical condition or
there is additional premium loading imposed by the direct life insurer due to
the client’s pre-existing medical condition.
(c) Incorporation of prominent statement(s): Before a client completes the

purchase of a life policy via the online direct channel, the financial adviser
should alert the client (such as via a pop-up prompt) that:
i. a life policy is not a savings account or deposit;

ii. the client may not get back the premiums paid (partially or in full) if the
client terminates or surrenders the policy early;
iii. some benefits of a life policy are not guaranteed (only if applicable);
iv. there is a 14-day free-look period;
v. the client can request the financial adviser to explain the product
features;
vi. the client may wish to separately seek advice on the suitability of the life
policy; and
vii. in the event that the client chooses not to seek advice on the suitability
of the life policy, the client should consider if the life policy is suitable
for his financial circumstances and needs.
These statements should be worded in a simple and concise manner.
Provision of tools and calculators and considerations of other types of life policies
10 A direct life insurer should encourage its clients to go through the items set out in
Annex B before buying a life policy via the online direct channel. This will enable the
client to –
(a) calculate the amount of life insurance coverage the client would need, so that
the client may determine if the life policy meets his protection needs;
(b) check if the premium payable for the life policy is affordable based on his
income and expenditure; and
(c) consider the different types of DPI and other types of life policies available,
and whether the life policy is suitable for his financial circumstances and
needs.
11 The safeguard in paragraph 10 may not be applicable for all types of life policies
sold via the online direct channel. For example, a direct life insurer which offers monthly
renewable group term life policies via the online direct channel is not expected to make
available such tools and calculators to its clients as there is no long term financial
commitment.
Handling of queries, complaints and claims
12 A direct life insurer should set up appropriate avenues to address general queries
from its clients relating to the life policies offered on its online direct channel, including
but not limited to telephone or email helplines.
13 A direct life insurer should also provide information, such as contact details,
information on the claims process and the process for filing complaints, on its online
direct channel.
Implementation of internal controls, policies and procedures
14 It is an existing obligation for a direct life insurer to ensure that it has adequate
policies, procedures and controls to mitigate money laundering and terrorism financing
risks, as set out in the relevant Regulations, Notices and Guidelines issued by the
Authority under the Monetary Authority of Singapore Act. A direct life insurer shall take
steps to address any specific risks associated with non-face-to-face business relations
with a client.
15 It is also an existing obligation for a direct life insurer to implement internal policies
and processes to address technological risks. A direct life insurer should
(a) establish a sound and robust technology risk management framework;
(b) strengthen system security, reliability, resiliency and recoverability; and
(c) deploy strong authentication to protect customer data, transactions and

systems.
A direct life insurer should also put in place an appropriate business continuity plan to
minimise system downtime or component failures to the online direct channel, and to
ensure the functionality and continued operation of the online direct channel.
16 A direct life insurer should, where relevant, consider and implement other
safeguards to manage any other risks arising from the distribution of life policies on the
online direct channel so as to protect the interest of its clients.
Application of the Guidelines
17 Direct life insurers should be able to demonstrate to the Authority that they are
able to observe the Guidelines.
18 Where the Authority is not satisfied with a direct life insurer’s observance of the
Guidelines, the Authority may require the direct life insurer to take additional measures
to address the deficiencies noted.
ANNEX A
I acknowledge that I have

Part A
(a) Read and understood the cover page, policy illustration and product summary,
including any coverage exclusion
(b) Completed and disclosed fully and truthfully all the information requested in the
Proposal Form and any supplementary questionnaire(s)
Part B – Only applicable if medical and moratorium or financial underwriting are

conducted
(c) Declared all pre-existing medical conditions in the Proposal Form
(d) Reviewed all existing life policies that I own, or am in the process of applying for
in the Proposal Form
(e) Declared my current financial situation such as my income in the Proposal Form
ANNEX B
You are encouraged to go through the following items before buying a life policy via
the online direct channel:
Have you…
(a) Used the Insurance Estimator at the following link:
https://www.cpf.gov.sg/eSvc/Web/Schemes/InsuranceEstimator/InsuranceEstimat
or to calculate the amount of life insurance coverage you would need?
(b) Used the Budget Calculator at the following link:
http://www.moneysense.gov.sg/financial-planning/financial-
calculators/budgetcalculator.aspx to check if the premium that you will pay is
affordable based on your current income and expenditure?
(c) Visited http://www.comparefirst.sg to compare the features and premiums of
Direct Purchase Insurance (DPI) and other types of life policies?
(d) Considered the different types of DPI and other types of life policies that are
available, and whether the life policy that you intend to purchase is suitable for
your financial circumstances and needs?
Note: For item (b) above, please refer to the following link at:
https://www.moneysense.gov.sg/financial-tools/budget-calculator
CHAPTER
04
TRADITIONAL LIFE INSURANCE PRODUCTS

Term Insurance This type of insurance provides life insurance cover for a specific period of time,
called the policy term. People usually buy Term Insurance when they need
temporary insurance protection, i.e. the buyers are not looking for insurance for
their entire life. Once the policy expires, the cover will cease and the insured will
receive nothing. The sum assured (or death benefit) of the policy is payable to the
beneficiaries only if the life insured dies during the policy term. That is why Term
Insurance is also known as temporary insurance.
Level Term Insurance The simplest and most straightforward type of life insurance policy. It is called a
policy Level Term policy because both the death benefit and the premium remain level
throughout the policy term. Level term is designed to meet a constant need.
Decreasing Term This type of policy provides a diminishing amount of cover over the term of the
Insurance policy policy. The death benefit begins at a certain amount and then gradually decreases
over the term of coverage according to the stated method that is described in the
policy.
Mortgage Decreasing Term For this policy, at any point in time, the death benefit is designed to be equal to the
Insurance remaining balance on the loan. As the balance on the loan gets smaller, the death
benefit will also get smaller.
Increasing Term Insurance This type of policy is not common in Singapore. Its purpose is to protect the death
benefit against the effect of inflation. An Increasing Term Insurance policy provides
a death benefit that starts from one amount and increases by some specified
amount or percentage at stated intervals over the policy term.
Renewable Options This option gives the life insured the right to renew his policy at the end of the
policy term, without evidence of insurability. Most insurers offer this type of policy
on a short-term basis. Renewal is allowed, as long as the expiry date of the policy
does not exceed a specified age (usually the age of 60 years).
Convertible Options This option gives the life insured the right to change, or to convert his Term
Insurance policy into a permanent policy (e.g. Whole Life Insurance policy), as
specified by the insurer, without evidence of insurability. The premium that the
policy owner is charged for the permanent coverage cannot be based on any
increase in the insured’s mortality risk, except for an increase in the insured’s age.
Attained Age Conversion When term coverage is converted to permanent insurance under an attained age
conversion, the renewal premium rate is based on the insured’s age when the
coverage is converted.
Whole Life Insurance Whole Life Insurance provides for the payment of the policy’s face value (plus
bonuses, if applicable) upon the death of the insured, regardless of when death
occurs.
Non-Forfeiture Options Non-forfeiture options, are offered to policyholders when there are cash values
built up in a Whole Life Insurance policy.
Ordinary Whole Life A type of Whole Life Insurance for which premiums are based on the assumption
Insurance that they will be paid until the insured’s death. This type of policy provides
permanent protection with some degree of flexibility, to meet changing needs
and circumstances for both long-lived persons and those with average-duration
lifetimes.
Limited Premium Payment A type of Whole Life Insurance for which premiums are limited by contract to
Whole Life Insurance a specified number of years. The extreme end of the limited-payment policies
spectrum is the single-premium Whole Life Insurance policy.
9
Endowment Insurance A type of life insurance that is designed to pay out the death benefit when the life
insured dies during the policy term, or the maturity value, which will be equal to the
death benefit, if he survives to the end of the policy term. It combines insurance
protection with a savings element for the policy owner. An Endowment Insurance
policy has a fixed maturity date. The maturity date is when the policy term expires
and the full maturity value will be paid out to the policy owner if he survives to
maturity.
Cover page In relation to a life policy, means a document highlighting the key information from
the policy illustration and the product summary, which is prepared by a direct life
insurer pursuant to this Notice No: MAS 318.
Product summary In relation to a life policy, means a summary setting out the principal features of the
life policy, which is prepared by a direct life insurer pursuant to this Notice No: MAS
318.
Bundled product In relation to a bundled product, means a document highlighting the principal
disclosure document features of the bundled product and contrasting that against the most comparable
term life insurance product, which is prepared by a direct life insurer pursuant to
this Notice No: MAS 318.
Product Highlights Sheet In relation to an investment-linked policy, means a product highlights sheet
prepared by a direct life insurer in accordance with the Notice on Investment-Linked
Policies [MAS Notice 307].
10
Part I Chapter 5. Riders (Or Supplementary Benefits)
PART I CHAPTER 5
RIDERS (OR SUPPLEMENTARY BENEFITS)
CHAPTER OUTLINE
1. Riders (Or Supplementary Benefits)

Appendix 5A – Common Diseases Covered Under Critical Illness Insurance Policies
Appendix 5B – Sample of Critical Illness Policy
LEARNING OUTCOMES

 know what riders are
 describe the features of the various types of riders
CONTENTS
CHAPTER OUTLINE ........................................................................................................... 1
1. RIDERS (OR SUPPLEMENTARY BENEFITS) ................................................................ 3
A. Waiver Of Premium Rider ........................................................................................ 3
A1. Waiver Of Premium Upon Total And Permanent Disability (TPD).................. 4
A2. Waiver Of Premium Upon Diagnosis Of Critical Illness .................................. 6
B. Total And Permanent Disability (TPD) Rider ........................................................... 6
C. Critical Illness Rider .................................................................................................. 7
C1. Acceleration Benefit Critical Illness Rider ........................................................ 7
C2. Additional Benefit Critical Illness Rider ............................................................ 8
C3. Features Of Critical Illness Riders (Acceleration And Additional Benefits) .. 10
C4. Exclusions ........................................................................................................ 11
C5. Eligibility Criteria For Benefit Payment Of Critical Illness Rider.................... 12
C6. Severity-based Critical Illness (CI) Insurance Plan ......................................... 18
C7. Multiple Pay Critical Illness (CI) Insurance Plan ............................................. 19
C8. Factors To Consider In Determining Adequacy Of Critical Illness
Coverage ………………………………………………………………………………20
D. Term Rider .............................................................................................................. 22
D1. Level Term Rider ............................................................................................. 22
D2. Family Income Benefit Rider ........................................................................... 23
D3. Decreasing Term Rider.................................................................................... 24
E. Payor Benefit Rider................................................................................................. 24
F. Guaranteed Insurability Option Rider ................................................................... 24
G. Accidental Death Benefit Rider .............................................................................. 25
H. Accidental Death And Dismemberment / Disablement Rider .............................. 26
I. Hospital Cash (Income) Benefit Rider.................................................................... 26
J. Conclusion .............................................................................................................. 27
Appendix 5A .................................................................................................................... 29
Appendix 5B .................................................................................................................... 30
1. RIDERS (OR SUPPLEMENTARY BENEFITS)
1.1 Riders, also known as supplementary benefits, are special policy provisions that
provide benefits which are not found in the basic policy contract, or that make
adjustments to it. These special provisions are attached to (or “ride” on) a basic
policy.
1.2 Insurers often offer Insurance products that are combinations of a basic policy
and one or more riders. They are sold as packages and usually the buyer does
not have the option to omit any of the riders that are included.
1.3 However, the policy owner does usually have the option to add one or more
riders to a basic policy or one of these “packaged” products. The policy owner
must specifically request for riders to be included, but their requests are subject
to the insurer’s assessment and approval. If approved, the policy owner has to
pay an additional premium, as the addition of a rider increases the risk of the
insurer. Whether a rider is granted automatically or has to be purchased, will be
reflected in the policy schedule. In addition, an endorsement detailing the terms
and conditions of this rider will also be attached to the basic policy.
1.4 Riders cannot be dropped by the insurer, as long as premiums are paid when
due. However, if the policy lapses, the insurer may refuse to reinstate a rider at
the same time that it reinstates the basic policy. On the other hand, the policy
owner cannot purchase a rider without a basic policy (e.g. Whole Life
Insurance). He can neither cancel the basic policy nor retain only the rider. Also
the term of the rider cannot exceed that of the basic policy.
1.5 Some of the common riders offered by insurers are:

 Waiver of Premium Rider;
 Total and Permanent Disability (TPD) Rider;
 Critical Illness Rider;
 Term Riders;
 Payor Benefit Rider;
 Guaranteed Insurability Option Rider;
 Accidental Death Benefit Rider;
 Accidental Death and Dismemberment / Disablement Rider; and
 Hospital Cash (Income) Benefit Rider.
1.6 We will now look at each of these riders in detail, and see how each of them can
be used to enhance the coverage of a life insurance policy to meet the specific
needs of a policy owner.
A. Waiver Of Premium Rider
1.7 The Waiver of Premium Rider is one of the most common riders attached to a
life insurance policy. Basically, what this rider does or offers is to keep a policy
in force in the event that the life insured is not able to pay the premiums, when
he is totally and permanently disabled or is suffering from one of the critical
illnesses covered under his policy. In other words, it causes the premiums under
a policy to be waived once any of the specified events happens.
1.8 Generally, the Waiver of Premium Rider can be categorised into the following
two main groups according to the covered events as specified in the policy:
 Total and Permanent Disability (TPD); and
 Critical Illnesses.
A1. Waiver Of Premium Upon Total And Permanent Disability (TPD)
1.9 Some insurers issue the Waiver of Premium Rider as an integral part of the
policy, i.e. it is “folded in” their policies.
1.10 In such a case, no additional premium is required, as it has already been costed
into the gross premium for the basic policy. In other words, it is issued
automatically to the policy owner who has been granted a life insurance policy.
1.11 In some cases, the Waiver of Premium Rider is available as a rider which has to
be purchased separately by the proposer (not applicable to single premium
policies).
1.12 With this rider, the insurer essentially agrees to waive the premium payments
due on a policy if the life insured becomes disabled from accident or sickness,
and is unable to continue paying the premiums. The premiums will be waived
for as long as the life insured remains disabled. The insurer is in effect paying
the premiums on behalf of the policy owner. This not only keeps the policy in
force, but also continues to increase its cash value if the policy is one that
generates cash values.
1.13 This means that the amount payable to the policy owner or his beneficiary in
the event of the happening of a covered event (e.g. death) will not be affected.
1.14 The Waiver of Premium rider expires when the life insured reaches a specified
age (usually the age of 60 or 65 years). Thus, if the life insured becomes totally
and permanently disabled after the expiry age, future premiums will not be
waived as this rider is no longer effective. It is important that you highlight this
to your client.
A1A. What Constitutes Total And Permanent Disability (TPD)?

1.15 Another important point which the policy owner should be made aware of is
what constitutes TPD under the terms of the Waiver of Premium Rider.
1.16 One common definition of TPD is as follows:
“Total and Permanent Disability” is disability such that there is, neither at
the time disability commences, nor at any time thereafter, any work,
occupation or profession that the life insured can ever be capable of doing
or following to earn or obtain any wages, compensation or profit.
1.17 It also includes the total and irrecoverable:

 loss of sight of both eyes; or
 loss of sight of one eye and loss by severance or loss of use of one limb at
or above the ankle or wrist; or
 loss by severance of:
− both hands at or above the wrist; or
− both feet at or above the ankle; or
− one hand at or above the wrist and one foot at or above the ankle.
1.18 There is usually a waiting period of six months before the insurer waives the
premiums payable. In other words, the policy owner will still need to pay the
monthly premiums during the waiting period to keep the policy in force. The
purpose of the waiting period is to make sure that the disability meets the TPD
definition.
1.19 Some insurers will refund the monthly premiums paid during the waiting period
once the disability is confirmed. Others will only waive the premium at the
policy anniversary immediately following the disablement. In view of the
different practices, it is important that you find out the exact practice of the
insurer that you are representing, and highlight it to your clients accordingly.
Note that there is usually no refund of the premiums already paid. For example,
if the policy owner has paid by annual premium, then the premium will be
waived only on the following premium due date.
A1B. Exclusions
1.20 This is yet another important point which you need to highlight to your client.
Most insurers impose exclusions (limitations) on their waiver of premium
riders.
1.21 This means that, even if the life insured meets the definition of disability, no
claim will be paid under the Waiver of Premium Rider if, for example, the
disability is due to:
 intentionally self-inflicted injuries, while sane or insane;
 bodily injuries sustained as a result of travel or flight in or on any type of
aircraft, except as a fare-paying passenger on a regularly scheduled
passenger flight of a commercial aircraft;
 injury received in military, naval or air force service during time of war; or
 injury received while committing a crime.
1.22 If the life insured is disabled as a result of any of the above excluded causes
(these are the more commonly excluded causes, they may not be the same for
all insurers), the insurer will not waive any premiums that are due while he is
disabled. In such cases, the policy owner will have to continue paying the
premiums as and when they are due, or make use of the non-forfeiture options
(only applicable to life policies which acquire cash value), so as to keep the
policy in force. If they do not or are not able to pay the premiums and the policy
lapses, the insurance coverage will be terminated and the insurer’s liability also
ends.
A2. Waiver Of Premium Upon Diagnosis Of Critical Illness
1.23 The purpose of this rider is also to keep a policy in force by having all the future
premiums under the policy waived, in this case when the life insured is
diagnosed to be suffering from any of the critical illnesses covered under the
rider.
1.24 Note that this rider should not be recommended if the underlying coverage,
perhaps in the form of a basic policy and rider, provides 100% acceleration of
the death benefit on Critical Illness. This is because in the event of a critical
illness, the sum assured would be paid out and the policy would terminate, so
there would be no premiums to waive.
1.25 The critical illnesses covered by the rider, including their definitions and
exclusions, are usually the same as those of other Critical Illness Riders that the
insurer issues.
1.26 The duration of this rider is dependent on:

(i) the basic policy that it is attached to; and
(ii) the type of Critical Illness Rider that the policy owner has opted for.
1.27 For example, if this rider is attached to an Endowment Insurance policy, it will
follow the term of this policy. On the other hand, if it is attached to a Whole Life
Insurance policy, it is usually for life (or the premium-paying term of the policy
if it is a limited premium policy).
1.28 Contracting a critical illness can result in a severe financial drain to the
individual and his family. Thus, your client may not be able to continue to
service his policy.
B. Total And Permanent Disability (TPD) Rider
1.29 Like the Waiver of Premium Rider, the TPD Rider is also usually available as an
integral part of a life insurance policy. In fact, most insurers issue it together
with the Waiver of Premium Rider in one endorsement.
1.30 The waiting period and definition of disability are the same for both riders. In
the event of a total and permanent disablement, the disability benefit is paid as
a lump sum or in instalments spread over a number of years.
1.31 Example 5.1 shows one of the ways whereby the disability benefit is paid, i.e.
the disability benefit is expressed as a percentage of the sum assured.
Example 5.1: Payment Of TPD Benefit

Percentage Of TPD Benefit Payable
1 annual payment
st
10% of the sum assured
2nd annual payment 10% of the sum assured
3rd annual payment 10% of the sum assured
4 annual payment
th
10% of the sum assured
5th annual payment 60% of the sum assured
1.32 The moment that the first annual instalment payment starts, all riders under the
policy, with the exception of the Extended Total and Permanent Disability
(ETPD) Rider (described below), will be terminated.
1.33 If the policy does not have an ETPD Rider, the policy will terminate immediately
on the last annual payment, or when the insured reaches a specified age (TPD
rider expires at the age of 60 years for most policies), whichever is the earlier.
1.34 Most insurers place a limit (usually S$2,000,000) on the aggregate amount of
TPD benefit that they will pay on all the policies that an insured has with the
insurer. They will also not pay the TPD benefit if the disability is caused by
intentional self-inflicted bodily injuries.
C. Critical Illness Rider
1.35 A Critical Illness (also known as Dread Disease) Rider provides for a lump sum
to be paid in the event that the life insured is diagnosed to be suffering from
one of the covered critical illnesses. It can be attached to Whole Life,
Endowment, Term and Investment-linked Life Insurance policies. There are
basically two types of Critical Illness Riders.
1.36 They either provide an:

 Acceleration Benefit; or
 Additional Benefit.
1.37 Let us look at how each of them works.
C1. Acceleration Benefit Critical Illness Rider
1.38 The first type is often known as the accelerator or enhancer rider. As the name
implies, this rider provides for the pre-payment of a portion (e.g. 50%) or the
full sum assured (i.e. 100%) of the basic policy to which it is attached. For
example, a person buys a S$200,000 Whole Life Insurance policy attached with
a 50% acceleration benefit Critical Illness Rider to it. In the event that he is
diagnosed to be suffering from one of the critical illnesses covered under his
policy, the insurer will pay him S$100,000 (i.e. 50% x S$200,000) plus 50% of the
bonuses (if any). The Critical Illness Rider will then be terminated. The balance
of the sum assured plus bonuses (if any) will be paid when he dies or suffers
TPD. On the other hand, if he dies or suffers TPD without contracting any critical
illness as defined, the full S$200,000 plus bonuses (if any) will be paid to his
beneficiaries or him in a lump sum or instalments respectively. Figure 5.1
illustrates how this rider works. The bonus is involved because the pay-out is
actually an advancement of the death benefit.
Figure 5.1: How Does A S$200,000 Whole Life Insurance Policy With 50%
Acceleration Benefit Critical Illness Rider Attached To It Work?
S$200,000
Whole Life
Insurance
Policy with
50%
Acceleration
Benefit Critical Illness
Death/TPD*
Payment Of
S$100,000 + 50% of
accumulated bonus
Payment Of
S$200,000 + Death/TPD*
accumulated *TPD is payable in one
bonus lump sum or by Payment Of
instalments S$100,000 + 50% of
accumulated bonus
1.39 As you can see from Figure 5.1, a person can make a critical illness claim only
once, as this rider will be terminated once a valid claim is made.
1.40 Thus, if the person in the above example has chosen a 100% Acceleration
Benefit instead, then the full sum assured (plus bonuses, if any) will be paid,
and the whole policy will be terminated.
1.41 This type of Critical Illness Rider usually covers a person up to the age of 100
years. This makes it an ideal rider to be attached to a Whole Life Insurance
policy, as the life insured can have the coverage even in his old age when the
need for such a cover is greatest.
1.42 Note that this type of rider can be bundled or packaged (instead of attaching as a
rider) with the Whole Life, Endowment, Term and Investment-linked Insurance
policies to provide cover for death, TPD and critical illnesses. The sum assured
(plus bonuses, if any) will be paid depending on whichever event occurs first and
the percentage of acceleration benefit chosen. The way that it works is the same
as that explained in Figure 5.1.
C2. Additional Benefit Critical Illness Rider
1.43 Under this second type of Critical Illness Rider, the payment of the rider sum
assured is in addition to that of the basic plan to which it is attached.
1.44 The rider sum assured is usually limited to a certain multiple of the basic sum
assured of the main policy (e.g. five times the basic sum assured). When the life
insured is diagnosed to be suffering from one of the covered critical illnesses,
only the sum assured of this rider will be paid. The sum assured of the basic
policy remains intact and will be paid out only when an insured event (such as
death) occurs. So buying this rider is like having a separate policy covering
critical illness only (with no death cover).
1.45 For example, if a person purchases a S$100,000 Whole Life Insurance policy
with a S$200,000 Additional Benefit Critical Illness Rider, the insurer will pay
him S$200,000 when he contracts one of the covered Critical Illnesses. The
Whole Life Insurance sum assured of S$100,000 will be paid only upon his death
or TPD. Figure 5.2 illustrates how this type of Critical Illness Rider works. The
bonus is not involved in the critical illness pay-out because it is actually a term
critical illness rider without bonus.
Figure 5.2: How Does A S$100,000 Whole Life Insurance Policy With A
S$200,000 Additional Benefit Critical Illness Rider Work?
Whole Life
Insurance Policy
=S$100,000
Death / TPD* Critical Illness
Rider = S$200,000 Critical Illness
Payment Of
*TPD is payable S$200,000
Payment
in one lump sum
Of
or by Death / TPD*
S$100,000 +
instalments
accumulated
bonus
Payment Of
S$100,000 +
accumulated bonus
1.46 Note from Figure 5.2, the benefit payment of the Critical Illness Rider does not
affect that of the basic sum assured. This means that if the life insured contracts
any one of the covered critical illnesses and then dies, the total amount that the
insurer will pay under this policy will be S$300,000. However, if he has not
contracted any of the covered critical illnesses, then the amount which the
insurer needs to pay is only S$100,000 plus accumulated bonus.
1.47 The term of this type of Critical Illness Rider can be shorter, but not longer than
that of the basic policy. Usually, this rider expires when the life insured reaches
a specified age (usually the age of 65 years).
1.48 Table 5.1 gives a summary of the differences between the Acceleration and
Additional Benefit types of Critical Illness Riders.
Table 5.1: Summary Of Differences Between Acceleration And Additional

Benefit Types Of Critical Illness Riders
(In this table, “policy” refers to the basic underlying policy together with the rider).
Acceleration Benefit Additional Benefit
(Packaged Policy Or Rider) Rider
It must be packaged or attached to a basic It must be attached to a basic policy.
policy, i.e. ILP, Term, Endowment or Whole
Life Insurance policy.
On diagnosis of a critical illness, a On diagnosis of a critical illness, the full
percentage of the basic sum assured as sum assured of the rider will be paid.
specified in the policy will be paid.
Payment of a CI Insurance claim will cause Payment of a CI Insurance claim will
the policy to be terminated if it is a 100% not affect the basic policy which will
Acceleration type of policy or rider. continue to be in force.
Total amount paid under the policy is equal Total amount paid under the policy is
to the basic sum assured plus bonuses (if equal to the sum assured of the CI
any). Insurance rider, plus the sum assured
of the basic policy, plus any bonuses
payable under the basic policy, in the
event of a person who contracts a
critical illness dies, or becomes totally
disabled subsequently.
CI Insurance rider sum assured must not Sum assured can be up to a certain
exceed that of the basic policy. number of times of the basic sum
assured, subject to the insurer’s
specified guidelines.
CI Insurance rider term usually follows that The term must not exceed that of the
of the basic policy. basic policy and usually expires, when
the life insured reaches a specified age.
1.49 Having seen how the two types of Critical Illness Rider work, we will now take a
look at their overall features.
C3. Features Of Critical Illness Riders (Acceleration And Additional Benefits)
1.50 Although there are two types of Critical Illness Riders (Acceleration and
Additional Benefits), each of them shares common features as described below:
(a) It pays a lump sum amount upon diagnosis of an insured critical illness.
(b) Generally, one critical illness claim is allowed unless it is a Multiple Pay CI
Insurance plan.
(c) It has a specific waiting period (usually ranging from 30 to 90 days).
(d) Some insurers may impose a limit on the total amount of sum assured (e.g.
S$2,000,000) that a policy owner can buy. This is to minimise the risk of
moral hazard.
(e) The premium is usually level and non-guaranteed.
(f) The premium is usually not fixed and is based on the age band basis (e.g.
age of 35 to 39 years is one rate, age of 40 to 44 years is another rate) for
policies that are renewable on a yearly basis.
(g) There is no restriction on how the CI Insurance benefit payable is to be used.

(h) It can be packaged or attached to an ILP, Term, Endowment or Whole Life
Insurance policy.
(i) It can be issued on a stand-alone basis (such a policy pays the benefit only
upon diagnosis of one of the covered critical illnesses. It does not pay upon
the life insured’s death or total and permanent disability).
(j) It can be attached as a supplementary benefit to a basic policy.
(k) The CI Insurance rider does not acquire any cash value.
(l) The CI Insurance rider is automatically terminated once the basic policy is
surrendered or converted into an Extended Term Insurance policy.
(m) The packaged CI Insurance policy which accumulates cash value (e.g.
Whole Life type of CI Insurance policy) also provides non-forfeiture options.
However, the CI Insurance cover may be terminated once the policy owner
exercises any of the non-forfeiture options (excluding the paid-up option).
(n) A stand-alone Term CI Insurance policy does not acquire cash value. Hence,
it does not have any non-forfeiture option.
(o) It provides 24 hours a day, worldwide coverage, unless otherwise endorsed
or amended in the policy.
(p) Assignment of the policy may or may not be allowed.
(q) There is a maximum (e.g. age of 60 years) and minimum (e.g. age of one
year) entry age restriction. For young lives, it may be subject to lien 1.
(r) There is a minimum (e.g. S$10,000) and maximum (e.g. S$2,000,000) sum
assured restriction.
(s) The cover may expire at a maximum age (e.g. 75 years) or a whole life cover
may be provided.
C4. Exclusions
1.51 Critical Illnesses arising from the following are typically excluded from the
coverage:
(a) pre-existing illnesses;
(b) self-inflicted injury or illness, while sane or insane;
(c) wilful misuse of drugs and / or alcohol;
(d) congenital or inherited disorder;
(e) Acquired Immune Deficiency Syndrome (AIDS) or AIDS-Related Complex
(ARC), or infection by any Human Immunodeficiency Virus (HIV);
(f) bodily injury sustained as a result of travel in or on any type of aircraft,
except as a fare-paying passenger, or as a crew member of an international
airline operating on a regularly scheduled passenger flight of a licensed
commercial aircraft; and
(g) war or warlike operation, civil war or civil commotion.
1
A lien is a feature which restricts the sum assured payable on the happening of the insured event. Most
insurers impose the lien on policies taken on children’s lives for a specified number of years, e.g. three years.
In such a case, if the insured child dies within the 1st year after the inception of the policy, the insurer will
pay only 25% of the sum assured. This percentage increases on the 2nd and 3rd year to 50% and 75%,
respectively. From the 4th year onwards, the full sum assured will be paid, whenever the insured event
happens.
1.52 If the life insured suffers from one of the covered critical illnesses as a result of
any of the above excluded causes, the insurer is not required to pay the claim.
Note that the exclusions vary from insurer to insurer. Hence, you should find
out the exclusions imposed by your insurer and highlight them to your clients
accordingly.
C5. Eligibility Criteria For Benefit Payment Of Critical Illness Rider
1.53 Before the policy owner can be eligible to claim the benefit amount, certain
eligibility criteria (as specified) must be met. You should find out from your
insurer what they are.
1.54 The common eligibility criteria are as follows:
C5A. Critical Illness Must Be One That Is Covered

1.55 The critical illness suffered must be one of the diseases covered in the rider, and
it must be the first incidence of it for the insured. In other words, if the critical
illness is a pre-existing illness or is excluded from the rider, it will not be
covered.
1.56 Although the types of disease covered by critical illness policies may vary from
one insurer to another, some major illnesses and types of surgery are covered
by almost all policies. These include major cancers, heart attack of specified
severity, coronary artery bypass surgery, stroke with permanent neurological
deficit, and end stage kidney failure. Benefits are paid only if the disease or
surgery exactly meets the definition in the policy. Definitions of diseases are
fixed across all insurers in Singapore. For details on the standardised
definitions, do refer to LIA Website. Appendix 5A shows the industry list of the
37 Critical Illnesses extracted from the LIA Website at: www.lia.org.sg. A sample
Critical Illness Policy is shown in Appendix 5B.
1.57 Since 2003, the industry has standardised definitions for a list of 37 severe
critical illnesses for insurers to adopt to provide consistency for policyholders.
Subsequent reviews were done in 2014 and 2019 to update the standard
definitions having considered advancements in medical technology, health
trends, diagnosis as well as the experiences gathered by the industry to address
any issues that arose due to lack of clarity on the definitions.
1.58 In the 2014 review, the previous maximum limit of 30 medical conditions per CI
plan was abolished. Insurers could then offer any number of medical conditions
under a CI plan including single-illness CI plans. For each insured medical
condition, subject to the adoption of the common definitions, there were no
restrictions on how many stages and what the stages of illness progression to
be covered by the insurers. Definitions for additional critical illnesses not
covered by the 37 standardised definitions were to be set by the individual
insurers.
1.59 In the latest review of 2019, the standardised definitions were updated to
enhance clarity. Critical Illness insurance products could incorporate either
Version 2014 or Version 2019 definitions. On and after 26 August 2020, CI
products using Version 2014 definitions were no longer sold in Singapore. For
Individual Policies, the application of Version 2019 definitions was to be based
on the Proposal Signed Date. For proposals that were signed by 25 August 2020,
insurers were to ensure that the policies were issued by 25 November 2020. This
gave insurers a grace period of three months to issue all such policies under
Version 2014 definitions. Policyholders with existing Critical Illness policies
were not impacted by the new definitions.
1.60 However, the above-mentioned timelines have been affected by the COVID-19
pandemic. On 29 June 2020, LIA issued a circular to members advising them of
an extension of Grace Period. In view that COVID-19 has presented a practical
difficulty for applications requiring medical examinations, LIA members were
advised that the grace period for transition to Version 2019 Definitions would
be extended from the original three months to six months, i.e. by 25 February
2021.
1.61 Insurers that were implementing Version 2019 Definitions before 26 August
2020 could, if they wish, align to the same cut-off date of 25 February 2021. For
proposals that had been signed by 25 August 2020, insurers had to ensure that
the policies were issued no later than 25 February 2021. This gave insurers a
grace period of six months to issue all such policies under Version 2014
definitions.
1.62 In short, if the insured is purchasing critical illness insurance from 26 August
2020 onwards, the updated set of definitions for the standard list of 37 critical
illnesses would apply as per the Life Insurance Association (LIA) Critical Illness
Framework 2019 outlined above.
1.63 In order for financial advisors to better advise their clients, they need to know
the CI definitions well as well as be able to highlight to their clients regarding the
definitions. Conditions are covered under the policy only if they meet the
definitions.
1.64 In addition, insurers must adopt a 90-day waiting period for the severe stage of
five CIs to minimise anti-selection risk. Waiting period refers to the period of time
stated in the policy which must pass, before some or all of the insured’s Health
Insurance coverage can begin. These five CIs are:
(a) Major Cancer
(b) Coronary Artery By-Pass Surgery
(c) Heart Attack of Specified Severity
(d) Angioplasty and Other Invasive Treatments for Coronary Artery
(e) Other Serious Coronary Artery Disease
1.65 Although each insurer is free to adopt its own wordings on the waiting period
clause, the waiting period is to begin from the date that cover commences, or date
of reinstatement and the “date of diagnosis” shall be used to apply to the waiting
period. For conditions that pay a benefit on surgical procedure, this “date of
diagnosis” is the date of diagnosis of the medical condition that leads to the
surgical procedure but not to the date of surgical procedure itself.
1.66 The following are within the scope of the CI Framework:

(a) New individual policies or benefits
(b) New group policies or renewals, including any new CI cover during the
policy year
(c) CI benefits issued as a standalone policy or a rider

(d) CI benefits issued on an individual basis or a group basis
(e) CI benefits issued as a rider to an H&S policy or a PA policy
(f) For cases of top-up to existing CI policies, insurers are given the discretion
to decide to either apply the existing definitions to the top-up amount or
apply the prevailing current definitions to the top-up amount. Where it is
the latter, it is for the insurer to decide on the date of implementation of
such a practice. Further, the insurer should disclose this practice to the
policyholder in order to avoid any misunderstanding or difficulties in the
future.
(g) Where an existing individual CI term policy (yearly renewable type) is auto-
renewed or has to be cancelled and re-issued due to administrative reasons,
for example: change of payment mode or credit cards, the same approach
applies as under (f) above.
(h) Where an existing CI benefit attached to a health policy (including
Integrated Shield Plan) is auto-renewed, the same approach applies as
under (f) above.
1.67 The following are out of scope of the CI Framework:

(a) CI products for Male or Female or Children which do not cover any of the CI
conditions in its entire scope. Example, a Female CI product which covers
only Female Organs Cancer does not need to apply the Major Cancer
definition.
(b) Terminal Illness issued under the general benefits of a basic plan.
1.68 However, the above does not preclude insurers from customising their products
by extending coverage for more medical conditions and stages of illness
progression, beyond the standard list of 37 critical illnesses. Therefore,
policyholders need to fully understand the benefits of any critical illness insurance
they are purchasing.
1.69 For example, some plans offer coverage for 187 conditions that go beyond critical
illnesses, including 150 multi-stage critical illnesses.
The benefits to policyholders arising from the new definitions under the CI Framework
2019.
1.70 While the main objective of the changes made was to enhance the clarity of the
definitions of coverage in respect of severe stages of CI, there are additional
benefits for policyholders as detailed below:
1.71 Previously, those who suffer from Thalassaemia or Haemophillia could not claim
under “HIV Due to Blood Transfusion and Occupationally Acquired HIV”. This
group can claim under this category now.
1.72 The legal definition of blindness of 6/60 has been adopted for “Blindness
(Irreversible Lost of Sight)” condition as compared to the previous definition of
3/60.The latest critical illness definitions offer both pros and cons for
policyholders. Policyholders and consumers should be advised to check with their
insurer on coverage options available to them. Financial advisors should advise
their clients on how much coverage they need before purchasing critical illness
insurance. The policyholders can look to LIA’s 2017 Protection Gap Study –
Singapore2 as a guide, which recommends having enough coverage to last for an
assumed critical illness recovery period of five years. Certain insurers also avail to
their policyholders critical illness calculators so that they can work out how much
critical illness coverage they need today.
1.73 In recent years, the insurance market has seen a number of innovations in the
CI Insurance covers. These include Severity-based critical illness (also known as
Early Pay CI) and Multiple Pay CI Insurance policies.
1.74 In Singapore, COVID-19 is not one of the critical illnesses under the insurers’ list
of critical illness conditions.
1.75 However, for any consequential complication arising after the diagnosis of COVID-
19 leading to a critical illness, such as End Stage Lung Disease, the critical illness
benefit covered under these plans will apply.
C5B. Meets Definition

1.76 The definitions of the various critical illnesses as specified in the policy forms an
extremely important part of the policy, as they will determine whether a claim is
payable. For a severe Critical illness that is under the list of 37 conditions in the
LIA CI framework, the definition shall follow the industry standard. For any illness
not found in the list, it shall follow the respective definition which the insurer has
adopted. It is important that you take some time to explain to your prospective
client, and ensure that your prospective client understands that the benefits will
be paid only if the illness qualifies and meets the definition as specified in the
policy.
1.77 Let us look at one of the severe CI definitions (based on LIA CI Framework 2019),
to illustrate how you should explain the “meeting the definition” criteria to your
prospective clients.
“Major Cancer”
A malignant tumour positively diagnosed with histological confirmation and
characterised by the uncontrolled growth of malignant cells with invasion and
destruction of normal tissue.
The term Major Cancer includes, but is not limited to, leukemia, lymphoma and
sarcoma.
Major Cancer diagnosed on the basis of finding tumour cells and/or tumour-
associated molecules in blood, saliva, faeces, urine or any other bodily fluid in
the absence of further definitive and clinically verifiable evidence does not meet
the above definition.
2
https://www.lia.org.sg/media/1332/protection-gap-study-report-2017.pdf
For the above definition, the following are excluded:

 All tumours which are histologically classified as any of the following:
- Pre-malignant;
- Non-invasive;
- Carcinoma-in-situ (Tis) or Ta;
- Having borderline malignancy;
- Having any degree of malignant potential;
- Having suspicious malignancy;
- Neoplasm of uncertain or unknown behaviour; or
- All grades of dysplasia, squamous intraepithelial lesions (HSIL and
LSIL) and intra epithelial neoplasia;
 Any non-melanoma skin carcinoma, skin confined primary cutaneous
lymphoma and dermatofibrosarcoma protuberans unless there is evidence
of metastases to lymph nodes or beyond;
 Malignant melanoma that has not caused invasion beyond the epidermis;
 All Prostate cancers histologically described as T1N0M0 (TNM
Classification) or below; or Prostate cancers of another equivalent or lesser
classification;
 All Thyroid cancers histologically classified as T1N0M0 (TNM Classification)
or below;
 All Neuroendocrine tumours histologically classified as T1N0M0 (TNM
Classification) or below;
 All tumours of the Urinary Bladder histologically classified as T1N0M0
(TNM Classification) or below;
 All Gastro-Intestinal Stromal tumours histologically classified as Stage I or
IA according to the latest edition of the AJCC Cancer Staging Manual, or
below;
 Chronic Lymphocytic Leukaemia less than RAI Stage 3;
 All bone marrow malignancies which do not require recurrent blood
transfusions, chemotherapy, targeted cancer therapies, bone marrow
transplant, haematopoietic stem cell transplant or other major
interventionist treatment; and
 All tumours in the presence of HIV infection.
1.78 As can be seen from the above specification, it does not mean that, so long as the
life insured is diagnosed to be suffering from cancer, he can make a critical illness
claim under his policy. Standard definitions allow consumers to compare the CI
plans covering the severe stage of medical conditions of different insurers. The
scope of coverage is clear and consistent across the industry, giving consumers
assurance and confidence. These standard definitions have been refined to clearly
reflect the intent of coverage.
1.79 As the definitions can be very technical, you may have difficulties explaining
them to your client. In such a case, it is advisable that you approach your
underwriter or claims manager and request that your insurer provides adequate
training to you in this area.
C5C. Diagnosis Meets The Conditions As Specified By The Insurer

1.80 The diagnosis of the critical illness must be made by registered medical
practitioners. It excludes physicians who are the insured himself or his spouse
and other lineal 3 relatives of his.
1.81 The diagnosis must be supported by medical evidence, such as radiological,

clinical, histological or laboratory evidence acceptable to the insurer. In
addition, some insurers require that the diagnosis must be supported by the
insurers’ medical director who may base his opinion on the medical evidence
submitted by the claimant and / or any additional evidence requested by him.
1.82 In the event of any dispute over the appropriateness or correctness of the
diagnosis, the insurer has the right to call for a medical examination of the life
insured, or the evidence used in arriving at such a diagnosis by an independent
acknowledged expert in the field of medicine concerned, as selected by the
insurer. The insurer will bear the cost of this. The opinion of this expert will be
binding on both the insurer and the policy owner / life insured.
C5D. Meets The Waiting Period Requirement

1.83 The critical illness must be diagnosed after the waiting period. The majority of
insurers in Singapore impose a waiting period on their Critical Illness Rider,
which is usually 90 days from the date of issue or date of any reinstatement of
the rider.
1.84 For example, if a Critical Illness Rider was issued on 1 June 2011, the insured
could make a claim under his policy only if he was diagnosed to be suffering
from one of the covered critical illnesses on or after 1 September 2011.
1.85 The waiting period is imposed to prevent the intending insured from buying the
rider only when he suspects that there is something wrong with his health - a
practice known as anti-selection.
1.86 If the life insured is found to be suffering from any of the critical illnesses before
or during the waiting period, the insurer will usually void the policy and refund
the premiums paid, without any interest.
C5E. Meets The Survival Period Requirement

1.87 The life insured must survive the survival period before the benefit of the Critical
Illness Rider becomes payable. The survival period is the period of time (usually
30 days) starting from the date of occurrence of a covered critical illness. Note
that this survival period is applicable only to the Additional Benefit type of
Critical Illness Rider.
1.88 The basic policy including the Critical Illness Rider must be in force.
1.89 The insured has not reached the expiry age of the critical illness cover.
3
Lineal relative refers to people who are descendants from the same ancestor.
1.90 In a nutshell,
The benefits under a CI Insurance policy are payable ONLY if the:

 policy is in force;
 life insured has not reached the expiry age of the CI Insurance cover;
 critical illness which the life insured is suffering from is one that is covered
under the policy and meets the conditions as specified in the policy;
 critical illness is not a pre-existing illness;
 critical illness contracted meets the definition of the particular critical
illness as specified in the policy;
 critical illness is diagnosed to have commenced after the waiting period;
and
 life insured survives the survival period if there is one imposed on the
policy.
C6. Severity-based Critical Illness (CI) Insurance Plan
1.91 Insurers have introduced CI Insurance that pays in an earlier stage of the illness.
Commonly known as Early Pay CI, this type of severity-based CI Insurance plan
pays claims during early stages and less severe critical illnesses. Benefits are
claimable at various stages of the illness, from early to intermediate to severe.
1.92 Depending on the stages and severity of the critical illness, the plan gives a
percentage of the sum assured as a lump sum payment to the policy owner. The
progressive lump sum payments, subject to a monetary cap of each severity level,
amounts to the total sum assured which can be multiples of the original coverage.
1.93 Waiting Period and Survival Period are both applicable to Severity-based CI
plans.
1.94 Severity-based CI plans may appeal to those who are concerned about financial
support for early treatment of the critical illness. It can be purchased as a term
plan or attached as a rider to an existing Life Insurance policy, to enhance and
complement the life insured’s CI Insurance coverage. The plan covers any
individual person from the age of one up to 75 years. The premium is higher
than that of the normal CI Insurance plan.
C6A. The Advantages of Severity-Based Cover 4

1.95 We can regard severity-based covers as a hybrid of the traditional critical illness
cover.
1.96 Unlike the traditional covers where the insured gets all or nothing
(when insured is diagnosed with the covered CI, he gets 100% of the
sum assured), severity-based critical illness insurance will pay a
certain percentage based on how severe the illness is. The insured
receives lower pay-outs when he is diagnosed with a less severe CI.
4
https://www.criticalillness.org.uk/critical-illness-vs-severity-based-cover.html
1.97 The advantages of severity based critical illness insurance are:
a) Greater number of illnesses covered

The insured is covered for a greater number of covered illnesses. Less severe
forms of cancer are covered. This would not be possible in a standard critical
illness policy. For example, partial blindness can be claimed under a severity-
based cover. However, for traditional critical illness covers, only totally
blindness can be claimed. It addresses the pitfall of a traditional CI policy i.e.
the insured may be severely ill but he cannot get the pay-out as the illness is
not a covered illness.
b) Pay-outs received at an early stage of the illness

This enables the insured to have the funds to prevent the illness
from deteriorating. The insured stands to receive a sum earlier that can be
used for treatment. For example, if a polyp is detected in one’s colon and is
identified as an early-stage cancer, one can claim and have his colon operated
on.
c) The ability to claim more than once

The insured can only claim once under a traditional CI policy. The
cover terminates once that claim is made. The severity-based policy
allows the insured to claim for more than one illness even for
unrelated conditions.
d) Continuity of coverage after a claim

The CI cover will still continue after the insured has claimed for a less severe
critical illness.
C6B. Premium and Other Considerations

1.98 An early pay CI plan is not cheap. For example, a 30-year old male who is a non-
smoker and who wants to be insured for $100,000 till the age of 65 can expect to
pay about $100 per month. Do note that premiums charged vary with each insurer.
1.99 Also, it is important to note while the severity-based policy allows the insured to
claim for more than one illness, any claims made will be deducted against the sum
assured. Therefore, the insured cannot claim an infinite amount of times against
his policy. This is especially so if the insured is unfortunate enough to be
diagnosed with multiple illnesses.
C7. Multiple Pay Critical Illness (CI) Insurance Plan
1.100 A multi-pay critical illness plan pays the insured multiple times over each
diagnosis of critical illness and recurrent or reoccurring critical illnesses. An
insured may get a critical illness once. Some insureds may get critical illness
again, and again. A normal critical illness plan would most likely terminate after
paying the insured. It may not be viable for the insured to buy another critical plan
as the costs would be very high. It would be also challenging as the insurer may
be reluctant to offer cover as it considers the probability of a recurrence of the
illness.
1.101 This type of CI Insurance plan allows for more than one critical illness claim on the
policy. A second claim and subsequent ones are allowed if the medical condition
deteriorates or if a different medical condition occurs.
1.102 Such multiple claims are not restricted to only severe stage CI. When such CI plan
includes benefits for severity-based CI, insurers may allow for multi-claims on
early stages of the CI subject to benefit limits.
1.103 Waiting Period and Survival Period are applicable for such plans.
1.104 Some insurers offer another boost of the coverage for Relapse/ Recurring
condition of Major Cancer after a 2-year gap from the first Major Cancer claim.
1.105 Future premiums may be waived upon diagnosis of first claim on advanced stage
CI.
1.106 It is critical therefore for financial advisors selling CI cover to advise their clients
not only on the definitions of CI but also which stage of the CI is covered. Their
clients need to know what is payable and what is not.
C8. Factors To Consider In Determining Adequacy Of Critical Illness Coverage 5
1.107 Critical Illness (CI) insurance provides a pay out when the insured is diagnosed
with a critical illness. Policyholders should check the policy documents to see the
exact list of illnesses covered. It is important to bear in mind that not all CI policies
cover the same range of illnesses.
1.108 There are different ways in which the CI insurance policy pays out and they are
largely based on the policy coverage.
1.109 Most CI policies provide a lump sum payment when the insured is diagnosed with
a critical illness. They usually pay only if the illness is at a severe stage (e.g. stage
IV cancer). However, other CI policies do pay out at earlier stages of the disease.
In addition, policies that provide multiple pay outs are more common nowadays.
These multiples pay out policies pay at different stages of the disease. It is
important that intermediaries selling such policies explain this distinction to their
policyholders. Otherwise, the policyholders may think that as long as they are
diagnosed with any of the CI, insurer will pay the benefits regardless of the stage
of the illness.
1.110 Therefore, having a CI policy should not be the main objective but selecting the
one that provides the right degree of financial support is the key. In determining
the adequacy of CI coverage, there are four factors to consider:
 Life Insurance Association’s (LIA) recommended amount

 Minimum five years of income, after taking into account debt
 Recovery expenses
 Providing for dependents
C8A. Life Insurance Association’s (LIA) recommended amount

1.111 Each CI plan should be customised to fit the insured’s specific financial situation.
It is best to avoid buying a generic plan that that does not fit one’s own unique
circumstances.
5
https://www.axa.com.sg/blog/insurance-guide/critical-illness-coverage-for-singaporeans
1.112 LIA recommends that the average Singaporean has CI coverage of around
$316,000.
1.113 However, LIA’s recommended sum should be viewed as a rough guideline rather
than a goal. Each of us face different circumstances. For example, if the insured
has dependents with special needs, or the insured has to provide for parents. In
such circumstances, the amount of CI coverage would be higher.
1.114 On the other hand, the insured’s children could be independent. In this case, the
CI coverage could be smaller as there is no need to provide for them.
1.115 The insured is advised to seek the help of a qualified Financial Consultant or
advisor in selecting a CI plan that best fits his financial situation.
C8B. Minimum five years of income, after taking into account debt.
1.116 A rule of thumb is to have coverage of at least five years of the insured’s income.
However, the age of the insured’s dependents has to be considered. If the
insured’s children at a tender age, he would need more coverage.
1.117 The CI policy should provide enough funds equivalent to at least five years of the
insured’s income. This amount should be after considering all debts and other
liabilities. The nett amount should be sufficient to support the insured’s way of
living for five years. Other practitioners may even recommend a minimum of
seven years, depending on the insured’s circumstances.
1.118 One thing worth noting is that one cannot just rely on life insurance as it is a death
benefit cover. A living benefit cover as found in CI insurance is needed as the
insured is still around during the extent of the critical illness. Life insurance
(without any additional riders) would pay out upon the insured’s death. Another
challenge is that it is often difficult to achieve a very accurate estimation of
remaining lifespan. The insured could have months, or years, left.
1.119 It is important not to just stick to the LIA recommended sum of $316,000 as a
guideline. The minimum income approach serves to preserve the insured’s family
lifestyle. The LIA sum of $316,000, works out to be roughly $5,260 per month. This
may not be adequate for some families. It also does not consider that the insured
may want quality time with them.
C8C. Recovery expenses

1.120 Following the contraction of a critical illness, the insured would need to incur costs
such as engaging a nurse, hiring domestic help etc. These added costs must be
taken into consideration.
1.121 Having a critical illness does not mean having no chances of recovery. With access
to the best medical care in such circumstances, the insured could recover in the
early stages. Having an early-stage CI plan would be most useful in this regard.
With certain early-stage CI plans, the insured can get pay outs for different stages
of critical illness. Moreover, obtaining coverage for recurring critical illness is also
possible. These types of plans can pay out up to 600 per cent of the Sum Assured.
1.122 CI insurance complements the insured’s existing hospital and surgical insurance
coverage. For example, the pay outs can be used to cover treatments that are
usually excluded under hospital and surgical insurance.
C8D. Providing for dependents

1.123 As discussed, life insurance policies provide death benefits only. Living benefits
are equally vital. When the insured is critically ill, he cannot work. He still needs to
pay the bills. This is where CI insurance plays a vital role.
1.124 In view of the above, it is important to consider the needs of the insured’s
dependents. If his child is just 10 years old, for example, coverage should span
eight years instead of five (this will last till the child is 18 where he or she could be
expected to be more independent then).
1.125 On the other hand, the insured’s dependents could be already financially
independent. The insured may then be able to get by with less coverage. It is best
for the insured to seek the advice of his Financial Consultant on such matters.
1.126 CI insurance is not just about providing the funds and pay-outs. It is about the
insured being able to spend time with his loved ones, at a crucial – and perhaps
the final – stage in his life.
1.127 Financial advisers advising on Critical Illness (CI) coverage should highlight /bring
to attention of their clients the following:
 Type of Plan Purchased
 Scope of Cover and Exclusions
 Coverage of the CI - whether early, intermediate, end stage
 Claim conditions, including if the client is holding on to several CI policies
covering the same CI condition and whether all the policies pay out if the
claims conditions are met
 Premium payments of the plan if it is a standalone or attached as a rider
 Waiver of Premium Rider
D. Term Rider
1.128 A Term Rider is a term plan attached to a permanent policy. It cannot be

attached to a Term Insurance policy (since the buyer could simply increase the
sum assured under the Term Insurance policy). The amount of the Term Rider
coverage is usually expressed as a ratio of the sum assured of the basic plan
e.g. 3 to 1 or 5 to 1, depending on the practice of the insurer. At a 3-1 ratio, a
S$100,000 sum assured Whole Life Insurance policy can have a Term Rider up
to a maximum of S$300,000 sum assured.
Types Of Term Riders
1.129 There are three types of Term Riders, namely Level Term Rider, Family Income
Benefit Rider and Decreasing Term Rider, as described below.
D1. Level Term Rider
1.130 A Level Term rider is usually used to increase the coverage under a basic policy.
It is commonly used when additional life insurance is needed for a certain period
of time, such as while the children are growing up. In such a case, the term of
this rider should be arranged such that it would end at a time when the youngest
child would have graduated from university or turns 21 years old. This rider is
usually available in various terms from 5 to 30 years.
1.131 A person is allowed to select any term, as long as his age and the term of the
policy do not exceed the expiry age of this rider (usually the age of 70 years).
1.132 The cost of a level term rider is generally less than a separate Term Insurance
policy for the same amount. If your client’s need is a temporary one, such as
providing dependants’ support, you should recommend that he attaches this
rider to a permanent policy to provide the dependant support in the event of his
early demise. By doing so, it could enable him to save on the premiums that he
would otherwise have to pay.
D2. Family Income Benefit Rider
1.133 This rider is usually attached to a juvenile policy to provide a monthly, quarterly
or annual income to a child till the end of the term of this rider in the event of
the breadwinner’s premature death.
1.134 It is considered a decreasing Term Rider, as the earlier the payor (the parent)
dies, the longer the period that the child will receive the income and, hence, the
larger the accumulated total amount that the child will receive. Figure 5.3
illustrates how this rider works.
Figure 5.3: Income Payment Under A 16-Year Family Income Benefit Rider
Which Pays An Income Of S$1,000 Per Month
Mr Deng dies. Mr Eng dies.
Yr 0 Yr 2 Yr 4 Yr 6 Yr 8 Yr 10 Yr 12 Yr 14 Yr 16
Policy Term
Mr Deng
Assuming that he dies at the beginning of the 5th year, his beneficiary will
start to receive the monthly income from the 5th year onwards, until the policy
expires at the end of the 16th year. The total amount that the beneficiary will
receive from the policy is S$144,000 (S$1,000 x 12 months x 12 years).
Mr Eng
Assuming that he dies at the beginning of the 13th year, his beneficiary will
start to receive the monthly income from the 13th year onwards, until the
policy expires at the end of the 16th year. The total amount that the beneficiary
will receive from the policy is only S$48,000 (S$1,000 x 12 months x 4 years).
1.135 Note from the above examples that the longer a person lives, the lesser the
benefit that his beneficiary will receive.
1.136 As with the other riders, the term of this rider is not allowed to be longer than
that of the basic policy, and the amount of benefit is usually dependent on the
basic sum assured.
D3. Decreasing Term Rider
1.137 A decreasing Term Rider is the same as the level Term Rider, except that the
sum assured for this rider decreases yearly.
1.138 It is normally issued in periods of 10, 15 and 20 years, etc. As the sum assured
decreases yearly, the amount of cover in the last few years of the rider term is
usually very small.
1.139 As the premium is level throughout the term of the policy, the policy owner may
feel that it is not worthwhile to pay the premium for such a small amount of
coverage and may decide to drop this rider.
1.140 To avoid such a situation, most insurers will arrange for the policy owner to pay
the premium for less than the full duration of the rider, yet the coverage will still
continue to the full term of the rider. For example, some insurers do not require
the policy owner to pay the premiums in the last four years prior to the expiry
of this rider.
1.141 Like the Decreasing Term Insurance, a decreasing Term Rider can be used by a
policy owner to protect the mortgage on his home. In fact, this is the most
common reason for anyone to attach this rider to his policy, as the premium is
cheaper than the stand-alone Decreasing Term Insurance policy.
E. Payor Benefit Rider
1.142 This rider provides that, if the person (usually the parent) who is paying the
premiums on the juvenile policy dies, or becomes disabled before the child (life
insured) has reached a specified age (usually either 21 or 25 years old), the
insurer will waive all future premiums until the child reaches the specified age.
1.143 Some insurers also incorporate critical illness cover into this rider. Thus, if a
policy owner has opted to attach this type of Payor Benefit Rider to his child’s
policy, the premiums under the policy will be waived not only on the death or
total and permanent disablement of the payor, but also upon being diagnosed
as suffering from any of the critical illnesses covered under this rider. The types
of critical illnesses covered will be the same as those under the stand-alone
Critical Illness Insurance policy issued by the insurer.
F. Guaranteed Insurability Option Rider
1.144 The Guaranteed Insurability Option Rider is not an insurance cover, but a right
to purchase additional amounts of insurance at specified intervals or when
certain events occur over an extended period of time, without evidence of
insurability.
1.145 On each of the option dates, the policy owner may purchase additional
insurance on the life insured, without evidence of insurability, subject to the
terms and conditions of the Guaranteed Insurability Option Rider.
1.146 Usually, the option dates are fixed on the policy anniversary dates at specified
times, such as at the ages of 30, 35 and 40 years, or at every third policy
anniversary date. Some riders have option dates based on events such as
marriage or birth of a child. The maximum additional insurance coverage
permitted is normally equal to the original sum assured. The premium charged
will be based on the life insured’s age at the time that the option is exercised.
1.147 It is not compulsory for the policy owner to purchase additional insurance
covers on any of the option dates. If he fails to exercise the option on any one
option date, that option will lapse, but this will not have any effect on his right
to exercise the option on the next option date.
1.148 If a Guaranteed Insurability Option Rider is added to a juvenile policy, the policy
owner can exercise the option on the same date as with a policy purchased for
an adult.
1.149 This Guaranteed Insurability Option Rider is very useful especially for a juvenile
policy, as a child has a long life span ahead of him, and things may change
anytime (e.g. deterioration in health) which may result in him becoming
uninsurable. This rider guarantees that he will be able to obtain some form of
permanent coverage, no matter what happens. As the premium for this rider is
also very low, you should, therefore, advise your clients who are buying policies
for their children to also include this rider in their policies.
G. Accidental Death Benefit Rider
1.150 Accidental Death Benefit (ADB) Rider provides for the payment of an amount in
addition to the basic sum assured should the life insured die as a result of an
accident.
1.151 The amount paid under an accidental death benefit rider is usually the same as
the basic sum assured, and is therefore, often referred to as double indemnity.
However, it can be three or more times the basic sum assured. Whatever the
amount is, this additional amount is paid only when the life insured dies from
an accident.
1.152 To be eligible for payment under this rider, death must occur before the expiry
of this rider (usually the age of 60 years) and must meet the insurer’s definition
of an accidental death. Typically, the insurer requires that the:
 “Accident” must be an event caused by external, violent and visible means;
and
 “Accidental injury” must be a bodily injury caused directly and
independently of any other cause(s) by accident, of which there is evidence
of visible contusion or wound on the exterior of the body.
1.153 There are a number of exclusions under this rider. The common ones are:
(a) self-inflicted injury;
(b) commission of a crime; and
(c) injury sustained while travelling in or on any type of aircraft other than as a
crew member or fare-paying passenger on a regularly scheduled passenger
flight of an international commercial airline.
1.154 The premium for this rider is affordable. Thus, it is an attractive rider to add on
to a client’s basic policy, so as to increase his coverage.
1.155 Note that, besides life insurers, general insurers also offer this type of coverage,
which is usually issued on a stand-alone basis. This type of policy is called
Personal Accident Insurance policy. Besides the accidental death benefit, some
insurers may also include other covers, such as accidental dismemberment /
disablement, hospital cash (income), medical expenses, and even overseas
emergency assistance and repatriation service expenses.
H. Accidental Death And Dismemberment / Disablement Rider
1.156 This is basically an Accidental Death Benefit Rider with the added protection
against physical loss by amputation or severance (dismemberment) or
functional permanent loss (disablement) of limbs (including fingers and toes),
speech, hearing, and the sight of eyes, etc. The insured event and the
corresponding sum assured payable (usually expressed as a percentage of the
sum assured of this rider) will be listed out in the endorsement.
1.157 Strictly speaking, this is not life insurance, but some life insurers issue this rider,
which is especially suitable for blue-collar workers.
I. Hospital Cash (Income) Benefit Rider
1.158 This rider provides a fixed daily benefit (e.g. S$150 per day) based on the period
of hospital confinement, without regard to the actual incurred hospital charges.
1.159 Usually, the amount of benefit allowed is dependent on the basic sum assured.
Most of these riders cover hospitalisation as a result of both sickness and
accident.
1.160 There is usually a limit on the amount payable per hospitalisation (e.g. up to 90
days). In addition, there is a limit on the maximum amount that the insured may
claim under this rider, such as not exceeding 730 times the daily hospital
confinement benefit. Once the total claims reach the maximum limit, this rider
will be automatically terminated.
1.161 There may be a waiting period (e.g. 30 or 45 days) from the issue date or date
of reinstatement of this rider before the insured is eligible to make a claim. In
addition, this rider will not pay if the hospitalisation is due to:
 pre-existing illness or injury;
 self-inflicted injury or attempted suicide, while sane or insane; and
 pregnancy, miscarriage, abortion, childbirth and their complications.
1.162 These are just some of the common exclusions which vary from insurer to
insurer. This rider terminates when the insured reaches a specified age (usually
the age of 60 years).
1.163 As most Medical Expense Insurance policies require the insured to bear a
certain percentage of the medical fees incurred, it will be good for your client to
have the Hospital Cash (Income) Benefit Rider. This is because this rider pays
from the first dollar onwards. Hence, it can be used to cover the amount that
your client needs to bear under his own Medical Expense Insurance policy.
J. Conclusion
1.164 As you have seen, riders enable one to increase the coverage or prevent a policy
from lapsing, usually at a low cost. For example, the Family Income Benefit
Rider and the Payor Benefit Rider are suitable to be attached to juvenile policies.
The former will enable a child to have a regular income until he is independent
if anything happens to his parents.
1.165 The Payor Benefit Rider, on the other hand, makes it possible to guarantee that
a juvenile policy will accomplish what the policy owner wants it to, whether or
not he is able to continue making the premium payments.
1.166 Riders also offer the policy owner the flexibility of increasing or reducing the
coverage under his policy, as they can be added at any time to meet his needs,
provided of course he meets the eligibility requirements. They can also be
removed if the need no longer exists. (Note that this may not be possible if the
policy being purchased automatically includes the rider.)
1.167 However, you must point out to your clients that all riders do not have any cash
value and also they will automatically be terminated once the basic policy is
converted into a paid-up or extended Term Insurance policy.
1.168 You must also highlight the limitations and exclusions under the various riders
to your clients. Table 5.3 shows a summary of the above common riders offered
by insurers and their key features.
Table 5.3: Common Riders And Their Key Features

Type Of Rider Key Features
Waiver of  Premiums are waived when the life insured is disabled
Premium Rider or suffers from critical illness.
 The covered events can be classified into two main
groups:
- Total and Permanent Disability (TPD); and
- Critical Illnesses
Total and  Benefit is paid out either in lump sum or in instalments
Permanent in the event of TPD.
Disability (TPD)  Usually an integral part of a life insurance policy
Rider
Critical Illness  Benefit is paid out in a lump sum in the event the life
Rider insured is diagnosed with a critical illness covered
under the policy.
 Can be attached to Whole Life, Endowment, Term and
Investment-Linked Policies.
 Two types of Critical Illness Riders:
- Acceleration Benefit; or
- Additional Benefit
 For benefit payment, critical illness needs to fulfil the
eligibility criteria, and cannot fall under the list of
exclusions as set out by the insurer.
Type Of Rider Key Features

Term Rider  Provides insurance coverage over a specified term.
 Can only be attached to a permanent policy.
 There are three types of term riders:
- Level Term Rider;
- Family Income Benefit Rider; and
- Decreasing Term Rider.
Payor Benefit  Applicable to third-party policies on a juvenile.
Rider  If the payor of the policy dies, the premiums for the
juvenile policy are waived until the juvenile reaches a
specified age.
Guaranteed  Gives the policy owner the right to purchase additional
Insurability amounts of insurance at specified intervals or on the
Option Rider occurrence of certain events, without evidence of
insurability.
 This rider guarantees the policy owner some form of
permanent coverage, even if his situation changes and
he becomes uninsurable.
Accidental Death  Provides for the payment of an amount in addition to
Benefit Rider the basic sum assured, should the insured die as a
result of an accident.
 To be eligible for the benefit, the insurer’s definition of
accidental death must be met.
Accidental Death  This rider is the same as the Accidental Death Benefit
and Rider, with added protection against dismemberment
Dismemberment or disablement.
/ Disablement
Rider
Hospital Cash  Fixed daily benefit based on the period of hospital
(Income) Benefit confinement.
Rider  The cause of hospitalisation must not fall within the list
of exclusions that is set by the insurer. Hospitalisation
as a result of both sickness and accident is usually
covered.
APPENDIX 5A
LIA CRITICAL ILLNESS (CI) FRAMEWORK 2019

STANDARD DEFINITIONS FOR SEVERE STAGE OF 37 CRITICAL ILLNESSES:
VERSION 2019
Industry list of all 37 critical illnesses:
1 Major Cancer
2 Heart Attack of Specified Severity
3 Stroke with Permanent Neurological Deficit
4 Coronary Artery By-pass Surgery
5 End Stage Kidney Failure
6 Irreversible Aplastic Anaemia
7 End Stage Lung Disease
8 End Stage Liver Failure
9 Coma
10 Deafness (Irreversible Loss of Hearing)
11 Open Chest Heart Valve Surgery
12 Irreversible Loss of Speech
13 Major Burns
14 Major Organ / Bone Marrow Transplantation
15 Multiple Sclerosis
16 Muscular Dystrophy
17 Idiopathic Parkinson’s Disease
18 Open Chest Surgery to Aorta
19 Alzheimer’s Disease / Severe Dementia
20 Fulminant Hepatitis
21 Motor Neurone Disease
22 Primary Pulmonary Hypertension
23 HIV Due to Blood Transfusion and Occupationally Acquired HIV
24 Benign Brain Tumour
25 Severe Encephalitis
26 Severe Bacterial Meningitis
27 Angioplasty & Other Invasive Treatment for Coronary Artery
28 Blindness (Irreversible Loss of Sight)
29 Major Head Trauma
30 Paralysis (Irreversible Loss of Use of Limbs)
31 Terminal Illness
32 Progressive Scleroderma
33 Persistent Vegetative State (Apallic Syndrome)
34 Systemic Lupus Erythematosus with Lupus Nephritis
35 Other Serious Coronary Artery Disease
36 Poliomyelitis
37 Loss of Independent Existence
Source : LIA Website: LIA Critical Illness (CI) Framework 2019

Standard Definitions For Severe Stage of 37 Critical Illness: Version 2019
APPENDIX 5B
SAMPLE OF CRITICAL ILLNESS POLICY
General conditions
1. THE CONTRACT
This policy is a written confirmation of a contract between you and us. This is a
regular premium non-participating life insurance policy that provides protection
for critical illnesses and coverage in the event that admission to an intensive care
unit (ICU) of a hospital is medically necessary.
2. DEFINITIONS
Unless we say otherwise, the following are definitions of words and expressions
we use in this policy.
(a) Age means the life insured’s age as at his/her last birthday, on the policy
effective date.
(b) Application means information you and/or the life insured gave to buy this
basic benefit or any supplementary benefit of this policy. Whether we accept
your application depends on our assessment of the information submitted.
(c) Basic benefit means the basic insurance cover as shown on the schedule
page or endorsement and as stated in the basic benefit conditions of this
basic benefit contract.
(d) Basic sum insured means the sum insured of the basic benefit (as may be
changed or adjusted in accordance with this basic benefit contract) as set
out on the schedule page.
(e) Critical illness or CI means a list of conditions that is covered under this
policy and it is defined in appendix A of this basic benefit contract.
(f) Critical illness (CI) benefit means the amount payable in the event of a
claim for CI as determined in accordance with clause 24.
(g) Dates
(i) Date of event means the date of diagnosis of a critical illness for CI
benefit and date of ICU or HDU admission for recovery care benefit.
However, in the case of Angioplasty and other invasive treatment for
coronary artery and certain other conditions as defined in appendix A,
it shall mean the date of treatment.
(ii) Grace period means a period of 30 calendar days after the premium due
date.
(iii) Policy anniversary means any anniversary of the policy effective date.
(iv) Policy start date (or policy effective date) means the date when this
policy takes effect, as shown on the schedule page. If there is no day in
any month or year that coincides with the policy effective date, the
policy anniversary, policy monthiversary, and policy year (where
applicable) will be the first calendar day of the next calendar month.
(v) Policy issue date means the date when this policy is issued, as
shown on the schedule page.
(vi) Policy year means a consecutive 12-month period. The first policy year
begins on the policy effective date and ends 1 day before the first policy
anniversary. Each subsequent policy year begins on the day of the
policy anniversary and ends 1 day before the next policy anniversary.
(vii) Benefit end date means the date when the basic benefit or any
supplementary benefit cover ends, as shown on the schedule page.
(viii) Premium end date means the date on which the final premium is due
and is to be paid, as shown on the schedule page.
(ix) Premium due date means the date when the premium is due and
payable according to the payment frequency you have chosen.
(h) Death Benefit means benefit payable to you as described under the death
benefit section as set out in clause 23.
(i) Diagnosis or diagnosed means the definitive diagnosis made by a medical

examiner, based on radiological, clinical, histological or laboratory evidence
which we accept. We may appoint another medical examiner to examine the
life insured or the evidence presented. The opinion and diagnosis of this
medical examiner will be final and binding.
(j) Endorsement means any document issued and signed by our Chief Executive
or Chief Operations Officer to change the terms of this policy. It forms part of
this policy.
(k) Intensive Care Unit (ICU) is the intensive care unit of a hospital that is
dedicated to the management and monitoring of patients with severe or life-
threatening conditions. High dependency unit and other accommodation
ward are not considered an intensive care unit.
(l) High Dependency Unit (HDU) is a step-down unit for patients who do not yet
require admission into an ICU. It is one level of care below that of an ICU.
(m) Life insured means the person named as the life insured on the schedule
page or endorsement. This is the person that this policy insures.
(n) Medical examiner means:

(i) any medical practitioner or specialist doctor with a recognised degree in
western medicine who is licensed and authorised to practise in his or her
country, who has the relevant skill to provide medical or surgical services
for the illness, disability or disease; or
(ii) any medical practitioner or specialist doctor in Singapore we choose if
you or the life insured makes a claim for basic benefit or supplementary
benefit (if applicable) under this policy.
This person must not be you or the life insured, or your or the life insured’s
husband, wife, relative or business partner.
(o) Medically necessary means such treatment, procedure or other medical

services which are:
(i) required for the diagnosis or direct treatment of the life insured’s medical
condition; and
(ii) clinically appropriate, in terms of type, frequency, extent, site and

duration, and considered effective for the life insured’s medical condition;
and
(iii) not primarily for the convenience of the patient or healthcare provider, a
medical examiner or any other healthcare provider, and not more costly
than an alternative service or sequence of services at least as likely to
produce equivalent therapeutic or diagnostic results as to the diagnosis
or treatment of that life insured’s medical condition; and
(iv) appropriate and consistent with the symptoms and findings or diagnosis
and direct treatment of the life insured’s medical condition; and
(v) in accordance with generally accepted standards of medical practice; and
(vi) in accordance with treating medical examiner’s specialty society
recommendations and established clinical protocols; and
(vii) not associated with treatment, procedure, supplies or other medical
services of an experimental or investigative nature; and
(viii) cannot have been omitted without adversely affecting the life insured’s
medical condition.
For these purposes, “generally accepted standards of medical practice”

means standards that are based on credible scientific evidence published in
peer-reviewed medical literature generally recognized by the relevant
medical community.
(p) Policy
(i) This policy is made up of the following:

a. the application form, any amendments, other forms and documents
provided by you and the life insured to apply for this policy;
b. this basic benefit contract;
c. the supplementary benefit contract (if any);
d. the schedule page;
e. the endorsement (if any);
f. any counter offers we made and you accepted; and
g. any information and documents provided by you and the life insured
with or after your application.
(ii) We may issue revised schedule pages and/or endorsements to show
changes made to this policy. Any change to this policy must be in writing
and signed by our Chief Executive or Chief Operations Officer.
(iii) We are not bound by any representation made by or to any other person
not included in this policy
(q) Pre-existing condition means any illness or condition which existed before
the policy issue date or the most recent date of reinstatement of this policy,
whichever is the latest, which would have affected our decision to accept your
application and for which:
(i) presented signs or symptoms which you or the life insured was aware of
or should have been aware of, and where the life insured should have
sought medical advice or treatment;
(ii) treatment, test or investigation was recommended by or received from a
medical examiner; or
(iii) the life insured has arranged or received medical consultation, test or
investigation.
(r) Premium means the amount you pay to us until the premium end date as
shown in the schedule page, to keep this policy in force.
(s) Recovery care benefit is as defined and set out in clause 25.
(t) Schedule page forms part of this policy setting out specific details.
(u) Supplementary benefit means optional insurance coverage attached to this

basic benefit contract. You can find details of supplementary benefit on
schedule page or endorsement, and terms in the supplementary benefit
contract.
(v) Total premiums paid to date means and is equal to the total premiums
paid to us for the basic benefit (without interest).
(w) We, our, us refer to Company ABC Pte Ltd.
(x) You / Your / Yourself refer to the owner of this policy as shown in
schedule page or endorsement (if there is an assignment to change the
ownership of this policy).
3. FREE-LOOK PERIOD
(a) You may cancel this policy by writing to us within 14 days after you receive
this policy.
(b) If you cancel the policy within this free-look period, we will refund all
premiums paid without interest and less any medical or other expenses we
have had to pay in processing your application.
(c) If we send this policy to you by post or email, it will be considered delivered
by us and received by you 7 days after the date of posting or email sent.
4. PREMIUMS
(a) The premium for this policy is shown on the schedule page or endorsement
and the premium rate is not guaranteed. We reserve the right to change the
premium rate for this policy by giving you 30 days’ notice.
(b) If there is a supplementary benefit contract attached to this policy, the

premium shown on the schedule page includes the premium for the
supplementary benefit.
(c) The premium shown will be based on the frequency of payment you have
chosen.
(d) You must pay the premiums by the premium due date. It is your
responsibility to pay all premiums when due and until the premium end
date as shown on the schedule page.
(e) We will not process the payment if we do not receive the full premiums for
the policy.
(f) If you pay premiums monthly, you must do so using a direct debit facility
(GIRO) approved by us. We may charge an administrative fee for any monthly
premium not paid through GIRO or where the GIRO transaction has not been
successful.
(g) If the basic sum insured is changed, the premium payable for this policy will
be revised accordingly. The revised premium rate that is applied to the policy
will be based on the age of the life insured.
5. BASIC SUM INSURED
(a) The basic sum insured on the policy start date is shown on the schedule
page.
(b) Depending on our approval and conditions that may change at any time, you
can ask us to reduce the sum insured as long as the policy is in force. If we
approve the request, we will charge you a premium based on the reduced sum
insured starting from the next premium due date.
(c) The basic sum insured will be reduced by the amount paid upon your claim of
any of the basic benefits as stated in this basic benefit contract. You must
continue to pay premiums on the reduced basic sum insured as instructed by
us.
(d) The maximum aggregated sum insured we will allow for all eCriticalCare plan
named policies (and any of its future versions issued by us), purchased by
you covering the same life insured shall be limited to S$300,000.
6. WAITING PERIOD
We will not cover the following critical illness of the life insured, if:
(i) Major Cancer is diagnosed;
(ii) Heart Attack with specified severity is diagnosed;
(iii) Other Serious Coronary Artery Disease is diagnosed;
(iv) Date of diagnosis of the condition that leads to performance of Coronary
Artery By-Pass Surgery is; and/or
(v) Date of diagnosis of the condition that leads to performance of Angioplasty
& Other Invasive Treatment for Coronary Artery is
within ninety (90) days from:

(i) the policy issue date; or
(ii) the date of reinstatement of this policy;
whichever is later.
Recovery care benefit is not payable if life insured was diagnosed with an illness
which directly or indirectly, partly or wholly, resulted into ICU or HDU admission
where such diagnosis was made within 90 days from the policy issue date or the
most recent date of reinstatement of this policy, whichever is later.
7. LAPSING AND REINSTATING THE POLICY
(a) This policy will lapse (no cover will be provided) if you do not pay the
premiums by the end of the grace period.
(b) You may ask us to reinstate the policy within 3 policy years from the date the
policy lapsed.
(c) We will decide whether to reinstate the policy and we must receive:
(i) evidence of the life insured’s eligibility for insurance cover (you will have
to pay for any medical reports and tests needed);
(ii) all overdue premiums which would have been paid had the policy not
lapsed and the interest we may charge on these premiums (in a way
which we will decide); and
(iii) any amount you may owe us.
(d) We can include new terms and conditions on the reinstated policy.
8. NON-DISCLOSURE
(a) Under the Insurance Act (Cap. 142), you and the life insured must disclose all
facts you and/or the life insured know or ought to know (including any facts
which may affect our decision to provide insurance coverage under this policy).
(b) If you and/or the life insured misrepresent or fail to disclose any facts (as
described above), we may void this policy. We may determine at our sole
discretion whether to refund all premiums received without interest, less the
policy debt, amounts you owe to us, medical and other expenses incurred and
to be incurred by us under this policy.
9. INCONTESTABILITY
(a) Except for fraud, non-payment of premium, any claim that is not covered under
this policy, or non-disclosure as described under clause 8, we will not contest
the validity of or void this policy after 2 years from any of the following dates,
whichever is the latest:
(i) the policy issue date; or
(ii) the date of the most recent reinstatement of the policy.
(b) If we contest the validity of or void this policy, we may determine at our sole
discretion whether to refund all premiums received without interest, less the
policy debt, amounts you owe to us, medical and other expenses incurred and
to be incurred by us under this policy.
10. MAKING A CLAIM
(a) You or the person making a claim must give us notice in writing of the claim
within 30 days of the event (or as soon as possible).
(b) You or the person making the claim must give us, within 30 days after notice
of the claim (or as soon as possible) evidence of the event. We must receive:
(i) this policy;

(ii) proof of ownership or entitlement of the person making the claim;
(iii) the birth certificate, identification documents or other relevant documents
we may need for the life insured or the person making the claim;
(iv) the completed claim form and the medical report;
(v) proof of the event giving rise to the claim under this policy; and
(vi) any other document we may ask for so we can process the claim.
(c) We may appoint another medical examiner to examine the life insured in
Singapore or the evidence presented. The opinion and diagnosis of this medical
examiner will be binding on the life insured and us. You will have to pay any
travel, accommodation and other costs; but not the cost of the examination
carried out by our appointed medical examiner.
(d) We will not be legally responsible if you or the person making the claim fails to
provide the documents, we need to check the claim or entitlement under this
policy.
(e) If the age or sex (or both) were incorrect on the application, we will change the
benefits due under this policy to those which would have been appropriate had
the age or sex been correctly stated.
(f) If we make a payment under this policy, this will fulfill our duty under the policy,
and we will have no further responsibility to you or any other person for the
claim. This will apply to any action, claim, proceedings, cost, damages,
demand, interest, liability, loss, penalty, tax and expenses you or the person
making the claim may suffer or have to pay as a result of or in connection with
the claim.
(g) We may ask you or the person claiming to repay any amount which we have
paid as a result of any mistake or oversight (including on our part or on the part
of our employees or representatives).
(h) We will take any amount you owe us on your policy before we pay any claim.
11. RESIDENCE, TRAVEL AND OCCUPATION
There are no restrictions on where the life insured stays, travels or works, unless we
say otherwise.
12. NON-PARTICIPATING
This policy does not benefit from our surplus distributions. When you ask to end
the policy or if the policy lapses or ends, it will have no cash value.
13. ASSIGNMENT
(a) While this policy is in force and during the lifetime of the life insured, you may
use your policy as security or collateral if you fully transfer the benefits of the
policy to another person or organization.
(b) You must give us:

(i) written notice of the assignment; and
(ii) a copy of the assignment.
(c) We will only treat the notice of assignment as received when it is delivered to
our registered address. If you provide this notice through our representative,
we will only treat it as received when the representative delivers it to our
registered address.
(d) By acknowledging the notice of assignment, we are not responsible for

whether the assignment is valid or legally enforceable.
14. SURVIVAL PERIOD
The life insured must survive for a period of 7 days from the date of event (as
applicable) in order for you to claim critical illness benefit and/or recovery care
benefit. Otherwise, only death benefit, subject to clause 23, shall be payable.
15. SUICIDE
(a) If the life insured dies from suicide within 1 year from the policy issue date, we
will not pay the death benefit and will refund all premiums paid without interest
and less any medical or other expenses we have had to pay in connection with
this policy and this policy ends.
(b) If the life insured dies from suicide within 1 year from the effective date of the
most recent reinstatement of the policy, we will not pay the death benefit and
will refund all premiums paid from the start date of the most recent
reinstatement without interest and less any medical or other expenses we have
had to pay in connection with this policy and this policy ends.
16. TERMINATION
This policy will end:

(a) when we receive your notice in writing to end the policy;
(b) on the benefit end date shown on the schedule page or endorsement;
(c) when it lapses;
(d) when the life insured dies and death benefit is paid;
(e) when the critical illness benefit is fully paid out,
whichever happens first.
17. EXCLUSIONS
(a) We will not pay the CI benefit, if critical illness of the life insured is caused
directly or indirectly, wholly or partly by any of the following:
(i) any self-inflicted injury, provoked assault or attempt at suicide, whether
sane or insane;
(ii) the life insured being under the influence of any narcotic, alcohol, gas
or fumes, voluntarily taken, administered, absorbed or inhaled or drugs
not prescribed by a medical examiner;

(iii) infection from any Human Immunodeficiency Virus (HIV), Acquired
Immunodeficiency Syndrome (AIDS) or any AIDS-related condition
unless the infection arose in accordance with the definition of HIV due
to Blood Transfusion and Occupational Acquired HIV (as defined in
appendix A);
(iv) donation of any of the life insured’s organs; or
(v) a pre-existing condition.
(b) We will not pay the recovery care benefit if the claim arises directly or
indirectly, wholly or partly from any of the following:
(i) any self-inflicted injury, provoked assault or attempt at suicide, whether
sane or insane;
(ii) the life insured being under the influence of any narcotic, alcohol, gas
or fumes, voluntarily taken, administered, absorbed or inhaled or
drugs not prescribed by a medical examiner;
(iii) infection from any Human Immunodeficiency Virus (HIV), Acquired
Immunodeficiency Syndrome (AIDS) or any AIDS-related condition
unless the infection arose in accordance with the definition of HIV due
to Blood Transfusion and Occupational Acquired HIV (as defined in
appendix A);
(iv) donation of any of the life insured’s organs;
(v) a pre-existing condition;
(vi) overseas medical treatment;
(vii) pregnancy or complications from pregnancy, childbirth, abortion,
miscarriage, prenatal or postnatal care, birth control, sterilisation and
treatment or tests pertaining to fertility;
(viii) psychological disorders, personality disorders, mental conditions or
behavioural disorders, including any addiction or dependence arising
from these disorders such as gambling or gaming addiction;
(ix) elective cosmetic or plastic surgery for purposes of beautification except
constructive surgery to treat functional defect due to Injury sustained;
(x) treatments for obesity, weight reduction or weight improvement;
(xi) medical or surgical procedures which are experimental in nature or not
generally accepted as standard medical treatment by the medical
profession;
(xii) sex-change operations;
(xiii) war or any act related to it, or service in the armed forces or in a Civil
Defence Force supporting any country at war;
(xiv) riot, insurrection, civil commotion, strikes, or terrorist activities except
as a victim; or
(xv) injuries arising while engaging in hazardous sports such as speed
racing (boat, horse or automobile), mountaineering or rock climbing
necessitating the use of guides or ropes, skiing or any kind including
jet-ski, skating sport, parachuting (unless trying to save human life),
ballooning, hang gliding, bungee-jumping, and underwater activities
involving the use of breathing apparatus.
18. GOVERNING LAW
This policy is governed by the laws of Singapore.
19. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT
A person who is not directly involved in this policy will have no rights under
the Contracts (Rights of Third Parties) Act (Cap. 53B) to enforce any of the
terms.
20. POLICY TRANSACTIONS
If you want to carry out any transactions under this policy, you must use the
forms we provide to you. You must tell us about any change in your personal
information, especially your correspondence address, residential address,
email address and contact number.
21. CURRENCY
All premiums and benefits quoted in this policy are in Singapore dollars.
Payments made to us under this policy or payments which we make under this
policy will also be in Singapore dollars.
22. POLICY OWNERS’ PROTECTION SCHEME
This policy is protected under the Policy Owners’ Protection Scheme which is
administered by the Singapore Deposit Insurance Corporation (SDIC).
Coverage for your policy is automatic and no further action is required from
you. For more information on the types of benefits that are covered under the
scheme as well as the limits of coverage, where applicable, please contact us
or visit the Life Insurance Association of Singapore (LIA) or SDIC websites
(www.lia.org.sg or www.sdic.org.sg).
Basic benefit conditions
23. DEATH BENEFIT
While this policy is in force, we will pay 20% of the basic sum insured, as death
benefit upon death of life insured. Upon the payment of the death benefit, this
policy will end.
24. CRITICAL ILLNESS (CI) BENEFIT
(a) If the life insured is diagnosed with a critical illness while this policy is in
force, we will pay the following:.
CI benefit for all critical illnesses, CI benefit for Angioplasty and Other
excluding Angioplasty and Other Invasive Treatment for
Invasive Treatment for Coronary Artery
Coronary Artery
• We will pay basic sum insured. • We will pay 10% of basic sum
• This policy will end insured in advance;
immediately after such • this policy will continue to be in
payment. force after such payment;
• the basic sum insured will be
reduced by amount paid; and
• the most we will pay for this
policy and all other policies we
have issued covering the same
life insured for Angioplasty and
Other Invasive Treatment for
Coronary Artery is limited to 10%
of the CI sum insured, subject to
a maximum of S$25,000. We will
pay this benefit only once under
this policy.
(b) This policy will remain in force if the basic sum insured is not fully paid
upon claim for CI benefit.
(c) If life insured is diagnosed with critical illness, you must continue to pay
premiums until we have approved your claim for critical illness benefit.
(d) We can decide the sequence in which payments are made if there is more
than 1 policy issued on the same life insured with CI benefit.
25. RECOVERY CARE BENEFIT
(a) While this policy is in force, we will pay 30% of the basic sum insured in
advance if the life insured:
(i) stays in the ICU for a total of 5 days or more consecutively in 1
hospital admission; or
(ii) stays both in the ICU and HDU together (not only the HDU admission
alone) for a total of 5 days or more consecutively in 1 hospital
admission.
This policy will continue to be in force after such payment. The basic sum
insured will be reduced by the amount paid under the recovery care
benefit.
(b) The stay in ICU or HDU must be confirmed as medically necessary.
(c) We will pay this benefit only once under this policy.
(d) The most we will pay for this policy and all other policies we have issued
covering the same life insured for recovery care benefit (including similar
benefits provided under any benefit name or specification in other
policies), is subject to a maximum of S$200,000.
APPENDIX A – CRITICAL ILLNESS DEFINITIONS
The following are definitions of terms used in the Definitions of Critical Illness (CI),
unless otherwise stated.
“Permanent neurological deficit” means symptoms of dysfunction in the nervous

system that are present on clinical examination and expected to last throughout the
lifetime of the life insured. Symptoms that are covered include numbness,
paralysis, localized weakness, dysarthria (difficulty with speech), aphasia (inability
to speak), dysphagia (difficulty swallowing), visual impairment, difficulty in walking,
lack of coordination, tremor, seizures, dementia, delirium and coma. For purpose of
this definition, “Permanent” means expected to last throughout the lifetime of the
life insured.
“Activities of Daily Livings (ADLs)” means:

(i) Washing - the ability to wash in the bath or shower (including getting into and
out of the bath or shower) or wash satisfactorily by other means;
(ii) Dressing - the ability to put on, take off, secure and unfasten all garments and,
as appropriate, any braces, artificial limbs or other surgical appliances;
(iii) Transferring - the ability to move from a bed to an upright chair or wheelchair and
vice versa;
(iv) Mobility - the ability to move indoors from room to room on level surfaces;
(v) Toileting - the ability to use the lavatory or otherwise manage bowel and
bladder functions so as to maintain a satisfactory level of personal hygiene;
(vi) Feeding - the ability to feed oneself once food has been prepared and made
available.
Critical Illness or CI means any of the following medical conditions:
1.1 Major Cancer
(i) A malignant tumour positively diagnosed with histological confirmation

and characterized by the uncontrolled growth of malignant cells with
invasion and destruction of normal tissue.
(ii) The term major cancer includes, but is not limited to, leukemia, lymphoma
and sarcoma.
(iii) Major Cancer diagnosed on the basis of finding tumour cells and/or
tumour-associated molecules in blood, saliva, faeces, urine or any other
bodily fluid in the absence of further definitive and clinically verifiable
evidence does not meet the above definition.
(iv) For the above definition, the following are excluded:

(a) All tumours which are histologically classified as any of the following:
• Pre-malignant;
• Non-invasive;
• Carcinoma-in-situ (Tis) or Ta;
• Having borderline malignancy;
• Having any degree of malignant potential;
• Having suspicious malignancy;
• Neoplasm of uncertain or unknown behavior; or

• All grades of dysplasia, squamous intraepithelial lesions (HSIL
and LSIL) and intra epithelial neoplasia;
(b) Any non-melanoma skin carcinoma, skin confined primary cutaneous
lymphoma and dermatofibrosarcoma protuberans unless there is
evidence of metastases to lymph nodes or beyond;
(c) Malignant melanoma that has not caused invasion beyond the epidermis;
(d) All Prostate cancers histologically described as T1N0M0 (TNM
Classification) or below; or Prostate cancers of another equivalent or
lesser classification;
(e) All Thyroid cancers histologically classified as T1N0M0 (TNM
Classification) or below;
(f) All Neuroendocrine tumours histologically classified as
T1N0M0 (TNM Classification) or below;
(g) All tumours of the Urinary Bladder histologically classified as T1N0M0
(TNM Classification) or below;
(h) All Gastro-Intestinal Stromal tumours histologically classified as Stage
I or IA according to the latest edition of the AJCC Cancer Staging
Manual, or below;
(i) Chronic Lymphocytic Leukaemia less than RAI Stage 3;
(j) All bone marrow malignancies which do not require recurrent blood
transfusions, chemotherapy, targeted cancer therapies, bone marrow
transplant, haematopoietic stem cell transplant or other major
interventionist treatment; and
(k) All tumours in the presence of HIV infection.
1.2 Heart Attack of Specified Severity
(i) Death of heart muscle due to ischaemia, that is evident by at least three
of the following criteria proving the occurrence of a new heart attack:
(a) History of typical chest pain;
(b) New characteristic electrocardiographic changes; with the
development of any of the following: ST elevation or depression, T
wave inversion, pathological Q waves or left bundle branch block;
(c) Elevation of the cardiac biomarkers, inclusive of CKMB above the
generally accepted normal laboratory levels or Cardiac Troponin T or
I at 0.5ng/ml and above;
(d) Imaging evidence of new loss of viable myocardium or new regional
wall motion abnormality. The imaging must be done by Cardiologist
specified by us.
(ii) For the above definition, the following are excluded:

(a) Angina;
(b) Heart attack of indeterminate age; and
(c) A rise in cardiac biomarkers or Troponin T or I following an intra-
arterial cardiac procedure including, but not limited to, coronary
angiography and coronary angioplasty.
Explanatory note: 0.5ng/ml = 0.5ug/L = 500pg/ml
1.3 Stroke with Permanent Neurological Deficit
(i) A cerebrovascular incident including infarction of brain tissue, cerebral

and subarachnoid haemorrhage, intracerebral embolism and cerebral
thrombosis resulting in permanent neurological deficit. This diagnosis
must be supported by all of the following conditions:
(a) Evidence of permanent clinical neurological deficit confirmed by a
neurologist at least 6 weeks after the event; and
(b) Findings on Magnetic Resonance Imaging, Computerised
Tomography, or other reliable imaging techniques consistent with
the diagnosis of a new stroke.
(ii) The following are excluded:

(a) Transient Ischaemic Attacks;
(b) Brain damage due to an accident or injury, infection, vasculitis, and
inflammatory disease;
(c) Vascular disease affecting the eye or optic nerve;
(d) Ischaemic disorders of the vestibular system; and
(e) Secondary haemorrhage within a pre-existing cerebral lesion.
1.4 Coronary Artery By-Pass Surgery
(i) The actual undergoing of open-chest surgery or Minimally Invasive

Direct Coronary Artery Bypass surgery to correct the narrowing or
blockage of one or more coronary arteries with bypass grafts. This
diagnosis must be supported by angiographic evidence of significant
coronary artery obstruction and the procedure must be considered
medically necessary by a consultant cardiologist.
(ii) Angioplasty and all other intra arterial, catheter based techniques,
‘keyhole’ or laser procedures are excluded.
1.5 End Stage Kidney Failure
Chronic irreversible failure of both kidneys requiring either permanent renal

dialysis or kidney transplantation.
1.6 Irreversible Aplastic Anaemia
(i) Chronic persistent and irreversible bone marrow failure, confirmed by

biopsy, which results in anaemia, neutropenia and thrombocytopenia
requiring treatment with at least one of the following:
(a) Blood product transfusion;
(b) Bone marrow stimulating agents;
(c) Immunosuppressive agents; or
(d) Bone marrow or haematopoietic stem cell transplantation.
(ii) The diagnosis must be confirmed by a haematologist.
1.7 Blindness (Irreversible Loss of Sight)
(i) Permanent and irreversible loss of sight in both eyes as a result of illness
or accident to the extent that even when tested with the use of visual
aids, vision is measured at 6/60 or worse in both eyes using a Snellen
eye chart or equivalent test, or visual field of 20 degrees or less in both
eyes. The blindness must be confirmed by an ophthalmologist.
(ii) The blindness must not be correctable by surgical procedures, implants

or any other means.
1.8 End Stage Lung Disease
(i) End stage lung disease, causing chronic respiratory failure. This diagnosis
must be supported by evidence of all of the following:
(a) FEV1 test results which are consistently less than 1 litre;
(b) Permanent supplementary oxygen therapy for hypoxemia;
(c) Arterial blood gas analyses with partial oxygen pressures of 55mmHg or
less (PaO2 ≤ 55mmHg); and
Dyspnea at rest.
(ii) The diagnosis must be confirmed by a respiratory Physician.
1.9 End Stage Liver Failure
(i) End stage liver failure as evidenced by all of the following:

(a) Permanent jaundice;
(b) Ascites; and
(c) Hepatic encephalopathy.
(ii) Liver disease secondary to alcohol or drug abuse is excluded.
1.10 Coma
(i) A coma that persists for at least 96 hours. This diagnosis must be
supported by evidence of all of the following:
(a) No response to external stimuli for at least 96 hours;
(b) Life support measures are necessary to sustain life; and
(c) Brain damage resulting in permanent neurological deficit which
must be assessed at least 30 days after the onset of the coma.
(ii) For the above definition, medically induced coma and coma resulting
directly from alcohol or drug abuse are excluded.
1.11 Deafness (Irreversible Loss of Hearing)
(i) Total and irreversible loss of hearing in both ears as a result of illness or
accident. This diagnosis must be supported by audiometric and sound-
threshold tests provided and certified by an Ear, Nose, Throat (ENT)
specialist.
(ii) Total means “the loss of at least 80 decibels in all frequencies of hearing”.
(iii) Irreversible means “cannot be reasonably restored to at least 40 decibels

by medical treatment, hearing aid and/or surgical procedures consistent
with the current standard of the medical services available in Singapore
after a period of 6 months from the date of intervention.”
1.12 Open Chest Heart Valve Surgery
The actual undergoing of open-heart surgery to replace or repair heart valve

abnormalities. The diagnosis of heart valve abnormality must be supported
by cardiac catheterization or echocardiogram and the procedure must be
considered medically necessary by a consultant cardiologist.
1.13 Irreversible Loss of Speech
(i) Total and irreversible loss of the ability to speak as a result of injury or
disease to the vocal cords. The inability to speak must be established for
a continuous period of 12 months. This diagnosis must be supported by
medical evidence furnished by an Ear, Nose, Throat (ENT) specialist.
(ii) All psychiatric related causes are excluded.
1.14 Major Burns
Third degree (full thickness of the skin) burns covering at least 20% of the
surface of the Life Insured(s)’s body.
1.15 Major Organ / Bone Marrow Transplantation
(i) The receipt of a transplant of:

(a) Human bone marrow using haematopoietic stem cells preceded
by total bone marrow ablation; or
(b) One of the following human organs: heart, lung, liver, kidney,
pancreas, that resulted from irreversible end stage failure of the
relevant organ.
(ii) Other stem cell transplants are excluded.
1.16 Multiple Sclerosis
(i) The definite diagnosis of Multiple Sclerosis and must be supported by all of
the following:
(a) Investigations which unequivocally confirm the diagnosis to be
Multiple Sclerosis; and
(b) Multiple neurological deficits which occurred over a continuous
period of at least 6 months.
(ii) Other causes of neurological damage such as Systemic Lupus

Erythematosus (SLE) and HIV are excluded.
1.17 Muscular Dystrophy
(i) The unequivocal diagnosis of muscular dystrophy must be made by a

consultant neurologist. The condition must result in the inability of the
life insured(s) to perform (whether aided or unaided) at least 3 of the
following 6 “Activities of Daily Livings” for a continuous period of at
least 6 months:
(ii) For the purpose of this definition, “aided” shall mean with the aid of
special equipment, device and/or apparatus and not pertaining to
human aid.
1.18 Severe Encephalitis
(i) Severe inflammation of brain substance (cerebral hemisphere, brainstem

or cerebellum) and resulting in permanent neurological deficit which must
be documented for at least 6 weeks. This diagnosis must be certified by a
consultant neurologist and supported by any confirmatory diagnostic
tests.
(ii) Encephalitis caused by HIV infection is excluded.
1.19 Idiopathic Parkinson’s Disease
(i) The unequivocal diagnosis of idiopathic Parkinson’s Disease by a

consultant neurologist. This diagnosis must be supported by all of the
following conditions:
(a) The disease cannot be controlled with medication; and
(b) Inability of the life insured(s) to perform (whether aided or unaided) at

least 3 of the following 6 “Activities of Daily Livings” for a continuous
period of at least 6 months:
(ii) For the purpose of this definition, “aided” shall mean with the aid of

human aid.
1.20 Open Chest Surgery to Aorta
(i) The actual undergoing of major surgery to repair or correct an aneurysm,

narrowing, obstruction or dissection of the aorta through surgical
opening of the chest or abdomen. For the purpose of this definition aorta
shall mean the thoracic and abdominal aorta but not its branches.
(ii) Surgery performed using only minimally invasive or intra arterial

techniques are excluded.
1.21 Alzheimer's Disease / Severe Dementia
(i) Deterioration or loss of cognitive function as confirmed by clinical

evaluation and imaging tests, arising from Alzheimer's disease or
irreversible organic disorders, resulting in significant reduction in mental
and social functioning requiring the continuous supervision of the Life
Insured(s). This diagnosis must be supported by the clinical confirmation
of an appropriate consultant and supported by our appointed Physician.

(a) Non-organic diseases such as neurosis and psychiatric illnesses; and
(b) Alcohol related brain damage.
1.22 Fulminant Hepatitis
A submassive to massive necrosis of the liver by the Hepatitis virus, leading

precipitously to liver failure. This diagnosis must be supported by all of the
following:
(a) Rapid decreasing of liver size as confirmed by abdominal ultrasound;
(b) Necrosis involving entire lobules, leaving only a collapsed reticular
framework;
(c) Rapid deterioration of liver function tests;
(d) Deepening jaundice; and
(e) Hepatic encephalopathy.
1.23 Motor Neurone Disease
Motor neurone disease characterised by progressive degeneration of

corticospinal tracts and anterior horn cells or bulbar efferent neurones which
include spinal muscular atrophy, progressive bulbar palsy, amyotrophic
lateral sclerosis and primary lateral sclerosis. This diagnosis must be
confirmed by a neurologist as progressive and resulting in permanent
neurological deficit.
1.24 Primary Pulmonary Hypertension
(i) Primary Pulmonary Hypertension with substantial right ventricular

enlargement confirmed by investigations including cardiac
catheterisation, resulting in permanent physical impairment of at least
Class IV of the New York Heart Association (NYHA) Classification of
Cardiac Impairment.
(ii) The NYHA Classification of Cardiac Impairment

Class I: No limitation of physical activity. Ordinary physical activity does
not cause undue fatigue, dyspnea, or anginal pain.
Class II: Slight limitation of physical activity. Ordinary physical activity
results in symptoms.
Class III: Marked limitation of physical activity. Comfortable at rest, but
less than ordinary activity causes symptoms.
Class IV: Unable to engage in any physical activity without discomfort.
Symptoms may be present even at rest.
1.25 HIV Due to Blood Transfusion and Occupationally Acquired HIV
(i) Infection with the Human Immunodeficiency Virus (HIV) through a blood
transfusion, provided that all of the following conditions are met:
(a) The blood transfusion was medically necessary or given as part of a
medical treatment;
(b) The blood transfusion was received in Republic of Singapore after the
date of issue, date of endorsement or date of reinstatement of this
contract, whichever is the later;
The source of the infection is established to be from the Institution that
provided the blood transfusion and the Institution is able to trace the origin
of the HIV tainted blood.
(ii) Infection with the Human Immunodeficiency Virus (HIV) which resulted
from an accident occurring after the date of issue, date of endorsement or
date of reinstatement of this contract, whichever is the later whilst the
Insured was carrying out the normal professional duties of his or her
occupation in Republic of Singapore, provided that all of the following are
proven to our satisfaction:
(a) Proof that the accident involved a definite source of the HIV infected
fluids;
(b) Proof of sero-conversion from HIV negative to HIV positive occurring
during the 180 days after the documented accident. This proof must
include a negative HIV antibody test conducted within 5 days of the
accident; and
(c) HIV infection resulting from any other means including sexual activity
and the use of intravenous drugs is excluded.
(iii) This benefit is only payable when the occupation of the insured is a
medical practitioner, housemen, medical student, state registered nurse,
medical laboratory technician, dentist (surgeon and nurse) or paramedical
worker, working in medical centre or clinic (in Republic of Singapore).
(iv) This benefit will not apply under either clause 1.25 (i) or clause 1.25 (ii)
where a cure has become available prior to the infection. “Cure” means
any treatment that renders the HIV inactive or non-infectious.
1.26 Benign Brain Tumor
(i) Benign brain tumour means a non-malignant tumour located in the cranial
vault and limited to the brain, meninges or cranial nerves where all of the
following conditions are met:
(a) It has undergone surgical removal or, if inoperable, has caused a
permanent neurological deficit; and
(b) Its presence must be confirmed by a neurologist or neurosurgeon and
supported by findings on Magnetic Resonance Imaging, Computerised
Tomography, or other reliable imaging techniques.

(a) Cysts;
(b) Abscess;
(c) Angioma;
(d) Granulomas;
(e) Vascular Malformations;
(f) Haematomas; and
(g) Tumours of the pituitary gland or spinal cord and skull base.
1.27 Severe Bacterial Meningitis
(i) Bacterial infection resulting in severe inflammation of the membranes of

the brain or spinal cord resulting in significant, irreversible and permanent
neurological deficit. The neurological deficit must persist for at least 6
weeks. This diagnosis must be confirmed by:
(a) The presence of bacterial infection in cerebrospinal fluid by lumbar
puncture; and
(b) A consultant neurologist.
(ii) Bacterial Meningitis in the presence of HIV infection is excluded.
1.28 Major Head Trauma
(i) Accidental head injury resulting in permanent neurological deficit to be

assessed no sooner than 6 weeks from the date of the accident. This
diagnosis must be confirmed by a consultant neurologist and supported
by relevant findings on Magnetic Resonance Imaging, Computerised
Tomography, or other reliable imaging techniques. "Accident” means an
event of violent, unexpected, external, involuntary and visible nature
which is independent of any other cause and is the sole cause of the head
Injury.

(a) Spinal cord injury; and
(b) Head injury due to any other causes.
1.29 Systemic Lupus Erythematosus With Lupus Nephritis
(i) The unequivocal diagnosis of Systemic Lupus Erythematosus (SLE) based

on recognised diagnostic criteria and supported with clinical and
laboratory evidence. In respect of this contract, systemic lupus
erythematosus will be restricted to those forms of systemic lupus
erythematosus which involve the kidneys (Class III to Class V Lupus
Nephritis, established by renal biopsy, and in accordance with the RPS/ISN
classification system). The final diagnosis must be confirmed by a certified
doctor specialising in Rheumatology and Immunology.
(ii) The RPS/ISN classification of Lupus Nephritis:
Class I: Minimal mesangial lupus nephritis

Class II: Mesangial proliferative lupus nephritis
Class III: Focal lupus nephritis (active and chronic; proliferative and
sclerosing)
Class IV: Diffuse lupus nephritis (active and chronic; proliferative and
sclerosing; segmental and global)
Class V: Membranous lupus nephritis
Class VI: Advanced sclerosis lupus nephritis
1.30 Angioplasty and Other Invasive Treatment For Coronary Artery
(i) The actual undergoing of balloon angioplasty or similar intra arterial

catheter procedure to correct a narrowing of minimum 60% stenosis, of
one or more major coronary arteries as shown by angiographic evidence.
The revascularisation must be considered medically necessary by a
consultant cardiologist.
(ii) Coronary arteries herein refer to left main stem, left anterior descending,
circumflex and right coronary artery.
(iii) Payment under this condition is limited to 10% of the Sum Insured under
this policy subject to a maximum of S$25,000. This benefit is payable
once only and shall be deducted from the amount payable under the
basic sum insured, thereby reducing the amount of the basic sum
insured which may be payable herein.
(iv) Diagnostic angiography is excluded.
1.31 Paralysis (Irreversible Loss of Use of Limbs)
(i) Total and irreversible loss of use of at least 2 entire limbs due to injury
or disease persisting for a period of at least 6 weeks and with no
foreseeable possibility of recovery. This condition must be confirmed by
a consultant neurologist.
(ii) Self-inflicted injuries are excluded.
1.32 Progressive Scleroderma
(i) A systemic collagen-vascular disease causing progressive diffuse

fibrosis in the skin, blood vessels and visceral organs. This diagnosis
must be unequivocally confirmed by a consultant rheumatologist and
supported by biopsy or equivalent confirmatory test and serological
evidence and the disorder must have reached systemic proportions to
involve the heart, lungs or kidneys.

(a) Localised scleroderma (linear scleroderma or morphea);
(b) Eosinophilic fascitis; and
(c) CREST syndrome.
1.33 Persistent Vegetative State (Apallic Syndrome)
Universal necrosis of the brain cortex with the brainstem intact. This
diagnosis must be definitely confirmed by a consultant neurologist holding
such an appointment at an approved hospital. This condition has to be
medically documented for at least one month.
1.34 Other Serious Coronary Artery Disease
(i) The narrowing of the lumen of at least one coronary artery by a

minimum of 75% and of two others by a minimum of 60%, as proven
by invasive coronary angiography, regardless of whether or not any
form of coronary artery surgery has been performed.
(ii) Diagnosis by Imaging or non-invasive diagnostic procedures such as

CT scan or MRI does not meet the confirmatory status required by the
definition.
(iii) Coronary arteries herein refer to left main stem, left anterior
descending, circumflex and right coronary artery. The branches of the
above coronary arteries are excluded.
1.35 Poliomyelitis
(i) The occurrence of Poliomyelitis where the following conditions are

met:
(a) Poliovirus is identified as the cause,
(b) Paralysis of the limb muscles or respiratory muscles must be
present and persist for at least 3 months.
(ii) The diagnosis must be confirmed by a consultant neurologist or

specialist in the relevant medical field.
1.36 Loss of Independent Existence
(i) A condition as a result of a disease, illness or injury whereby the life

insured(s) is unable to perform (whether aided or unaided) at least 3 of
the following 6 "Activities of Daily Livings", for a continuous period of
6 months.
(ii) This condition must be confirmed by our approved doctor.
(iii) Non-organic diseases such as neurosis and psychiatric illnesses are

excluded.
(iv) For the purpose of this definition, “aided” shall mean with the aid of
human aid.
1.37 Terminal Illness
The conclusive diagnosis of an illness that is expected to result in the death

of the life insured within twelve (12) months. This diagnosis must be
supported by a specialist and confirmed by our appointed Physician.
Terminal illness in the presence of HIV infection is excluded.
CHAPTER
05
RIDERS (OR SUPPLEMENTARY BENEFITS)

Riders Also known as supplementary benefits, are special policy provisions that provide
benefits which are not found in the basic policy contract, or that make adjustments
to it. These special provisions are attached to (or “ride” on) a basic policy.
Waiver of Premium Rider One of the most common riders attached to a life insurance policy. This rider does
or offers is to keep a policy in force in the event that the life insured is not able to
pay the premiums, when he is totally and permanently disabled or is suffering from
one of the critical illnesses covered under his policy. In other words, it causes the
premiums under a policy to be waived once any of the specified events happens.
Total and Permanent TPD is disability such that there is, neither at the time disability commences, nor at
Disability (TPD) any time thereafter, any work, occupation or profession that the life insured can
ever be capable of doing or following to earn or obtain any wages, compensation or
profit.
Waiver Of Premium Upon The purpose of this rider is also to keep a policy in force by having all the future
Diagnosis Of Critical Illness premiums under the policy waived, in this case when the life insured is diagnosed
to be suffering from any of the critical illnesses covered under the rider.
Critical Illness Rider A Critical Illness (also known as Dread Disease) Rider provides for a lump sum to be
paid in the event that the life insured is diagnosed to be suffering from one of the
covered critical illnesses. It can be attached to Whole Life, Endowment, Term and
Investment-linked Life Insurance policies. There are basically two types of Critical
Illness Riders.
Acceleration Benefit • Often known as the accelerator or enhancer rider.
Critical Illness Rider • This rider provides for the pre-payment of a portion (e.g. 50%) or the full sum
assured (i.e. 100%) of the basic policy to which it is attached.
• Eg. A person buys a S$200,000 Whole Life Insurance policy attached with a 50%
acceleration benefit Critical Illness Rider to it. If he is diagnosed to be suffering
from one of the critical illnesses covered under his policy, the insurer will pay
him S$100,000 (i.e. 50% x S$200,000) plus 50% of the bonuses (if any). The
Critical Illness Rider will then be terminated. The balance of the sum assured
plus bonuses (if any) will be paid when he dies or suffers TPD.
• If he dies or suffers TPD without contracting any critical illness as defined, the
full S$200,000 plus bonuses (if any) will be paid to his beneficiaries or him in a
lump sum or instalments respectively.
Additional Benefit Critical • The payment of the rider sum assured is in addition to that of the basic plan to
Illness Rider which it is attached.
• The rider sum assured is usually limited to a certain multiple of the basic sum
assured of the main policy (e.g. five times the basic sum assured).
• When the life insured is diagnosed to be suffering from one of the covered
critical illnesses, only the sum assured of this rider will be paid. The sum
assured of the basic policy remains intact and will be paid out only when an
insured event (such as death) occurs.
• Hence buying this rider is like having a separate policy covering critical illness
only (with no death cover).
11
Difference Between
Acceleration And Acceleration Benefit (Packaged
Additional Benefit Types Additional Benefit (Rider)
Policy Or Rider)
Of Critical Illness Riders
It must be packaged or attached It must be attached to a basic policy.
to a basic policy, i.e. ILP, Term,
Endowment or Whole Life Insurance
policy.
On diagnosis of a critical illness, a On diagnosis of a critical illness, the full
percentage of the basic sum assured sum assured of the rider will be paid.
as specified in the policy will be paid.
Payment of a CI Insurance claim will Payment of a CI Insurance claim will
cause the policy to be terminated if it not affect the basic policy which will
is a 100% Acceleration type of policy continue to be in force.
or rider.
Total amount paid under the policy is Total amount paid under the policy
equal to the basic sum assured plus is equal to the sum assured of the CI
bonuses (if any). Insurance rider, plus the sum assured
of the basic policy, plus any bonuses
payable under the basic policy, in the
event of a person who contracts a
critical illness dies, or becomes totally
disabled subsequently.
CI Insurance rider sum assured must Sum assured can be up to a certain
not exceed that of the basic policy. number of times of the basic sum
assured, subject to the insurer’s
specified guidelines.
CI Insurance rider term usually The term must not exceed that of the
follows that of the basic policy. basic policy and usually expires, when
the life insured reaches a specified age.
12
Common Features Of • Pays a lump sum amount upon diagnosis of an insured critical illness.
Critical Illness Riders • Generally, one critical illness claim is allowed unless it is a Multiple Pay CI
(Acceleration And Insurance plan.
Additional Benefits) • Has a specific waiting period (usually ranging from 30 to 90 days).
• Some insurers may impose a limit on the total amount of sum assured (e.g.
S$2,000,000) that a policy owner can buy. This is to minimise the risk of moral
hazard.
• Premium is usually level and non-guaranteed.
• Premium is usually not fixed and is based on the age band basis (e.g. age of 35
to 39 years is one rate, age of 40 to 44 years is another rate) for policies that are
renewable on a yearly basis.
• No restriction on how the CI Insurance benefit payable is to be used.
• Can be packaged or attached to an ILP, Term, Endowment or Whole Life
Insurance policy.
• Can be issued on a stand-alone basis (such a policy pays the benefit only upon
diagnosis of one of the covered critical illnesses. It does not pay upon the life
insured’s death or total and permanent disability).
• Can be attached as a supplementary benefit to a basic policy.
• The CI Insurance rider does not acquire any cash value.
• The CI Insurance rider is automatically terminated once the basic policy is
surrendered or converted into an Extended Term Insurance policy.
• The packaged CI Insurance policy which accumulates cash value (e.g. Whole Life
type of CI Insurance policy) also provides non-forfeiture options. However, the
CI Insurance cover may be terminated once the policy owner exercises any of
the non-forfeiture options (excluding the paid-up option).
• A stand-alone Term CI Insurance policy does not acquire cash value. Hence, it
does not have any non-forfeiture option.
• Provides 24 hours a day, worldwide coverage, unless otherwise endorsed or
amended in the policy.
• Assignment of the policy may or may not be allowed.
• Maximum (e.g. age of 60 years) and minimum (e.g. age of one year) entry age
restriction. For young lives, it may be subject to lien.
• Minimum (e.g. S$10,000) and maximum (e.g. S$2,000,000) sum assured
restriction.
• Cover may expire at a maximum age (e.g. 75 years) or a whole life cover may be
provided.
Eligibility Criteria for • Policy is in force;
Benefit Payment of Critical • Life insured has not reached the expiry age of the CI Insurance cover;
Illness Rider • Critical illness which the life insured is suffering from is one that is covered
under the policy and meets the conditions as specified in the policy;
• Critical illness is not a pre-existing illness;
• Critical illness contracted meets the definition of the particular critical illness as
specified in the policy;
• Critical illness is diagnosed to have commenced after the waiting period; and
• Life insured survives the survival period if there is one imposed on the policy.
Severity-based Critical • Commonly known as Early Pay CI
Illness (CI) Insurance Plan • Such plans pay claims during early stages and less severe critical illnesses.
Benefits are claimable at various stages of the illness, from early to intermediate
to severe.
• Waiting Period and Survival Period are both applicable to Severity-based CI
plans.
• Advantages include:
» Greater number of illnesses covered
» Pay-outs received at an early stage of the illness
» Ability to claim more than once
» Continuity of coverage after a claim
13
Multiple Pay Critical Illness • It pays the insured multiple times over each diagnosis of critical illness and
(CI) Insurance Plan recurrent or reoccurring critical illnesses.
• Such multiple claims are not restricted to only severe stage CI. When such CI
plan includes benefits for severity-based CI, insurers may allow for multi-claims
on early stages of the CI subject to benefit limits.
• Waiting Period and Survival Period are applicable for such plans.
• Future premiums may be waived upon diagnosis of first claim on advanced
stage CI.
Factors To Consider In In determining the adequacy of CI coverage, there are five factors to consider:
Determining Adequacy Of • Life Insurance Association’s (LIA) recommended amount
Critical Illness Coverage • Minimum five years of income, after taking into account debt
• Recovery expenses
• Providing for dependents
Term Rider A Term Rider is a term plan attached to a permanent policy. It cannot be attached
to a Term Insurance policy (since the buyer could simply increase the sum assured
under the Term Insurance policy). The amount of the Term Rider coverage is usually
expressed as a ratio of the sum assured of the basic plan e.g. 3 to 1 or 5 to 1,
depending on the practice of the insurer.
Level Term Rider A Level Term rider is usually used to increase the coverage under a basic policy. It
is commonly used when additional life insurance is needed for a certain period of
time, such as while the children are growing up.
Family Income Benefit This rider is usually attached to a juvenile policy to provide a monthly, quarterly
Rider or annual income to a child till the end of the term of this rider in the event of the
breadwinner’s premature death.
Decreasing Term Rider The sum assured for Decreasing Term rider decreases yearly. It is normally issued
in periods of 10, 15 and 20 years, etc. As the sum assured decreases yearly, the
amount of cover in the last few years of the rider term is usually very small.
Payor Benefit Rider This rider provides that, if the person (usually the parent) who is paying the
premiums on the juvenile policy dies, or becomes disabled before the child (life
insured) has reached a specified age (usually either 21 or 25 years old), the insurer
will waive all future premiums until the child reaches the specified age.
Guaranteed Insurability This rider is not an insurance cover, but a right to purchase additional amounts
Option Rider of insurance at specified intervals or when certain events occur over an extended
period of time, without evidence of insurability.
Accidental Death Benefit (ADB) Rider provides for the payment of an amount in addition to the basic sum
Rider (ADB) assured should the life insured die as a result of an accident. The amount paid
under an accidental death benefit rider is usually the same as the basic sum
assured, and is therefore, often referred to as double indemnity.
“Accident” Must be an event caused by external, violent and visible means.
“Accidental injury” Must be a bodily injury caused directly and independently of any other cause(s) by
accident, of which there is evidence of visible contusion or wound on the exterior of
the body.
Accidental Death And Basically an Accidental Death Benefit Rider with the added protection against
Dismemberment / physical loss by amputation or severance (dismemberment) or functional
Disablement Rider permanent loss (disablement) of limbs (including fingers and toes), speech, hearing,
and the sight of eyes, etc. The insured event and the corresponding sum assured
payable (usually expressed as a percentage of the sum assured of this rider) will be
listed out in the endorsement.
Hospital Cash (Income) This rider provides a fixed daily benefit (e.g. S$150 per day) based on the period of
Benefit Rider hospital confinement, without regard to the actual incurred hospital charges.
14
Part I Chapter 6. Participating Life Insurance Policies
PART I CHAPTER 6
PARTICIPATING LIFE INSURANCE POLICIES
CHAPTER OUTLINE
1. What Are Participating Policies?

2. Guaranteed And Non-Guaranteed Benefits (Bonuses)
3. Determination Of Bonuses
4. Disclosure Requirements Relating To Participating Life Insurance Policies
5. “Your Guide To Participating Policies”
6. Participating Fund Governance
Appendix 6A: Information To Be Disclosed In The Product Summary
Appendix 6B: Sample Policy Illustration For A Participating Life Insurance Policy
Appendix 6C: Information To Be Contained In Annual Bonus Update
LEARNING OUTCOMES

 understand participating policies
 distinguish between guaranteed and non-guaranteed benefits
 understand how bonuses are determined
 know the disclosure requirements relating to participating life insurance policies
 understand the objectives and the salient points covered in “Your Guide to
Participating Policies”
 understand the Internal Governance Policy on Participating Fund Management in the
context of MAS Notice 320
CONTENTS
CHAPTER OUTLINE .............................................................................................................. 1
1. WHAT ARE PARTICIPATING POLICIES? ......................................................................... 3
A. Common Types Of Participating Policies .................................................................. 3
B. Objective Of Participating Policies And Its Implications ........................................... 4
2. GUARANTEED AND NON-GUARANTEED BENEFITS (BONUSES) ............................... 4
A. Types Of Non-Guaranteed Benefits (Bonuses).......................................................... 5
A1. Reversionary Bonus (RB) ..................................................................................... 5
A2. Terminal Bonus (TB)............................................................................................. 7
A3. Cash Dividends ..................................................................................................... 7
A4. Interim Bonus ....................................................................................................... 7
A5. Level Of Reversionary Bonus Versus Terminal Bonus ....................................... 8
B. Death, Surrender And Paid-Up Values ....................................................................... 8
3. DETERMINATION OF BONUSES ..................................................................................... 9
A. Risk Sharing Mechanism .......................................................................................... 10
A1. Risk Sharing Rules .............................................................................................. 10
A2. Methodology To Derive Assets Backing Participating Policy Group ............... 11
B. Bonus Allocation Process ......................................................................................... 11
B1. Determination Of Annual Bonuses To Be Allocated ......................................... 12
B2. Determination Of Terminal Bonuses ................................................................. 12
B3. The 90:10 Rule..................................................................................................... 13
C. Reserving For Future Non-Guaranteed Bonuses ..................................................... 13
4. DISCLOSURE REQUIREMENTS RELATING TO PARTICIPATING LIFE INSURANCE
POLICIES ........................................................................................................................ 14
A. Point-Of-Sale Disclosure – Product Summary ......................................................... 15
B. Point-Of-Sale Disclosure – Policy Illustration........................................................... 15
C. Post-Sales Disclosure – Annual Bonus Update ....................................................... 16
5. “YOUR GUIDE TO PARTICIPATING POLICIES” ............................................................ 16
6. PARTICIPATING FUND GOVERNANCE ......................................................................... 17
A. Internal Governance Policy On Management Of Participating Fund ..................... 17
B. Information To Be Contained In The Internal Governance Policy .......................... 18
Appendix 6A ....................................................................................................................... 19
Appendix 6B ....................................................................................................................... 22
Appendix 6C ....................................................................................................................... 27
1. WHAT ARE PARTICIPATING POLICIES?
1.1 Participating policies refer to life insurance products that participate in the
performance of the participating fund of the life insurer. Such products are also
known as with-profits policies as they share in the profits or surplus of the
insurer’s participating fund.
1.2 Premiums of participating policies are pooled together in a specially designated

participating fund. The fund is invested in a range of assets, such as government
and corporate bonds, equities, property and cash. The proportion invested in each
type of asset (often referred to as the investment mix) may change over time, in
line with the insurer’s investment strategy. The objective of such investment focus
on long term solvency against claim or maturity liabilities rather than maximum
gains.
1.3 Participating life insurance policies provide a combination of guaranteed and non-
guaranteed benefits. All participating policies must be written in the participating
fund. Both guaranteed benefits and non-guaranteed benefits (or bonuses, as they
are commonly called) are paid out of the assets of the participating fund. The
insurer has the obligation to pay guaranteed benefits regardless of the
performance of the participating fund. Expenses incurred in the administering of
the participating policies are also paid out from the participating fund.
1.4 In the extreme event that the participating fund has insufficient assets to meet
guaranteed benefits, the insurer is required to make good the shortfall by injecting
additional capital into the participating fund.
1.5 Details of how the participating fund should be managed are covered in a later
section of this chapter.
A. Common Types Of Participating Policies
1.6 Participating products are typically used for the purpose of meeting savings /
investment and protection needs. Common participating products include:
 Participating Whole Life Insurance policy;
 Participating Endowment Insurance policy;
 Participating Anticipated Endowment Insurance policy; and
 Participating Annuity insurance policy
1.7 There are also Annuity products issued on a participating basis in the industry.
1.8 Many participating policies allow riders to be attached. Common riders include
term rider, critical illness rider and accidental death rider. These riders typically do
not participate in the profits of the participating fund.
1.9 It is common that some non-participating policies and / or riders are written in the
participating fund. The experience of these non-participating policies / riders can
affect participating fund performance, which in turn, can affect the level of
bonuses allocated to participating policies.
B. Objective Of Participating Policies And Its Implications
1.10 A common objective of participating policies is to provide competitive and stable

medium- to long-term returns to participating policy owners. This is achieved by
investing a larger proportion in assets like equities which will give potentially
higher returns in the longer term. Stability of returns is managed through the
bonus declaration process, which is discussed in more detail later in this chapter.
1.11 Unlike an Investment-linked Life Insurance policy where assets for each policy
owner are clearly identifiable in the form of units held, assets are not separately
maintained for each participating policy owner.
2. GUARANTEED AND NON-GUARANTEED BENEFITS (BONUSES)
2.1 As mentioned earlier, unlike non-participating policies which provide only

guaranteed benefits, participating policies provide a combination of guaranteed
and non-guaranteed benefits.
2.2 Guaranteed benefit, or sum assured, is the amount guaranteed to be paid out to
the beneficiaries if the life insured dies within the policy term. There will also be
guaranteed cash values that will be paid on surrender.
2.3 Non-guaranteed benefits or bonuses are not guaranteed, because the level of
non-guaranteed bonuses depends on the value of the assets backing the policies,
which in turn depends, among other things, on the following key factors:
 investment performance (this is usually by far the most important factor);
 the level of expenses incurred by or allocated to the participating fund; and
 the amounts paid out to meet claims on policies in the participating fund.
2.4 If the investments have been performing well, or claims and expenses are less
than expected, there will be more funds available for bonus additions.
2.5 Bonuses are determined (or “declared”) on an annual basis and most commonly
expressed in the form of an addition to the sum assured. Once the bonuses have
been added to the policy, the insurer cannot later reduce them or take them away.
(Bear in mind the difference in this regard between reversionary bonuses and
terminal bonuses, which are described in the next section.)
2.6 Although bonus levels are not guaranteed, insurers generally try to avoid large
fluctuations in the bonus declared from year to year, by smoothing bonuses over
time. This means that bonuses may be held back in years when the performance
of the fund has been good, so that they can be maintained when conditions are
less favourable. The net effect is that bonuses will not necessarily follow the rises
and falls in the investment markets. In addition, when the future outlook of fund
performance continues to be unfavourable, it may be necessary for insurers to
reduce the estimates of future bonuses accordingly.
2.7 The level of bonuses also varies between different participating policies,
depending on the benefit design of the product. Some participating policies have
higher guaranteed benefits and lower bonuses, while others may have lower
guaranteed benefits and higher bonuses.
2.8 In assessing the benefits of participating policies, it is important to look at

guaranteed benefits and non-guaranteed bonuses in totality, instead of just
focusing on guaranteed benefits or bonuses in isolation. It is also important to
consider the mix between guaranteed benefits and bonuses. For example, policies
with a higher proportion of guaranteed benefits will have a more conservative
investment mandate (e.g. more assets such as government bonds, where low risk
is the key characteristic). By contrast, policies with a higher proportion of bonuses
will likely be supported by more volatile asset classes, such as equities to give
potentially higher returns. This investment freedom arises from the long-term
investment horizon of the fund, meaning that short-term fluctuations pose less of
a threat. The investment policy also does not have to be as conservative as would
be the case, if most or all of the benefits were guaranteed.
2.9 Representatives should advise their clients of these differences, so that the clients
would be able to select a plan that would meet their own risk preferences and
investment objectives.
A. Types Of Non-Guaranteed Benefits (Bonuses)
2.10 Most participating policies sold in Singapore provide non-guaranteed benefits in

the form of bonuses which are additions to the sum assured. These typically
comprise reversionary bonuses and terminal bonuses.
A1. Reversionary Bonus (RB)
2.11 Reversionary Bonus, also known as Annual Bonus, is by far the most common
method used. Under this method, the bonus is in the form of an addition to the
sum assured, irrespective of the age of the insured, or the period that the policy
has been in force. However, the addition is in proportion to the sum assured, e.g.
S$10 per S$1,000 sum assured. The amount of bonus is declared annually and
credited to each policy on its anniversary date (sometimes this is referred to as
the bonus “vesting”). Once declared, it becomes a guaranteed amount in addition
to the sum assured, and it is payable when there is a claim on the policy.
2.12 There are two ways by which the reversionary bonuses are allocated under this
method:
A1A. Simple Reversionary Bonus (SRB)

2.13 The yearly addition is based on the sum assured only. Example 6.1 gives an
illustration of how this bonus system works.
Example 6.1: Simple Reversionary Bonus (SRB) System

Mr Foo has a S$50,000 Whole Life Insurance policy. Assuming that the insurer
pays a simple reversionary bonus of S$10 per S$1,000 sum assured, the total
bonus that he would have received at the end of the fifth year would be
S$2,500, and the sum assured is increased to S$52,500 which is derived at as
follows:
End Of Policy Year SRB Total Sum Assured

0 S$NA S$50,000
1 S$500 S$50,500
2 S$500 S$51,000
3 S$500 S$51,500
4 S$500 S$52,000
5 S$500 S$52,500
A1B. Compound Reversionary Bonus (CRB)

2.14 The yearly addition is allocated in proportion to the sum assured plus any existing
bonuses attached to the policy. Example 6.2 gives an illustration of how this bonus
system works.
Example 6.2: Compound Reversionary Bonus (CRB) System

Assuming that Mr Foo’s (see Example 6.1) insurer pays a compound
reversionary bonus of S$10 per S$1,000 sum assured and a compounding rate
of 1% p.a. to Mr Foo instead, the total bonus that he would have received at
the end of the fifth year would be S$2,550.50, and the sum assured is
increased to S$52,550.50 which is arrived at as follows:
End Of Policy Year CRB Total Sum Assured

0 NA S$50,000.00
1 S$500.00 S$50,500.00
2 S$505.00 S$51,005.00
3 S$510.05 S$51,515.05
4 S$515.15 S$52,030.20
5 S$520.30 S$52,550.50
2.15 From Examples 6.1 and 6.2, it can be seen that the CRB system is designed to pay
an increasing level of bonus to the policy owner because of the compounding
effect, while the SRB system is designed to pay level bonuses.
2.16 Both the simple and compound reversionary bonuses can be surrendered for their
cash equivalent (an actuarial present value), while the policy continues to be in
force. However, it is not advisable for a policy owner to surrender the bonuses
under his policy, as this will affect future benefits payable under the policy,
especially for a policy with compound reversionary bonus, as the value of

compounding on the past bonuses will be lost.
A2. Terminal Bonus (TB)
2.17 TB is added on top of the regular reversionary bonuses when the policy is
terminated. They are typically only applicable to participating policies that
terminate after having been in force for a certain minimum number of years.
2.18 Terminal bonus is the bonus which insurers pay to a participating policy that has
been kept in force until maturity, death (or TPD if included in the policy coverage)
or surrender, usually provided the policy has been in force for a minimum period.
Some insurers will not pay this bonus if the premium has been discontinued,
while some other insurers prescribe a minimum period, e.g. 25 years, for which
the policy must be in force before it is entitled to receive this bonus. This minimum
may be longer for surrenders.
2.19 This bonus is usually declared as a percentage (e.g. 50%) of the reversionary
bonuses already attached to the policy, or as a percentage of the basic sum
assured.
2.20 It is important to note that unlike reversionary bonuses, the TB is not added to the
sum assured of participating policies that remain in force; it is only added on
termination in the circumstances described above.
2.21 Terminal Bonuses are designed to fine tune the fairness of smoothing of bonuses
for policies that are terminating in a particular year. For this reason, they are likely
to fluctuate more than reversionary bonuses.
A3. Cash Dividends
2.22 Some participating policies provide non-guaranteed benefits in the form of cash
dividends rather than additions to the sum assured. Reversionary bonus and
terminal bonus may also be allotted as an equivalent cash amount to policy
owners. Although these bonuses are declared as immediate cash payments, most
insurers usually allow them to be converted to additional sum assureds (also
known as paid-up addition), or to be applied towards reduction of future
premiums.
A4. Interim Bonus
2.23 In Singapore the actual bonus declaration typically takes place only in March /
April following the end of the financial year for which audited financial statements
of the participating fund have been completed, after the Board of Directors has
approved the bonuses to be allocated.
2.24 Bonuses allocated may not vest (i.e. attach to the policy legally) immediately. The
practice of bonus vesting varies among insurers. Typically, allocated bonuses are
vested only upon the policy anniversary for which the bonus is due and after the
premiums due have been paid.
2.25 Meanwhile, participating policies that terminate in the early part of the year before
the finalisation of the bonus allocation may be given interim bonuses. Interim
bonuses are typically determined based on the prevailing bonus rates, or bonus
rates used in the reserves for future bonuses or results from an interim bonus
investigation report.
2.26 Life insurers should provide training to intermediaries and relevant staff members
on company-specific practices on interim bonuses.
A5. Level Of Reversionary Bonus Versus Terminal Bonus
2.27 Of the total bonuses, the mix between reversionary bonus and terminal bonus can
vary for different participating products. Some participating policies are designed
with relatively higher terminal bonus and lower reversionary bonus, while others
may have relatively lower terminal bonus and higher reversionary bonus. This
will also depend somewhat on the insurer’s bonus philosophy, as there are many
different valid approaches that can be taken.
2.28 As terminal bonuses are allocated towards the later part of policy duration,
participating policies with higher terminal bonuses tend to have greater
deferment in bonus allocation. This may enable the participating policies to be
supported by longer duration and more volatile asset classes, which may
generate higher returns.
B. Death, Surrender And Paid-Up Values
2.29 As you can see, the benefits payable under a participating policy will be increased
by the bonus payment, unless the policy owner has opted to use the bonus to
offset the future premiums under his policy, or withdraw it in cash. Thus, the death
benefit, surrender value and paid-up amount 1 will all be inclusive of the bonuses
credited to the policy (the amount of bonus may be lower in the case of surrender
and paid-up).
2.30 In a nutshell,
Guaranteed Death
Death Benefit = + Bonuses Credited
Benefit
Guaranteed Surrender Value of

Surrender Value = +
Surrender Value Bonuses Credited
Guaranteed Paid-Up Paid-up Value of

Paid-Up Amount = +
Value Bonuses Credited
1
Paid-up amount is the sum assured of a reduced-paid up insurance policy which is purchased with the net cash value
of a life insurance policy, when the insured exercises this particular non-forfeiture option.
2.31 As all participating policies acquire cash value, the policy owners are entitled to
the following benefits:
 non-forfeiture options; These benefits will be explained in
 automatic premium loan; and detail in a later chapter of this Study
 policy loan. Text.
2.32 Buying a life insurance policy is a long-term commitment. Early termination of the
policy usually involves high costs and the surrender value may be less than the
total premiums paid.
2.33 Some insurance policies have clauses that allow the insurers to reduce surrender
values when the market falls sharply. This is to make sure that those who
surrender do not take an unfair share of the assets at the expense of the remaining
policy owners.
3. DETERMINATION OF BONUSES
3.1 Determination of bonuses for participating policies is an important aspect of

participating fund management. As bonuses form a significant part of the total
benefits to policy owners for most participating policies, it is important that
representatives have a good understanding of the process by which bonuses are
determined, so that they can provide correct and proper advice to customers
when recommending participating policies.
3.2 At each year-end, the Appointed Actuary (as required under the Insurance Act
1966) will conduct a detailed analysis of the performance of the participating fund
and make recommendations of:
 the amount of bonuses to be allocated; and
 the amount to be set aside for future bonuses.
3.3 The bonuses that are declared will have to be approved by the Board of Directors
of the insurer, taking into account the Appointed Actuary’s recommendations.
3.4 While it is the insurer who exercises discretion / makes the final decision on the
bonus determination, the insurer has to take into account the following
considerations:
 to maintain fairness and equity between different classes and generations
of participating policy owners, i.e. by not treating any particular groups of
participating policies favourably, and not having practices that are unfair to
any participating policies;
 to maintain solvency of the participating fund, i.e. by not declaring
excessive bonuses that may threaten the solvency of the participating fund
and be detrimental to all participating policy owners; and
 to ensure consistency with the objective of providing stable medium to
long-term returns to participating policy owners, i.e. by not allocating
bonuses that fluctuate excessively from year to year and from one
generation of policies to the next generation.
3.5 Insurers are required to have in place the following measures to enable proper
exercise of discretion in determining bonuses:
 Risk sharing mechanism to clearly set out risk sharing rules and
methodology used to derive from assets backing each participating product
group, which forms an important part of the basis for bonus allocation and
reserving for future bonuses.
 Bonus allocation process to determine the appropriate annual (e.g.
reversionary) bonuses and terminal bonuses to be allocated to participating
policies at each year end.
 Reserving for future non-guaranteed bonuses to set aside appropriate
reserves for future annual (e.g. reversionary) bonuses and terminal
bonuses for participating policies at each year end.
A. Risk Sharing Mechanism
3.6 Insurers must have in place a clearly written policy on risk sharing mechanism
which covers:
 Risk sharing rules on how the experience of a participating fund (in terms
of investment, expenses, claims, surrender, etc.) should be shared by each
participating product group; and
 Methodology to determine the amount of asset backing each participating
product group, which, in turn, will be used to determine the bonuses for the
participating product group.
3.7 Insurers have to ensure that the risk sharing mechanism is applied consistently
over time.
A1. Risk Sharing Rules
3.8 Risk sharing rules cover the way in which key factors or risks that affect the
performance of the participating fund are shared by (or pooled across) each
participating policy. Key risks affecting participating fund performance include:
 Investment risk;
 Expense risk – acquisition and maintenance;
 Mortality risk;
 Dread disease and other morbidity risks;
 Lapse / surrender risks; and
 Business risks, e.g. non-participating policies and riders.
3.9 It is important to note that, while investment risk is often the largest risk, it is by
no means the only risk that affects the performance of a participating fund. Other
risks, such as expense and mortality risks, can also affect the performance.
Insurers have to set out how each of the key risks is shared.
A2. Methodology To Derive Assets Backing Participating Policy Group
3.10 Essentially, this is a process of allocating participating fund assets to each

participating product group / class that the participating policy belongs, to reflect
its share of overall participating fund performance for the purpose of determining
the bonuses of each participating product group.
3.11 A common methodology to calculate the assets backing each product is through
a formula that captures all key relevant cash flow of the product, such as:
Claims paid Expenses (e.g.

Cash
Flow =
Premium
Income + Investment
Income - (e.g. death,
surrender, - commissions,
management
maturity) expenses, tax)
3.12 For items that are product-specific, such as premium income, commissions and
maturity benefits, the common practice is to allocate the actual amount to the
particular participating product.
3.13 For items that involve shared experience, such as investment income (investment
risk), management expense (expense risk), claims (mortality / morbidity risk), etc,
an estimated amount is allocated to each participating product group in a manner
consistent with the risk sharing rules as described earlier, taking into account the
appropriate expected experience of each participating product group.
3.14 Any estimation or approximation adopted in the calculation process must be fair
and equitable to each class and generation of participating policies.
B. Bonus Allocation Process
3.15 At each year end, insurers declare the amount of annual (e.g. reversionary) and
terminal bonuses to be allocated to participating policies.
3.16 The bonuses to be allocated have to be approved by the Board of Directors of the
insurer, taking into account the written recommendation of the insurer’s
Appointed Actuary.
3.17 In making the recommendations for annual and terminal bonuses to be allocated,
the Appointed Actuary has to carry out an in-depth analysis taking the following
into consideration:
 to maintain equity and fairness between different generations of
participating policies;
 to maintain solvency of the participating fund; and
 to ensure consistency with the objective to provide competitive and stable
medium to long-term returns to participating policy owners.
3.18 Bonuses allocated are communicated to participating policy owners annually.

This will be in the form of an Annual Bonus Update as specified in Appendix C of
Notice No: MAS 320.
Do Vesting And Allocation Of Bonuses Mean The Same?

Bonuses allocated may not vest (i.e. attach to the policy legally) immediately.
The practice of bonus vesting varies among insurers. Typically, allocated
bonuses are vested only upon the policy anniversary for which the bonus is
due and after having paid the premiums due.
B1. Determination Of Annual Bonuses To Be Allocated
3.19 Annual bonuses are allocated annually to all in-force participating policies, except
in some cases, such as policies in-force for less than two years.
3.20 Most insurers adopt the policy of allocating stable annual bonuses, such that
annual bonus rates will be adjusted only if:
 there is a prolonged period of good or poor performance; and / or
 there is a change in medium to long-term expected investment returns.
3.21 Under this approach, the annual bonuses allocated in a particular year may not
be directly dependent on the performance of the participating fund in that year.
This means that the same annual bonuses may be allocated for a “good” year
and a “bad” year.
3.22 It is important to note that not allocating higher annual bonuses during a good
year does not mean that participating policy owners are short-changed. This is
because the assets built up from a given year that are not used in annual bonus
allocation of that year (and after meeting reserves for future guaranteed benefits),
will be set aside as reserves for:
 future bonuses (this is particularly important for participating policies with
high target terminal bonuses); and / or
 future annual bonuses.
3.23 The reverse is true for a year when the performance is bad. The stable annual
bonus declared may need to be supported by assets built up from previous good
years.
B2. Determination Of Terminal Bonuses
3.24 Terminal bonuses are bonuses allocated to terminating policies, particularly upon
maturity and death, and sometimes also upon surrender. Terminal bonuses are
typically not applicable to policies that terminate during the initial years.
3.25 A common approach to determine terminal bonuses upon maturity is to set the
terminal bonuses at the level such that the total benefits, i.e. both guaranteed and
non-guaranteed benefits, payable to these policy owners are approximately equal
to the share of participating fund assets backing these policies over the long run.
3.26 A similar approach is typically adopted for determining terminal bonuses upon
death, based on the expected level of death payouts.
3.27 However, in any particular year, terminal bonuses allocated to each maturing
participating policy may not always be equal to the assets backing the maturing
policies. This is because of the participating policy objective of providing stable
returns, such that returns (including terminal bonuses) to maturing policy owners
do not fluctuate excessively between different groups of maturing participating
policies and from year to year. It is impossible to pay out the full share of assets
backing each policy, while at the same time smoothing out the returns. (Policy
owners who would prefer to get a full share of assets could buy ILPs instead.)
B3. The 90:10 Rule
3.28 Since ultimately the determination of bonuses is at the discretion of the insurer,
there is a further regulatory safeguard to ensure that the insurer does not
deliberately under declare bonuses in order to retain more profit for itself. This is
the 90:10 rule, set out in the Insurance Act, which states that the profits that the
insurer can take out of the participating fund in any year are limited to 1/9 of the
amount allocated to policy owners as bonus for that year. It is referred to as the
90:10 rule, because it means that 90% of any surplus determined to be
distributable, as bonus goes to policy owners in the participating fund, and 10%
goes to the insurer.
3.29 If the insurer reduces bonus rates, it is also reducing the profit that it can take from
the participating fund, while if it can increase bonus rates, it can increase its profit.
The interests of the participating fund policy owners and the insurer are aligned
through the 90:10 rule.
C. Reserving For Future Non-Guaranteed Bonuses
3.30 In addition to bonus allocation, insurers also have to determine the reserves to be
set aside for future annual and terminal bonuses at each year end.
3.31 Reserves for future bonuses provide for the expected bonuses, both annual and
terminal bonuses, to be allocated every year in the future throughout the entire
policy duration of in-force participating policies.
3.32 Reserving for future bonuses is embedded in the policy liability valuation basis,
introduced under the Risk-Based Capital (RBC) framework (as from 1 January
2005), which requires the Appointed Actuary to conduct an annual valuation of
policy liabilities to determine the amount of reserves to be set aside for:
 guaranteed benefits;
 future non-guaranteed bonuses; and
 provision for adverse deviation (i.e. buffers for adverse fluctuation in
experience).
3.33 In effect, reserves for future non-guaranteed bonuses are determined based on
both:
 the value of assets backing the participating product group; and
 the assumptions relating to future experience, including future premium
collection, investment returns, expenses, claims, etc.
3.34 If the value of assets backing the participating product group is higher (e.g.
prolonged period of good performance), everything else being the same, there
will be higher reserves for future bonuses. The reverse is true if the value of assets
backing the participating product group is low.
3.35 If the insurer expects the future experience to be favourable, everything else being
the same, there will be greater expected amount of assets backing the
participating product group. This means there will be higher reserves for future
bonuses. The reverse is true if the future experience is expected to be
unfavourable.
3.36 Upon the participating policy owners’ requests, future bonuses included in the
year-end reserves can be shown in the form of an updated Policy Illustration (PI).
The illustrated future bonuses in the updated PI will be the same as those
projected as bonuses in year-end reserves.
3.37 It is important to note that as reserves for future bonuses involve estimation of
future events, the actual bonuses allocated in the future may be higher or lower
than what the insurer has reserved at year-end for future bonuses.
3.38 Reserves for future bonuses may also change from year to year, as the experience
unfolds (i.e. owing to impact on value of assets backing the participating product
group), and as the insurer revises its assumptions on future experience.
3.39 If there are changes to future bonus rates (e.g. the insurer may not have adjusted
the bonus allocated for the year, but instead revises the future annual and / or
terminal bonus rates in its year-end reserves), the insurer will need to provide
updated maturity / surrender values to the participating policy owners, showing
the impact of the bonus revision, in the Annual Bonus Update.
4. DISCLOSURE REQUIREMENTS RELATING TO PARTICIPATING LIFE

INSURANCE POLICIES
4.1 Representatives selling participating policies have to provide information which

is clear, adequate and not false nor misleading, to enable clients to make an
informed decision.
4.2 As mentioned in a previous chapter, the MAS and LIA have published guidelines
which stipulate that a representative must furnish the client with a copy of the
Cover Page, Product Summary, Policy Illustration, Bundled Product Disclosure
Document and Product Highlights Sheet in respect of that policy, and “Your Guide
to Life Insurance” when making a recommendation for a life policy.
4.3 In addition, post-sales information in the form of annual bonus update must be
sent to participating policy owners annually.
4.4 As part of the regulatory requirements under MAS Notice No: FAA-N16 to furnish
a copy of the Policy Illustration to the prospective client, the LIA has also issued a
guideline to all its members on the standardised format to be used in illustrating
life insurance benefits for participating life insurance policies.
4.5 Life insurers issuing participating policies are required under Notice No: MAS 320
on Management of Participating Life Insurance Business, to comply with specific
sets of disclosure requirements at point-of-sale (Product Summary) and post-
sales (Annual Bonus Update). Let us take a look at each of these requirements in
turn.
A. Point-Of-Sale Disclosure – Product Summary
4.6 The product summary is meant to help the consumer understand the practical
aspects of the high-level concepts mentioned in the consumer guide “Your Guide
to Participating Policies” (The consumer guide is explained in a later section of
this chapter). For example, the consumer guide touches on concepts like pooling
of premiums, investment of assets, and smoothing. The product summary, on the
other hand, provides more information about how the insurer actually carries out
risk sharing, investment and smoothing for that particular product group.
4.7 Under Appendix B of Notice No: MAS 320, the insurer shall include the following
information in the product summary for its participating policies:
(a) provider of the plan;
(b) nature and objective of the plan;
(c) benefits under the plan;
(d) investment of assets;
(e) type of risks affecting the level of bonuses;
(f) sharing of risks;
(g) smoothing of bonuses;
(h) fees and charges;
(i) adjustments in premium rates;
(j) impact of early surrender;
(k) update on performance;
(l) conflict of interests;
(m) related party transactions;
(n) free look period.
4.8 For more details on the Product Summary for participating policies found in
Notice No: MAS 320, do refer to Appendix 6A.
B. Point-Of-Sale Disclosure – Policy Illustration
4.9 The Policy Illustration is a document, often in the form of a computer printout,
which illustrates clearly the premiums and benefits payable under the policy every
year. The Policy Illustration usually comes together with the Product Summary.
4.10 To prevent the abuse of policy illustrations being used as a sales presentation tool,
the LIA Disclosure Guidelines prescribe the basis for computing some of the
figures used in the policy illustration. They also require all life insurers to adhere
to standardised formats for illustrating the benefits. There are different formats
for non-participating, participating and Investment-linked Life Insurance policies.
Under the LIA Disclosure Guidelines, both the client and the representative are
required to sign on every page of the policy illustration.
4.11 A sample Policy Illustration for a participating life insurance policy is shown in
Appendix 6B.
C. Post-Sales Disclosure – Annual Bonus Update
4.12 Under Notice No: MAS 320, an insurer is required to provide post-sales
information in the form of an Annual Bonus Update to all its participating policy
owners annually. The insurer may send to the policy owner the Annual Bonus
Update in parts provided that:
(a) the insurer has informed the policy owner of the scheduled period in which
the parts of the Annual Bonus Update will be sent; and
(b) all the parts of the Annual Bonus Update are sent to the policy owner by
the date in each policy year as specified by the insurer in the policy or any
other document.
4.13 The insurer may send to the policy owner the Annual Bonus Update in electronic
form where the written consent of the policy owner has been obtained.
4.14 The information to be contained in Annual Bonus Update as stated in Appendix C

of Notice No: MAS 320 are as follows:
(a) purpose of the annual bonus update;
(b) past performance and future outlook;
(c) bonus allocation; and
(d) update on changes in future non-guaranteed bonuses;
 whenever there is, or will be a change in bonus rates, state the revised
maturity or surrender value figures, and impact of the bonus rate
revision to these figures, to the policyholder of the participating policy.
4.15 For more details on the Annual Bonus Update found in Notice No: MAS 320, do
refer to Appendix 6C.
5. “YOUR GUIDE TO PARTICIPATING POLICIES”
5.1 “Your Guide to Participating Policies” is one of the consumer guides published
by LIA.
5.2 Though “Your Guide to Participating Policies” is not a compulsory document to

be provided at point of sale, it is nonetheless a useful reference document to be
provided upon the prospective consumer’s request.
5.3 “Your Guide to Participating Policies” is an industry publication issued under the
MoneySENSE banner, aimed at providing prospective buyers with non-company-
specific information about how a participating policy works.
5.4 It is meant to supplement the product summary, which contains more company-
specific information, such as risk sharing rules, smoothing practices, investment
strategy and past relevant experience of the participating fund.
5.5 Representatives selling participating policies should have read through a copy of
the guide and understood the contents of the guide sufficiently well, in order to
address any queries from their prospective policy owners.
5.6 This guide, structured in an easy to understand Q&A format, covers the following
salient points:
 Explain what a participating policy is, by covering its key features;
 Describe the aim of a participating policy;
 Differentiate a participating policy from an investment-linked policy;
 State the factors that will affect the non-guaranteed bonuses received;
 Highlight the considerations that the insurers have to take into account
when determining bonuses;
 Describe the common types of bonuses;
 Describe what happens on early termination of the policy;
 Set out the disclosure documents that the policy owners should receive at
the point of sale, and expect to receive after purchasing a participating
policy; and
 Highlight the existing key safeguards or insurance regulatory requirements
that will protect the interests of participating policy owners.
6. PARTICIPATING FUND GOVERNANCE
6.1 Under Notice No: MAS 320 on the Management Of Participating Life Insurance
Business, insurers are expected to put in place an Internal Governance Policy.
Details are listed below.
A. Internal Governance Policy On Management Of Participating Fund
6.2 Every insurer which has established or will be establishing a participating fund
must have in place an Internal Governance Policy on participating fund
management, as specified in Notice No: MAS 320.
6.3 The insurer must include in the Internal Governance Policy the items as specified
in Notice No: MAS 320, which is available from the MAS website.
6.4 The insurer must ensure that:

 the Internal Governance Policy is approved by its Board of Directors;
 the Internal Governance Policy is reviewed annually by its Board of
Directors, to ensure that the Internal Governance Policy remains
appropriate; and
 the participating fund is managed according to the rules and guiding
principles as set out in the internal governance policy.
6.5 Insurers are currently not required by MAS to disclose the Internal Governance
Policy to the consumers or existing policy owners. Making this a mandatory
requirement could inadvertently cause insurers to draft their internal governance
policies in a broad manner or include many caveats, thereby undermining the

usefulness of the policies in enhancing the internal governance and management
of the participating fund. The internal governance policy may also be too technical
for the layperson to understand. Instead, information that is relevant and
important would be included in the product summary and disclosed to
prospective customers in a manner that would be easily understood by a
layperson. However, life insurers are free to provide their internal governance
policies to their policy owners upon request or post them on their corporate
websites.
B. Information To Be Contained In The Internal Governance Policy
6.6 The information to be included in the Internal Governance Policy as set out in
Notice No: MAS 320 is as follows:
(a) Section 1 - Introduction;
(b) Section 2 - Bonus determination;
(c) Section 3 - Investment of participating fund assets;
(d) Section 4 - Risk management;
(e) Section 5 - Charges and expenses;
(f) Section 6 - Circumstances under which to cease taking new business;
(g) Section 7 - Shareholders’ profits and responsibilities; and
(h) Section 8 - Disclosure requirements.
APPENDIX 6A
Information To Be Disclosed In The Product Summary
Under Notice No: MAS 320, the insurer shall include the following information in the
product summary for its participating policies.
(a) Provider Of The Plan

 State the name and address of the insurer.
(b) Nature And Objective Of The Plan
 State that the plan is a participating life insurance policy and that it allows the
policy owner to participate in the performance of the participating fund in the
form of bonuses that are not guaranteed.
 Describe the objective of the participating plan.
(c) Benefits Under The Plan
 Describe the benefits provided under the participating policy, such as death
benefits, disability benefits, critical illness benefits, surrender value and
maturity benefit, as well as the distinction between guaranteed and non-
guaranteed benefits.
 Describe the different types of bonuses that may be paid, and the frequency in
which the bonuses are determined and allocated to the participating policy
owner.
 Highlight that all guaranteed benefits, including bonuses which have already
been allocated to the participating policy owner will be provided for regardless
of the performance of participating fund.
 Highlight that future bonuses of this plan which have yet to be allocated to the
participating policy owner are not guaranteed and the insurer will decide the
level of bonus to be declared each year as approved by the Board of Directors,
taking into account the written recommendation by the Appointed Actuary.
(d) Investment Of Assets
 State the investment objective of the combined assets backing the plan.
 Describe the investment strategy including the broad investment mix for the
participating fund, or where applicable, the sub-funds.
 State whether the insurer fully manages, partly manages or does not manage
at all, the assets of the participating fund itself. Where the insurer does not
manage or partly manages the assets of the participating fund, disclose the
names and addresses of all the external fund managers appointed by the
insurer to do so.
 State the current investment mix of the participating fund or sub-funds where
applicable.
 State the following information as may be applicable to the participating policy;

(a) in respect of the sub-fund to which the policy belongs or, in the absence of
a sub-fund, the participating fund:
(i) the annual net investment returns for the past 3 years; and
(ii) the average annual net investment returns over the past 3 years, 5 years
and 10 years,
where the net investment return is computed in accordance with the

industry standards issued by the Life Association of Singapore (“LIA”); and
(b) in respect of the participating fund or the sub-fund to which the policy
belongs:
(i) the annual total expense ratios for the past 3 years; and
(ii) the average annual total expense ratios over the past 3 years, 5 years
and 10 years,
where the total expense ratio is the ratio of the total expenses incurred by
the participating fund or the sub-fund (as the case may be), including
investment, management, distribution, taxation and other expenses, to the
assets of the participating fund or the sub-fund (as the case may be), as
computed in accordance with the industry standards issued by the LIA.
Highlight that past performance is not necessarily indicative of future

performance.
(e) Type Of Risks Affecting The Level Of Bonuses

 State the key factors affecting the performance of the participating fund.
 Highlight that the insurer would determine the level of bonuses taking into
account the current performance as well as future outlook for the participating
fund.
(f) Sharing Of Risks
 Describe how key risks (for example, investment, mortality, and morbidity), and
expenses of the plan are shared with other plans.
 Describe how the insurer determines the assets available to support the group
or class of products that the participating policy belongs to.
(g) Smoothing Of Bonuses
 Describe how the smoothing of annual (e.g. reversionary) and terminal bonuses
will be carried out over the duration of the policy.
 State the annual (e.g. reversionary) and terminal bonus rates for this plan for
the past three years. If it is a new bonus series, indicate explicitly that there is
no past experience available. Highlight that past performance is not necessarily
indicative of future performance.
(h) Fees And Charges

 Describe, by giving examples, the types of expenses that can be incurred and
the charges that can be allocated to the participating fund to cover the
expenses.
 Highlight that the fees and charges have been included in the calculation of the
premium and will not be separately charged to the policy owner.
(i) Adjustments In Premium Rates
 Where the premium rate is guaranteed, the insurer must explicitly state so. If
not, highlight that the premium rate is not guaranteed and may be adjusted
based on future experience.
(j) Impact Of Early Surrender
 Describe the penalty, if any, on early surrender of the plan.
 Highlight that buying a life insurance policy is a long-term commitment. An
early termination of the policy usually involves high costs and the surrender
value may be less than the total premiums paid.
 Make reference to the policy illustration to highlight the loss or low returns on
surrendering the plan early.
(k) Update On Performance
 Describe the documents that the policy owners can expect to receive from the
insurer to provide information about the performance of their policy.
 State when the policy owners can expect to receive these documents.
(l) Conflict Of Interests
 Describe any conflict of interests that may exist or may arise in relation to the
participating fund and its management. Where there are conflicts of interest,
state the manner in which they will be mitigated or resolved.
(m) Related Party Transactions
 Describe transactions between the insurer and its related parties, if any, the
significance of such transactions and how the insurer ensures that the
transactions are carried out at arms’ length.
(n) Free Look Period
 Explain the free look provision.
APPENDIX 6B
Sample Policy Illustration For A Participating Life Insurance Policy
Introduction
XYZ Insurance Company believes that it is important that you fully appreciate the
benefits of your policy. You should also understand how the cost of your insurance
cover and the expenses of administration and sales affect the benefits that you will
receive.
The illustration that follows shows how the value of your policy progresses over time
and the sum(s) that would be payable. The methods used to derive the values shown
follow guidelines established by the Life Insurance Association, Singapore, to ensure
that a fair and consistent approach is used in preparing this illustration.
Please note that your policy provides a combination of (1) guaranteed benefits and (2)
non-guaranteed benefits in the form of bonuses / cash dividends. The bonus rates /
dividend scales used in this illustration are not guaranteed and may vary according to
the performance of the Participating Fund.
As buying a life insurance policy is a long-term commitment, an early termination of the

policy usually involves high costs and the surrender value, if any, that is payable to you
may be zero or less than the total premiums paid.
If you need clarification please do not hesitate to ask your financial adviser.
Policyholder and plan details

Proposed insured: Prospect [Affix signature] Prepared by:
Age next birthday: 35 Date:
Sex: M
Smoker/Non-smoker: NS
Plan: ABC Endowment Plan

Sum insured: $
Annual premium: $
Term: 20
Policy illustration
End of Total DEATH BENEFIT
Policy [Basic] Guaranteed Illustrated at Illustrated at
Year/Age Premiums (S$) [X-1.5%] investment return [X%] investment return
Paid To- Non-guaranteed Total (S$) Non-guaranteed (S$) Total (S$)
date (S$)
1/36
2/37
3/38
4/39
5/40
6/41
7/42
8/43
9/44
10/45
15/50
20/55
End of Total SURRENDER VALUE

Policy [Basic] Guaranteed Illustrated at Illustrated at
Year/Age Premiums (S$) [X-1.5%] investment return [X%] investment return
Paid To- Non-guaranteed Total (S$) Non-guaranteed (S$) Total (S$)
date (S$)
1/36
2/37
3/38
4/39
5/40
6/41
7/42
8/43
9/44
10/45
15/50
MATURITY VALUE
20/55
Based on the Illustrated Investment Rate of Return of the Participating Fund:
At [X%] p.a., your total Illustrated Yield [at maturity (for endowment plan)] /
[upon surrender at age N (for Whole Life plan)] is D % p.a.
At [X - 1.5%] p.a., your total Illustrated Yield [at maturity (for endowment plan)] /
[upon surrender at age N (for Whole Life plan)] is E % p.a.
What is the significance of the Illustrated Investment Rate of Return?
The illustrations have been prepared on two assumptions regarding the investment rate
of return achieved by the investments of the Participating Fund. The two rates [X%] p.a.
and [X-1.5%] p.a., are purely illustrative and do not represent upper and lower limits on
the investment performance of the Participating Fund. The two rates shown are net of
any investment expenses.
The higher Illustrated Investment Rate of Return does not exceed the maximum long-
term illustration investment rate of return (currently A%), which has been set by the Life
Insurance Association, Singapore.
[Where the bonus rates (or cash dividend scales) implied by the illustrated non-
guaranteed values exceed the prevailing bonus rates (or cash dividend scales], state
the implied bonus rates (or cash dividend scales) and provide clear explanation why
higher bonus rates (or cash dividends) are used in the illustrations.]
Changes in the economic and investment environment may affect the investment
performance of the Participating Fund and the benefits that you may receive. Please
note that investment performance is not the only factor that will affect the benefits that
you will receive. Other factors such as the actual level of death claims, disability claims,
expenses incurred and other terminations on the Participating Fund will also have a
bearing on the benefits that you will receive.
As the bonus rates (or cash dividends) used for the benefits illustrated above are not
guaranteed, the actual benefits payable may vary according to the future experience of
the Participating Fund.
What is the Illustrated Yield [*at Maturity or upon Surrender]?
The Illustrated Yields [*at Maturity or upon Surrender] represent the annualised
investment return you may receive upon the [maturity: for endowment product] /
[surrender of the policy at the age of [N]: for whole life product], net of the cost of
insurance and the expenses incurred, based on the Illustrated Investment Rates of
Return of the Participating Fund at X% and [X-1.5%].
The Illustrated Yields are not guaranteed and do not represent upper and lower limits
on the yield you could receive on this Participating policy.
As the bonus rates (or cash dividends) used for the benefits illustrated above are not
guaranteed, the actual benefits payable may vary according to the future experience of
the Participating Fund. Every year, you will be informed of the actual bonus rates or
cash dividends (if any) of your Participating policy for that year. You can refer to the
Product Summary for more information on the illustrated bonus rates for this product.
You can also refer to Your Guide to Participating Policies to find out how bonus is
determined.
Please note that the guaranteed benefit you receive upon the [maturity of the policy: for
endowment product] [surrender of the policy at the age of [N]: for whole life product]
may be less than the total premiums paid.
What is the impact of deductions on what you might get back?
The following table illustrates the effect that deductions will have on the amount you
get back on surrender or maturity. It also highlights the cost of surrendering the policy
early.
Table of deductions
End of Total DEDUCTIONS
Policy [Basic] Illustrated at [X-1.5]% investment return Illustrated at [X%] investment return
Year/Age Premiums Value of Effect of Total Value of Effect of Total
Paid To- [Basic] Deductions To- Surrender [Basic] Deductions To- Surrender
date Premiums Paid date (S$) Value (S$) Premiums date (S$) Value (S$)
(S$) To-date (S$) Paid To-date
1/36
2/37
3/38
4/39
5/40
6/41
7/42
8/43
9/44
10/45
15/50
20/55
What do the columns in the table of deductions mean?
1. “Value of Premiums Paid To-date” is obtained by accumulating the premiums paid

to date at the Illustrated Investment Rate of Return, assuming that you were able
to invest all of your premiums without deduction for the cost of insurance and
without incurring any expenses.
2. The difference between the “Value of Premiums Paid To-date” and “Total
Surrender Value” represents the “Effect of Deductions To-date”. This is the
accumulated value of the deductions for the cost of insurance, distribution cost,
expenses, surrender charge, expected tax payments, and expected transfers to
shareholders (for participating policies).
How much are you paying for distribution cost?
This table shows the total cost of distribution that XYZ Insurer expects to incur in
relation to your policy, including the cost of any financial advice provided to you.
Total distribution cost

End of Policy Year Total Premiums Paid To- Total Distribution Cost To-
/ Age date (S$) date (S$)
1 / 36
2 / 37
3 / 38
4 / 39
5 / 40
6 / 41
7 / 42
8 / 43
9 / 44
10 / 45
15 / 50
20 / 55
What does the last column represent?
1. The Total Distribution Cost To Date is the sum of each year’s expected distribution-
related costs, without interest. Such costs include cash payments in the form of
commission, costs of benefits and services paid to the distribution channel.
2. Please note that the Total Distribution Cost is not an additional cost to you; it has
already been allowed for in calculating your premium.
3. You can obtain the Total Distribution Cost of each of the supplementary benefits
(if applicable) from your Financial Adviser or its representatives.
You can refer to LIA website at www.lia.org.sg for more details.
Source: LIA Guidelines (MU22/18)
APPENDIX 6C
For information only
Information To Be Contained In Annual Bonus Update
The information required in Notice No: MAS 320 are as follows:

(a) Information To Be Contained In Annual Bonus Update
 Where there is a sub-fund for different groups or classes of participating
products in the participating fund, the information in Appendix C of Notice No:
MAS 320 must be in respect of the relevant sub-fund.
(b) Purpose Of The Annual Bonus Update
State the purpose of the Annual Bonus Update as:
 informing the participating policy owners of the performance of the
participating fund over the previous accounting period and of the bonuses
allocated to them for the year; and
 setting out the future outlook based on the latest actuarial investigation of
policy liabilities carried out under Section 95(1) of the Insurance Act 1966 and
updating the participating policy owners on any changes in future non-
guaranteed bonuses.
(c) Past Performance And Future Outlook
 Describe the participating fund performance over the previous accounting
period, with specific comments on key factors affecting bonuses to be allocated
in this accounting period such as investment, mortality, morbidity, expenses
and surrender experiences.
 Describe the future outlook for the participating fund, in particular, any changes
in outlook on the key factors affecting future non-guaranteed bonuses.
 Explain how the past experience (including accumulated experience from
previous years) and future outlook will impact the bonus allocation and
reserves for future bonuses.
 Provide an explanation where the information provided in the above
paragraphs is inconsistent with the latest actuarial investigation of policy
liabilities of the participating fund carried out under Section 95(1) of the
Insurance Act 1966.
(d) Bonus Allocation
 Highlight that the bonuses allocated to the participating policy owner for the
previous accounting period were as approved by the Board of Directors, taking
into account the written recommendation by the Appointed Actuary.
 Provide a clear explanation where the bonuses approved by the Board of
Directors differ from the recommendation made by the Appointed Actuary.
 State when the bonus allocated will vest in the participating policy of the policy
owner.
 State the bonus rates allocated for the participating policy owner for the three
years immediately preceding the accounting period under review. Where such
information is not available, the insurer must explicitly state the reason(s) for
the unavailability.
 State clearly that a full policy illustration is available to participating policy

owners upon request.
 The full policy illustration must be based on the insurer’s best estimate of the
investment rate of return as shown to be supportable by the latest actuarial
investigation of policy liabilities carried out under Section 95(1) of the Insurance
Act 1966, but must not exceed the industry’s best estimate, at that time, of the
long-term investment rate of return.
 Where a full policy illustration is provided to the participating policy owner,
state clearly that the actual bonuses declared in the future may turn out to be
higher or lower than those illustrated.
(e) Update On Changes In Future Non-Guaranteed Bonuses
 Whenever there is, or will be a change in bonus rates, state the following figures
to the policy owner of the participating policy:
(i) in relation to endowment plans:
- an illustration of the revised total maturity benefit (maturity value);
- the impact of the bonus rate revision on the maturity value;
(ii) in relation to whole of life plans:
- an illustration of the revised total surrender value;
- the impact of the bonus rate revision on the total surrender value,
shown at a particular age or duration as specified in the next paragraph.
 Where a policy owner whose current age is less than 45 years, show the values
required in paragraph (ii) above at age 65. Where a policy owner whose current
age is between 45 and 79 years inclusive, show the same values in 20 years’
time. Where a policy owner whose current age is between 80 and 99 years
inclusive, show the same values at age 99.
 The illustration of benefits for the purpose of a change in bonus rates must be
based on the insurer’s best estimate investment rate of return as shown to be
supportable by the latest actuarial investigation of policy liabilities carried out
under Section 95(1) of the Insurance Act 1966, but must not exceed the
industry’s best estimate, at that time, of the long-term investment rate of return.
 State clearly that the actual bonuses that may be declared in the future may
turn out to be higher or lower than shown in the illustration of benefits for the
purpose of a change in bonus rates.
CHAPTER
06
PARTICIPATING LIFE INSURANCE POLICIES

Participating policies Refer to life insurance products that participate in the performance of the
participating fund of the life insurer. Such products are also known as with-profits
policies as they share in the profits or surplus of the insurer’s participating fund.
Guaranteed benefit Is the amount guaranteed to be paid out to the beneficiaries if the life insured dies
within the policy term. There will also be guaranteed cash values that will be paid on
surrender.
Non-guaranteed benefits Benefits or bonuses that are not guaranteed, because the level of non-guaranteed
bonuses depends on the value of the assets backing the policies, which in turn
depends, among other things.
Reversionary Bonus Also known as annual bonus, which is by far the most common method used. The
bonus is in the form of an addition to the sum assured, irrespective of the age of
the insured, or the period that the policy has been in force. However, the addition is
in proportion to the sum assured, e.g. S$10 per S$1,000 sum assured.
Terminal Bonus It is added on top of the regular reversionary bonuses when the policy is
terminated. They are typically only applicable to participating policies that terminate
after having been in force for a certain minimum number of years.
Cash Dividends Some participating policies provide non-guaranteed benefits in the form of cash
dividends rather than additions to the sum assured.
Interim Bonus Interim bonuses are typically determined based on the prevailing bonus rates, or
bonus rates used in the reserves for future bonuses or results from an interim
bonus investigation report.
The 90:10 Rule It sets out in the Insurance Act, which states that the profits that the insurer can
take out of the participating fund in any year are limited to 1/9 of the amount
allocated to policy owners as bonus for that year. It is referred to as the 90:10 rule,
because it means that 90% of any surplus determined to be distributable, as bonus
goes to policy owners in the participating fund, and 10% goes to the insurer.
Product Summary The product summary is meant to help the consumer understand the practical
aspects of the high-level concepts mentioned in the consumer guide “Your Guide to
Participating Policies”.
Policy Illustration It is a document, often in the form of a computer printout, which illustrates
clearly the premiums and benefits payable under the policy every year. The Policy
Illustration usually comes together with the Product Summary.
Annual Bonus Update Under Notice No: MAS 320, an insurer is required to provide post-sales information
in the form of an Annual Bonus Update to all its participating policy owners
annually.
15
Part I Chapter 7. Investment-Linked Life Insurance Policies (ILPS): Types, Features, Benefits And Risks
PART I CHAPTER 7
INVESTMENT-LINKED LIFE INSURANCE
POLICIES (ILPS): TYPES, FEATURES, BENEFITS
AND RISKS
CHAPTER OUTLINE
1. Introduction
2. What Is An ILP?
3. What Is An Investment-linked Sub-Fund?
4. Purpose Of ILPs
5. Types Of ILPs
6. Features Of ILPs
7. Key Factors To Consider Before Purchasing An ILP
8. Are ILPs Suitable For Older People?
9. Investing In ILPs With CPF Savings
10. Differences Between An ILP And A Traditional Life Insurance Policy
11. Pricing Of ILP Units
12. How Much Of The Premium Is Used To Purchase Units?
13. How Are Unit Prices Computed?
14. Insurance Protection Features Of ILPs
15. Investment Returns Of ILPs
16. Fees And Charges For ILPs
17. Benefits Of Investing In ILPs
18. Risks Of Investing In ILPs
19. Comparison With Unit Trusts (UTs)
LEARNING OUTCOMES

 know the definition of an Investment-linked Life Insurance Policy (ILP)
 explain what an investment-linked sub-fund is
 describe the purposes, types and features of ILPs
 understand the key factors to consider before purchasing an ILP
 understand the suitability of ILPs for older people
 know that CPF savings can be used to invest in ILPs
 differentiate between an ILP and a traditional life insurance policy
 understand the pricing of ILP units
 know how much of the premium is used to purchase units
 understand how unit prices are computed
 understand the insurance protection features and investment returns of ILPs
 describe the different types of fees and charges for ILPs

 describe the benefits and risks of investing in ILPs
 distinguish between ILPs and Unit Trusts (UTs)
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. INTRODUCTION ........................................................................................................... 5
2. WHAT IS AN ILP? ......................................................................................................... 5
3. WHAT IS AN INVESTMENT-LINKED SUB-FUND? ...................................................... 5
4. PURPOSE OF ILPs ........................................................................................................ 6
A. Investment ............................................................................................................... 6
B. Wealth Accumulation .............................................................................................. 6
C. Protection ................................................................................................................. 6
5. TYPES OF ILPs .............................................................................................................. 6
A. By Frequency Of Premium Payment....................................................................... 6
A1.Single Premium .................................................................................................. 6
A2.Regular Premium ............................................................................................... 6
B. By Product Features................................................................................................. 7
B1.Investment-Linked Whole Life Insurance Policy ............................................... 7
B2.Investment-Linked Annuity Policy ..................................................................... 7
6. FEATURES OF ILPs ....................................................................................................... 7
A. Protection ................................................................................................................. 7
B. Top-Ups .................................................................................................................... 8
C. Sub-Fund Switch...................................................................................................... 8
D. Partial / Full Surrender ............................................................................................. 8
E. Premium Holiday ..................................................................................................... 8
F. Riders........................................................................................................................ 8
7. KEY FACTORS TO CONSIDER BEFORE PURCHASING AN ILP .................................. 9
A. Insurance Protection Needs .................................................................................... 9
B. Risk Profile ............................................................................................................... 9
C. Personal Investment Objective ............................................................................... 9
D. Time Horizon ............................................................................................................ 9
8. ARE ILPs SUITABLE FOR OLDER PEOPLE?................................................................. 9
9. INVESTING IN ILPs WITH CPF SAVINGS .................................................................. 10
10. DIFFERENCES BETWEEN AN ILP AND A TRADITIONAL LIFE INSURANCE POLICY
..................................................................................................................................... 10
A. Bonuses .................................................................................................................. 10
B. Investment Returns................................................................................................ 10
C. Premium Breakdown ............................................................................................. 10
D. Investment Mandate .............................................................................................. 11
11. PRICING OF ILP UNITS............................................................................................... 12
A. Offer And Bid Prices .............................................................................................. 12
B. Single Pricing ......................................................................................................... 12
12. HOW MUCH OF THE PREMIUM IS USED TO PURCHASE UNITS? ......................... 13
A. Front-End Loading ................................................................................................. 13
B. Back-End Loading .................................................................................................. 13
13. HOW ARE UNIT PRICES COMPUTED? ...................................................................... 13
14. INSURANCE PROTECTION FEATURE OF ILPs.......................................................... 14
A. What Types of Insurance Protection Do ILPs Provide? ........................................ 14
B. Effect Of Age On Cost Of Insurance ...................................................................... 14
C. Effect Of Age On Amount Of Premiums To Be Paid ............................................ 14
D. How Does The Level Of Protection Affect Cash Values? ..................................... 15
15. INVESTMENT RETURNS OF ILPs .............................................................................. 15
A. Are Investment Returns Guaranteed? .................................................................. 15

B. What Types Of Sub-Funds Do ILPs Offer? ............................................................ 15
16. FEES AND CHARGES FOR ILPs ................................................................................. 16
A. Initial Sales Charge Or Bid-Offer Spread .............................................................. 16
B. Sub-Fund Management Fee .................................................................................. 16
C. Benefit / Insurance Charges .................................................................................. 17
D. Policy Fees ............................................................................................................. 18
E. Administrative Charges ......................................................................................... 18
F. Surrender Charges................................................................................................. 18
G. Premium Holiday Charges .................................................................................... 18
H. Sub-Fund Switching Charges................................................................................ 19
17. BENEFITS OF INVESTING IN ILPs ............................................................................. 19
A. Pooling Or Diversification ..................................................................................... 19
B. Flexibility ................................................................................................................ 19
C. Dollar Cost Averaging ........................................................................................... 20
D. Professional Management .................................................................................... 20
E. Affordability ........................................................................................................... 21
F. Ease Of Administration.......................................................................................... 21
G. Choice Of Sub-Funds ............................................................................................. 21
H. Potential Returns ................................................................................................... 21
I. Guaranteed Insurability ......................................................................................... 21
18. RISKS OF INVESTING IN ILPs .................................................................................... 21
A. Investment Returns Are Not Guaranteed ............................................................. 22
B. Insurance Coverage Charges Are Not Guaranteed .............................................. 22
C. Units May Be Insufficient To Pay The Insurance Coverage Charges .................. 22
19. COMPARISON WITH UNIT TRUSTS (UTs) ............................................................... 22
1. INTRODUCTION
1.1 Investment-linked Life Insurance Policies (ILPs) started gaining popularity from
the early 1990s. One reason for their popularity is that ILPs offer the potential
of higher returns as compared to traditional life insurance policies.
2. WHAT IS AN ILP?
2.1 An ILP is a life insurance policy which provides a combination of protection and
investment. Premiums buy life insurance protection and investment units in
professionally managed investment-linked sub-funds.
2.2 The Insurance Act 1966 defines an investment-linked policy as follows:
“Investment-linked policy” means any policy which provides benefits

calculated by reference to units, the value of which is related to the market
value of the underlying assets.
2.3 ILPs do not provide guaranteed cash values. The value of the ILP depends on
the price of the underlying assets, which in turn depends on how the
investments in the sub-fund perform. Fees, expenses and insurance charges
associated with an ILP are usually paid for either through a deduction of the
premium and / or sale of purchased units. The value of the policy will fluctuate
with the value of the units purchased by the premiums.
3. WHAT IS AN INVESTMENT-LINKED SUB-FUND?
3.1 Just like unit trusts, an investment-linked sub-fund is a professionally managed

investment fund, usually by an insurance company (insurer) or external fund
manager. An investment-linked sub-fund pools together the premiums paid by
policy owners with similar investment objectives. The aggregate sum is then
used by the fund to build a diversified investment portfolio of assets which
consists of stocks, bonds and other assets according to the investment objective
of the fund. The price of each unit in a fund depends on how the investments
in that fund perform.
3.2 The investment-linked sub-fund helps in the investment planning of individuals

by giving them a choice of placing their monies in a diversified investment
option. This helps to diversify their investments and protect against the risk of
“putting too many eggs in one basket”. Hence, such funds provide investors
with an opportunity to attain medium to long-term capital growth by investing
primarily in equities. Such funds will endeavour to provide above average
returns in the long term.
4. PURPOSE OF ILPS
A. Investment
4.1 By linking the returns of an ILP to the performance of an underlying sub-fund,

the policy owner can earn potentially higher returns, as compared to that of a
traditional life insurance plan. This is because the investment risks are now fully
borne by the policy owner.
B. Wealth Accumulation
4.2 An ILP can also serve as a wealth accumulation vehicle to meet the long-term
financial goals of a policy owner. By regularly investing in an ILP, a policy owner
can use it as a long-term store of wealth.
C. Protection
4.3 Besides life insurance coverage, an ILP can also provide cover for total and
permanent disability, as well as critical illnesses.
5. TYPES OF ILPS
5.1 There are two ways to classify the different types of ILPs. They can be classified
by:
 frequency of premium payment; and / or
 product features.
A. By Frequency Of Premium Payment
A1. Single Premium
5.2 In a single premium policy, a lump-sum premium is used to purchase units in

a sub-fund.
5.3 The emphasis here is normally for savings and investment. However, it is
possible for this policy to be used for protection, although its use as a protection
plan is less common than the Regular Premium version.
A2. Regular Premium
5.4 For such policies, premiums are paid on a regular basis. Units are purchased as
premiums are received.
5.5 Regular premium policies are usually purchased for protection purposes. Apart
from life insurance protection, total and permanent disability and critical
illnesses cover, other forms of coverage are also available. The facility to vary
the level of insurance cover is a common feature.
5.6 In addition to single and regular premium payments, most plans give the option
of investing an additional amount to the ILP at any time. This additional amount
(known as a top-up premium) can be invested on a regular or ad-hoc basis.
Some single premium ILPs offer you the option of making top-ups at specific
intervals. These options are commonly known as recurring single premium
options.
B. By Product Features
B1. Investment-Linked Whole Life Insurance Policy
5.7 This policy is similar to a traditional Whole Life Insurance policy because it is
designed to provide lifetime coverage. For a regular premium policy, the policy
owner can choose to vary the level of insurance cover.
B2. Investment-Linked Annuity Policy
5.8 An Investment-Linked Annuity or Variable Annuity policy generates a regular

stream of income for the policy owner for as long as he is alive, or till all units
in the policy have been cashed out. Under such a policy, the policy owner pays
a single premium or regular premiums to purchase units. When the policy
owner retires, a fixed number of units can be cashed out at pre-determined
intervals to generate an income. Income will fluctuate, depending on the unit
price at the time of cash out. However, over the long term, the value of units is
expected to rise. Hence, the policy owner will enjoy the advantage of protection
against inflation.
5.9 On the other hand, if the value of units fluctuates too much, then the income of
the policy owner will be affected. However, annuity payments can be paid at a
fixed amount basis. The advantage to the policy owner is that he receives a
steady stream of income. On the other hand, because the policy value is
dependent on the unit price, the units for payment deduction may be depleted
quickly during times of adverse economic conditions. Hence, there may not be
enough sub-funds left to cover the lifetime of the insured. However, there can
be variants of the products that provide a stream of income throughout the
lifetime of the policy owner.
6. FEATURES OF ILPS
A. Protection
6.1 Since ILPs are developed and distributed by life insurers, the basic and
minimum protection benefit is the death protection. The protection element
may take the form of death (or accidental death) or total and permanent
disability. On top of that, most of the additional benefits, e.g. personal accident
and critical illness covers, can be attached to an Investment-linked Plan.
6.2 Generally, regular premium ILPs also give the policy owner the flexibility to vary
the level of insurance coverage to meet his individual protection needs.
However, an increase in coverage may be subject to the insurer’s underwriting
approval.
6.3 Most single premium ILPs provide lower levels of insurance protection as
compared to regular premium ILPs.
B. Top-Ups
6.4 During the policy term of an ILP, the policy owner has a choice to do a top-up
anytime by investing an additional premium. This top-up can be on a regular or
ad hoc (for a particular purpose) basis. Most insurers have a 100% premium
allocation for top-up premiums.
C. Sub-Fund Switch
6.5 All life insurers in Singapore have more than one investment sub-fund for their
policy owners to choose from. Thus, this enables a policy owner to do a sub-
fund switch according to his personal circumstances. Sub-fund switch is just
switching from one investment sub-fund to another investment sub-fund.
6.6 Do remember that, on a normal buy transaction, the policy owner will buy at
the offer price.
6.7 However, most sub-fund switches are done on a bid-to-bid basis, i.e. to sell
from one sub-fund at the bid price and to buy into another also at the bid price.
Sub-fund switch can either be on an ad hoc or regular basis. Another name for
regular sub-fund switches is automatic sub-fund switch. It simply means that
any sub-fund switch will be done on a specified regular date, with a fixed
amount as specified by the policy owner.
D. Partial / Full Surrender
6.8 The policy owner has the right to surrender part or the whole of the units
allocated to him. This is attractive to the policy owner who wants to have easy
access to the sub-funds. Withdrawals (i.e. partial cashing out of units) and
surrenders (i.e. cashing out of all units) are allowed.
E. Premium Holiday
6.9 Premium holiday is a period when the policy owner does not pay any premium,
and yet enjoy the benefits that are defined in the policy. Since there is no
premium paid, the insurer will sell away the existing units from the policy to
pay for all the benefit charges. Hence, how long the premium holiday period
lasts will depend on the actual number of units which can be used to pay for all
these charges.
F. Riders
6.10 Usually, a Whole Life Investment-linked policy allows for more comprehensive
protection against mortality, major illnesses and permanent disability by
including riders. Some riders are paid by unit deductions, while others are paid
by additional premium payments.
7. KEY FACTORS TO CONSIDER BEFORE PURCHASING AN ILP
A. Insurance Protection Needs
7.1 This determines the type of insurance coverage that the policy owner will be
taking (e.g. protection for death, critical illnesses, disability and accidents), and
the level and duration of insurance coverage suitable to meet his needs.
B. Risk Profile
7.2 The policy owner’s risk profile refers to how much investment risk that he is
willing to bear. It varies from individual to individual, and changes as he gets
older, as his financial situation and investment objectives change. The cash
value of an ILP depends on the performance of the investment-linked sub-
fund(s) as selected. The returns are not guaranteed. A policy owner investing in
an ILP needs to be aware that the cash value of his policy will fluctuate
according to the performance of the sub-fund(s). The changing risk profile will
also mean that the policy owner should re-evaluate his investments at different
points of time (after he has purchased the ILP), to ensure that his policy remains
relevant to his needs.
C. Personal Investment Objective
7.3 Different investment-linked sub-funds focus on different asset classes,

geographical regions or industry sectors, and have different levels of volatility.
It is important to select a sub-fund(s) that will commensurate with his risk profile
and investment objectives.
D. Time Horizon
7.4 This refers to the period that the policy owner can stay invested before he
expects to cash out his investment. Regular premium ILPs are generally
regarded as long-term insurance plans. A longer time horizon is particularly
important when investing in these types of plans, as there are usually
significant charges in the early policy years.
8. ARE ILPS SUITABLE FOR OLDER PEOPLE?
8.1 The suitability for older people can be assessed through the four points as
mentioned above, namely Insurance Protection Needs, Risk Profile, Personal
Investment Objective and Time Horizon. As a general rule, older people have
less pressing needs for life insurance – they may have made adequate
provision, or they may have fewer needs once their children are financially
independent.
8.2 An important factor that comes into play for the older person is his ability to
sustain premium payments if retirement is approaching. As such, an older
person who is unlikely to continue his premium payments beyond retirement
and for whom the primary aim is investment, a regular premium ILP will not be
a suitable option. The initial costs and the short-term investment horizon will
seriously limit the potential returns. There will be other investment options that
will better suit his needs.
8.3 Similarly, if insurance protection is a significant objective, but cover is required

only for a very limited period, there are likely to be other insurance options that
can be considered as such.
9. INVESTING IN ILPS WITH CPF SAVINGS
9.1 Premiums and top-ups can be made with CPF savings if the ILP is included
under the CPF Investment Scheme (CPFIS). Since January 2001, only single
premium plans and recurrent single premium plans (i.e. top-ups in single
premium payments) have been allowed under the CPFIS. However, CPF
members who have purchased regular premium plans before 2001 can
continue to have the regular premiums paid from their CPF savings.
10. DIFFERENCES BETWEEN AN ILP AND A TRADITIONAL LIFE INSURANCE

POLICY
A. Bonuses
10.1 Traditional participating policies share in the profits of the insurer. The benefits
under these policies are increased by regular additions of reversionary and
terminal bonuses. Once declared, they become guaranteed additions to the
policies. However, future bonuses are not guaranteed.
10.2 In the case of an ILP, the policy value is linked to the prevailing unit value that
fluctuates with the value of the underlying assets.
B. Investment Returns
10.3 Policy owners of traditional participating policies are generally guaranteed a

minimum surrender value. This is in addition to any bonuses that may be
declared.
10.4 In general, ILPs do not guarantee a minimum return, and the policy owners bear
the full investment risks.
C. Premium Breakdown
10.5 Under traditional policies, the policy owners will not know the proportions of
premiums that are used to pay for insurance cover, expenses and savings.
10.6 Disclosure under ILPs is more transparent. Hence, the policy owners will know
the amounts that have been deducted for expenses and insurance cover, as well
as the amount that has been allocated to purchase units for investment
purposes.
D. Investment Mandate
10.7 For traditional policies, premiums collected are pooled into the insurer’s Life
Sub-fund, which is invested taking into account the nature, term and currency
of the insurer’s liabilities. Typically, the Life Sub-fund invests mainly in fixed
income instruments, such as bonds with a relatively smaller proportion in
equities.
10.8 For ILPs, each of the underlying sub-funds is invested in accordance with its
specified investment objective. This may be investing 100% in bonds or 100%
in equities, depending on the investment mandate of the sub-fund.
Summary Table On The Differences Between

An ILP And A Traditional Life Insurance Policy
ILP Traditional Life Insurance Policy
Bonuses The value of the ILP For participating whole life and
depends on the endowment plans, bonuses may be
performance of the payable depending on the insurer’s
chosen sub-funds. profits. Bonuses are not guaranteed.
However, once they are declared by
the insurer, they become guaranteed
additions to the sum assured of the
plans.
Investment The investment risk is There are two categories of benefits -
Returns usually borne entirely by guaranteed and non-guaranteed. For
the policy owner. guaranteed benefits, the insurer bears
the investment risk. However, for non-
guaranteed benefits, such as bonuses,
benefits depend on the performance
of the insurer’s participating sub-fund.
Premium The amount of the The premium amount used for
Breakdown premium used for insurance coverage, other charges and
insurance coverage, other investment are bundled up. They are
charges and the purchase not separately identified in the Product
of units are unbundled Summary and Policy Contract.
and transparent. They are
disclosed in the Product
Summary and Policy
Contract.
Investment The part of your All of your premiums go into the

Mandate premiums allocated for insurer’s participating sub-fund. The
the purchase of units will insurer decides on the appropriate
be invested in your investment portfolio for this sub-fund
chosen investment-linked after taking into account the nature,
sub-fund. The sub-fund is term and currency of the insurer’s
invested according to its overall liabilities.
specified investment
The performance of the sub-fund will
objective. The
depend not only upon investment
performance of the sub- performance, but also upon other
fund can be tracked factors, such as claims experience
through the daily
(whether this is more or less than
publication of unit prices.
anticipated) and expense levels.
11. PRICING OF ILP UNITS
A. Offer And Bid Prices

Definitions
(a) Offer Price
The offer price is the price which the insurer uses to
allocate units to a policy when premiums are paid. It is
the price of a unit that is sold to a policy owner. If the offer price is S$1 and
the whole S$100 premium is to be applied to buy units, it will, therefore,
buy 100 units.
(b) Bid Price

The bid price is the price which the insurer will give for the units if the policy
owner wishes to cash in or claim under the policy. It is the price of a unit to
be sold by the policy owner. This is always lower than the offer price. For
example, if the bid price is S$0.95, 100 units can be cashed for S$95.
(c) Bid-Offer Spread

The bid-offer spread is one of the initial charges levied when the policy
owner purchases a unit in the sub-fund. It is a charge made by the insurer
to cover its expenses in setting up the policy. Usually, there is a 5%
difference between bid and offer prices, although there are insurers that
charge lesser than this rate. The bid-offer spread is sometimes called the
initial sales charge.
An example below explains the relationship between the offer price, bid
price and bid-offer spread.
Bid-Offer Spread: 5%
Offer Price is at S$2.45
Bid Price = S$2.45 x 95% = S$2.33
If you invest S$100, you get 100/2.45 = 40.82 units
If you sell immediately, you get back only S$2.33 x 40.82 units = S$95.11
B. Single Pricing
11.1 Some insurers use a single price to reflect the value of the underlying
investment sub-funds. The difference between a single pricing concept and a
bid-offer pricing concept is that, under a single pricing model, policy owners
will buy and sell units based only on that particular one price. On the other
hand, for a bid-offer pricing model, policy owners will buy units at offer price
and sell units at bid price. An interesting way to remember this is “BOSB”.
“BOSB” stands for Buy at Offer, Sell at Bid. For a single pricing model, the initial
sales charge is clearly and precisely stated and made known to the policy
owners. That is to say that only the net premium, after deducting the sales
charge, will be used to purchase units based on this single price.
12. HOW MUCH OF THE PREMIUM IS USED TO PURCHASE UNITS?
12.1 The full amount of premium paid may not always be allocated to purchase
units. Before buying an ILP, it is important to find out what percentage of the
premium will be used to purchase units. This information, commonly known as
premium allocation rate, is available in the Product Summary and / or Policy
Contract.
12.2 For most single premium ILPs and top-ups, 100% of the premiums are used to
purchase units. For regular premium ILPs, the amount of premium used to
purchase units will depend on the structure of the plan i.e. whether it has a
front-end loading or back-end loading.
A. Front-End Loading
12.3 In a front-end loaded plan, a certain amount of the premiums will be used to
help defray the insurer’s expenses, such as distribution and administration
costs in the early years. These expenses decrease over time. As such, less than
100% of the premiums are allocated to purchase units in the initial years. The
premium allocation increases over time until it reaches 100%. Some insurers
also provide premium allocations in excess of 100% in the later policy years,
usually to reward policy owners who keep their policies in force for the long
term.
12.4 Premium allocation is explained further in the later chapter in this Study Text
on “How do ILPs work?”
B. Back-End Loading
12.5 Under a back-end loaded plan, 100% of the premiums are allocated to purchase
units from the start. However, to help insurers defray distribution and
administration costs, back-end charges are imposed if the policy owner wishes
to surrender his plan, in whole or in part, within a certain time.
12.6 It should be noted that, although the premium allocation structure differs for
front-end and back-end loaded ILPs, the overall effect of the charges will be
similar.
13. HOW ARE UNIT PRICES COMPUTED?
13.1 The frequency and methodology for computing unit prices vary from sub-fund
to sub-fund. Details are specified in the Product Summary and Policy Contract.
13.2 For most ILPs, unit prices are computed based on forward pricing. This means
that the fund manager re-calculates the sub-fund’s net asset value, based on
the value of the investment-linked sub-fund’s underlying assets, after the
market closes. The sub-fund management charges are then deducted from the
net asset value, and the balance is then divided by the total number of units to
arrive at the unit price. All ILP orders to purchase or sell units are then settled,
based on the next computed unit price.
13.3 Forward pricing is the most widely used pricing model in the local insurance
industry. It basically means that the number of units that are purchased from
the underlying investment sub-funds shall be determined by reference to the
offer price established on the next valuation date. In essence, it means that the
next available offer price after the premium has been paid. Similarly, units that
are sold will be determined using the next available bid price. Valuation date is
the date that the insurer will determine the value of the underlying assets in the
investment sub-funds.
14. INSURANCE PROTECTION FEATURE OF ILPS
A. What Types of Insurance Protection Do ILPs Provide?
14.1 As mentioned previously, ILPs provide insurance protection in the event of

death. Additional benefits may include total and permanent disability,
accidental death, critical illness and hospitalisation coverage. Regular premium
ILPs also generally give the policy owner the flexibility to vary the level of
insurance coverage to meet your individual protection needs.
14.2 However, an increase in coverage may be subject to the insurer’s underwriting

approval.
14.3 It should be noted that the cost of insurance, based on the policy owner’s age,
scope and type of protection chosen, would be charged accordingly. Most
single premium ILPs provide lower levels of insurance protection as compared
to regular premiums ILPs.
B. Effect Of Age On Cost Of Insurance
14.4 The cost of insurance will increase with age. It is an inescapable fact of life that,
as the policy owner ages from 30 years old onwards, there is, year by year, an
increasing risk of death, disability or contracting a critical illness. This
increasing risk of claim has to be factored into the calculation of the premiums
for any life insurance product.
C. Effect Of Age On Amount Of Premiums To Be Paid
14.5 The policy owner does not necessarily have to increase the premiums paid as
his age increases. Most life insurance products, including regular premium ILPs
are designed, so that the premium which the policy owner pays remains level
throughout the life of the policy. For most regular premium ILPs, the premium,
which is usually payable monthly, is used to buy units in the chosen
investment-linked sub-fund. Units are then sold to pay for the insurance cover
that month.
14.6 While these insurance coverage charges increase year by year, the premium
that the policy owner pays — that is, the sum of money that actually leaves his
bank account each month — will have been determined with the expectation
that the premium will remain unchanged for the intended duration of the policy.
This premium will have been based on certain assumptions about the
performance of the sub-fund but, if the sub-fund performs poorly, the units may
not be adequate to meet the insurance coverage charges. Under these
circumstances, the policy owner may need to increase his premiums or reduce
the level of insurance protection.
14.7 It should be noted that some insurers offer plans that limit insurance cover to
modest levels for which there is no explicit charge, and where the cost is borne
by the insurer out of the management fees.
D. How Does The Level Of Protection Affect Cash Values?
14.8 For regular premium ILPs, it is important to understand that, for the premium
which the policy owner wishes to pay, there will be a trade-off between the
amount of insurance coverage provided and the amount available for
investment. The higher the level of coverage selected, the more units will be
absorbed to pay for the insurance charges, and the fewer units will remain to
accumulate cash values under his policy.
15. INVESTMENT RETURNS OF ILPS
A. Are Investment Returns Guaranteed?
15.1 Investment returns from ILPs depend on the performance of the policy owner’s
chosen sub-fund. The returns are not guaranteed. The policy owner has to bear
the investment losses if the sub-fund performs poorly. Conversely, he will enjoy
the full benefit of investment gains if the sub-funds perform well. It should also
be noted that the past returns of a sub-fund are not necessarily indicative of the
future performance of the sub-fund.
B. What Types Of Sub-Funds Do ILPs Offer?
15.2 Most insurers offer a wide range of sub-funds to suit the policy owner’s
investment objectives, risk profile and time horizons. There is a correlation
between risk and reward, so that there will be a trade-off between the risks
associated with the sub-fund and its potential returns. For example, higher risk
investments, such as equity sub-funds, offer greater potential for higher
returns, whereas the relative safety of cash sub-funds may be expected to yield
more modest returns.
15.3 The policy owner’s risk preference, and therefore, the appropriate sub-fund,
may change during the lifetime of his policy as his time horizons shorten. As a
general rule, the closer that the policy owner gets to the time when the value of
the policy will be realised, the less risk that he will wish to take.
15.4 For investments under the CPF Investment Scheme, the CPF assigns a risk
classification to all participating ILP sub-funds.
15.5 For further details and more information on the common type of sub-funds
available, do refer to the next chapter of this Study Text.
16. FEES AND CHARGES FOR ILPS
16.1 Fees and charges for an ILP are paid for through the following ways:
 deduction of premiums; and / or
 sale of purchased units.
16.2 For the sale of purchased units, charges are deducted by way of reducing the
number of units that the policy owner holds. Charges are first converted to units
by using the bid price, after which the same number of units is deducted from
the policy owner.
16.3 Here are examples of the types of fees and charges that may be incurred in an
ILP:
 Initial sales charge;
 Sub-fund management fee;
 Benefit / Insurance charges;
 Policy fees;
 Administrative charges;
 Surrender charges;
 Premium holiday charges; and
 Sub-fund switching charges.
A. Initial Sales Charge Or Bid-Offer Spread
16.4 This is a charge that goes towards paying the insurer which sells the sub-fund
in respect of an ILP. Initial sales charges are usually a percentage of the
investment amount (e.g. 3% or 5%). Initial sales charges are one-off charges,
and are made either at the point of purchase, or at the point of redemption
(sale). This is unlike the other costs, which may be incurred every year upon
owning a share in the sub-fund.
B. Sub-Fund Management Fee
16.5 The investments of the unitised sub-fund are managed by professional

investment managers. A sub-fund management fee is paid to the fund manager
for portfolio supervision and for general management of the sub-fund affairs.
Such fee also serves to compensate the manager for the expenses incurred in
providing the relevant services. There will normally be a sub-fund management
charge likely to range from 0.5% to 2% per annum. The level of this charge will
depend on the competition, the type of assets under management, and the
profit requirements of the life insurers. A sub-fund investing in government
securities will normally attract a lower sub-fund management charge as
compared to an equity sub-fund. They are normally charged at the same
frequency as the pricing of the units. The pricing of the units should have taken
this into account. Such a fee will cover investment expenses and will provide
for profits to shareholders of the insurer.
C. Benefit / Insurance Charges
16.6 These are charges incurred by the client for the insurer to provide coverage for
certain events like death, total and permanent disability or critical illness, etc.
occurring during the policy period of insurance for the ILP.
16.7 The charges for the basic insurance cover, i.e. death and total and permanent
disability, increase with the life insured’s age. For example, the charges for
S$1,000 basic insurance cover for a male when he is at the age of 30, 40, 50 and
60 years are S$0.78, S$1.29, S$3.12 and S$11.64 respectively. The numbers in
this example are not definite numbers as different insurers offer different rates.
These charges are usually sub-funded by the cancellation of a number of units
under the policy, which will give the equivalent dollar amount of the relevant
benefit charges.
16.8 On the other hand, the charges for riders can be by way of cancellation of units
(e.g. critical illness rider) or by cash payment (e.g. accidental death benefit
rider). If it is the former, the charges increase with the insured’s age. As for the
latter, the charges are a fixed amount payable throughout the premium
payment term of the policy.
16.9 The charges for the basic insurance cover and those riders which are paid by
way of cancellation of units escalate as the insured ages, as you can see from
the above example. Should the charges outstrip the annual premiums paid, the
investment gains would be used to pay for the charges. This means that there
is a possibility of the policy lapsing (some insurers have features in place to
prevent this from happening) or having low surrender value at the point of a
claim. This defeats the purpose of the client buying the policy to earn high
investment returns, and enjoy insurance protection at the same time.
16.10 It will have serious consequences on his financial planning. It is important that
you bear this point in mind when you advise your clients, (particularly those
who are in the older age group, as the mortality charges are higher) to purchase
ILPs for their insurance needs. You should ensure that the charges for the
insurance cover would not result in your client not meeting his objective for
which he had bought the policy. For any client who has substantial life
insurance needs, you can advise him to purchase one of the traditional life
insurance policies instead. It is also important that you highlight the increase in
charges to your client. You may refer to later relevant chapter to see how this
is done.
16.11 The charges for the cash payment type of insurance cover are included in the
premium that the policy owner pays and, as the rate is unchanged as age
increases, it does not have any adverse effect on the policy. However, some of
these benefits’ premium rates are non-guaranteed in nature and, hence, may
change depending on the claim experience. This may have an overall effect on
the policy in terms of affordability.
D. Policy Fees
16.12 These cover the administrative expenses of setting up the policy, as well as the
regular running expenses of administering the policy. As the cost of setting up
a big or small policy is more or less the same amount, the insurer will normally
levy (impose and collect) a uniform policy fee for each policy.
E. Administrative Charges
16.13 These cover the initial expenses of the policy. The cost of administration is
incurred largely to provide record-keeping and transaction services.
Sometimes, these costs may represent additional fees paid to the fund
manager. Other times, these fees are paid to banks and sub-fund service
organisations, which provide such services independent of insurers. These
costs usually range from 0.2% to 0.4% of average sub-fund assets.
RECORD-
F. Surrender Charges KEEPING
16.14 Surrender charges or back-end loads are the charges that a client would incur
should he decide to cash out a portion or all of his units before a certain period
of time. This serves to compensate the insurer for the costs incurred in the setup
and the administration of the policy. Surrender charges are usually a
percentage of the total surrender value that a client will be cashing out or
surrendering. The charges usually decrease from the first year onwards.
16.15 For example, the surrender charges may be:
95% of surrender value in year 1;

85% in year 2;
65% in year 3;
until it finally decreases to zero.
16.16 The dollar amount for the surrender charges will be calculated as follows:
A x B x Bid price
where A is the surrender factor or percentage as above; and

B is the number of units to be surrendered.
G. Premium Holiday Charges
16.17 An ILP gives the policy owner the flexibility to go on a premium holiday. A
premium holiday means that the policy owner can choose to stop paying his
regular premium for a certain period of time, for as long as the surrender value
of that policy is enough to cover the charges for the policy.
16.18 A fee, called the premium holiday charge, may be levied by the insurer for using
this premium holiday feature. This charge may be based on a percentage of the
regular premium that is due, or a percentage of the charges and fees payable
for the policy. The percentage payable usually decreases with time. The charges
and fees payable are by way of deduction of units at the bid price. As practices
of insurers do differ, it is important that the adviser check the practice of the
insurer which he represents, before giving advice to his clients.
H. Sub-Fund Switching Charges
16.19 As mentioned earlier, the policy owner has the option to switch his holdings
from one sub-fund to another. The sub-fund switch feature of an ILP allows the
policy owner to switch all or a portion of his holdings from one sub-fund to
another, in line with his risk profile and investment preference. The first such
sub-fund switch made in a year is usually free, but subsequent switches are
subject to charges, usually at a flat dollar amount per switch made (e.g. S$25).
There are insurers that offer more than one free sub-fund switch per year. Some
may even offer unlimited sub-fund switches, subject to certain conditions.
17. BENEFITS OF INVESTING IN ILPS
A. Pooling Or Diversification
17.1 The sub-fund offers the policy owner an access to a "pooled" or "diversified"
portfolio. A sub-fund normally consists of a large number of equity stocks and
/ or a range of corporate bonds. The policy owner is unlikely to be able to
construct such a diversified portfolio on his own. A diversified portfolio has
better risk characteristics than a portfolio that is not well diversified, i.e. a sub-
fund should cushion from a severe price decline of any one stock, and
sometimes, a sector of stocks in the portfolio.
17.2 Diversification does not and cannot protect policy owners against adverse
moves in the broad investment market. It protects only against the risk of
“putting too many eggs in one basket”, i.e. putting too much money into one
company’s securities.
B. Flexibility
17.3 An ILP can be very flexible because of the nature of the product. An ILP policy
owner can vary the amount of life cover within very wide limits and can vary
premium payments, take premium holidays, add single premium top-ups, or
make withdrawals at any time.
17.4 Such flexibility cannot be achieved under a conventional product structure. For
example, a participating or non-participating Endowment or Whole Life
Insurance policy requires complicated alteration of calculations, if the policy
owner wishes to change his premium level or sum assured. This is expensive
and the cost has to be reflected in the premium to be charged.
17.5 However, there are limitations to the flexible features offered by ILPs. It is
important that you know the limitations, and highlight them to your clients
when presenting your recommendations to them.
C. Dollar Cost Averaging
17.6 Dollar cost averaging simply means investing the same dollar amount in a sub-
fund at regular intervals, regardless of the sub-fund price fluctuations. By
regularly investing specified amounts of money over a period of time, the policy
owner is able to capitalise on market cycles, by purchasing more units when
prices are low and fewer units when prices are high.
17.7 If you invest in the long term, buying units of the sub-fund at different prices as
a sub-fund value characteristically moves up and down, you will find that the
cost of each share should be typically lower than the average price of the share
during the same period. This is the beneficial effect of dollar cost averaging.
17.8 As a result, the average cost of the units is reduced, thereby increasing the
potential for higher returns on the principal, and effectively eliminating the risk
of timing the market incorrectly.
An Example Of A Dollar Cost Averaging Plan

140.00 1.4
120.00 1.2
100.00 1.0
80.00 0.8
60.00 0.6
40.00 0.4
20.00 0.2
0.00 0.0
December
April
March
June
August
October
February
May
July
Septembe
Novembe
Januar
Units Acquired Price ($)
Source: https://secure.fundsupermart.com/main/research/viewHTML.tpl?articleNo=2963
D. Professional Management
17.9 A professional fund manager or investment adviser carefully selects the specific
stocks and / or bonds in which the sub-fund invests. This may be done by a
single person or a team of people.
17.10 In addition, the sub-fund management company usually employs researchers,

as well as investment analysts and strategists, to provide the fund manager
with detailed information, insights, and interpretations that are important
considerations, when selecting individual stocks or bonds. These data and
opinions enable the fund manager to fulfil the sub-fund objectives and select
securities that will, hopefully, produce a substantial positive return.
E. Affordability
17.11 The small investor is able to access the sub-fund with a modest capital. He is
unlikely to be able to purchase bonds and certain stocks directly, and as cost-
effectively, at such low levels of capital investment.
F. Ease Of Administration
17.12 The policy owner, apart from keeping his policy document and annual
statements provided by the insurer, he need not concern himself with the
administration of his investments. The administration of a portfolio of
investments can be a complicated affair.
G. Choice Of Sub-Funds
17.13 ILPs let the policy owner choose from a wide range of investment-linked sub-
funds, managed by professional fund managers. It is important to select sub-
fund(s) that suit your client’s financial goals and risk profile, for example, low,
medium or high risk. ILPs also allow the policy owner to move his money from
one sub-fund to another, to suit his financial situation and risk profile, since
these can change over time. Most insurers offer a limited number of free
switches and charge a nominal fee per switch. Before switching from one sub-
fund to another, do check whether your client is entitled to free switches and, if
not, how much he needs to pay for the switch.
H. Potential Returns
17.14 With ILPs, depending on the choice of sub-fund, the policy owner can earn
potentially higher returns over the long term as compared to other life
insurance policies, such as traditional whole life and endowment plans, since
the investment risk is borne by the policy owner, and he may choose to invest
into higher risk sub-funds.
I. Guaranteed Insurability
17.15 Like other life insurance products, once you purchase an ILP, you will enjoy
guaranteed insurability for the duration of the plan, regardless of any changes
in your health status. However, an increase in coverage may be subject to the
insurer’s underwriting approval.
18. RISKS OF INVESTING IN ILPS
18.1 Since the values of the units of ILPs are directly linked to the investment
performance of the underlying assets in the sub-fund, the value of the units can
rise or fall with the underlying assets in the sub-fund. Hence, it is possible that
the value of the policies may fall. As such, the cash and maturity values will be
adversely affected. Therefore, while the potential yield of an ILP may be higher
than a non-linked or traditional life insurance policy, the risks are also greater.
A. Investment Returns Are Not Guaranteed
18.2 In an ILP, the investment risk will be borne entirely by the policy owner. The
performance of the sub-funds is not guaranteed, and the price of the units can
rise or fall. As such, if a sub-fund does not perform well, the cash and maturity
values will be adversely affected.
B. Insurance Coverage Charges Are Not Guaranteed
18.3 Most single premium ILPs offer lower insurance coverage levels. Consequently,
they have lower insurance coverage charges as compared with regular
premium ILPs.
18.4 For regular premium ILPs, the scale of insurance coverage charges is not
usually guaranteed and may be adjusted by the insurers, subject to any
maximum limits as stated in the policy. An increase in the scale of charges
would only arise should there be a general and sustained worsening of claims
experience. Should such an increase be necessary, it would be applied to an
entire class of policies, and not in isolation to an individual policy.
C. Units May Be Insufficient To Pay The Insurance Coverage Charges
18.5 As the risk of death, disability and illness generally increases with age,
insurance coverage charges typically increase as the policy owner gets older.
For most regular premium ILPs, insurance coverage charges are paid through
the sale of units. As the policy owner gets older, it is possible that a combination
of high insurance protection and a poorly performing sub-fund may result in
the value of the units being inadequate to meet such charges for the level of
coverage as provided by his policy.
19. COMPARISON WITH UNIT TRUSTS (UTs)
19.1 ILPs and UTs are very similar. Broadly there are no differences in the tax
treatment or investment bases between ILPs and UTs. However, there are some
differences in the way that they operate, e.g. ILPs do not need trustees or
registrars.
19.2 The key distinction between ILPs and UTs is that ILPs provide insurance
coverage (death benefit), as well as investment returns, whereas UTs provide
only investment returns. Upon the death of the policy owner of an ILP, the
benefits paid out will be both the value of the units, as well as the death benefit,
or the higher of the two. Besides the death benefit, some insurers provide other
types of coverage, such as total and permanent disability benefit, and critical
illness benefit, under an ILP.
19.3 You may refer to the Comparison Chart for your knowledge.
Comparison Chart Between ILPs And Unit Trusts
Item ILPs UTs

Investment ILP sub-funds are subject to the Subject to requirements as
Guidelines requirements as specified in the specified in the Code on
Insurance Regulations – Collective Investment
Insurance Act 1966 and Notice Schemes and regulated
No: MAS 307 under the Securities and
Futures Act 2001.
Product ▪ A Copy Of The Cover Page Prospectus / Profile
Disclosure ▪ Product Summary Statement
(at point of ▪ Policy Illustration
sale) ▪ Bundled Product Disclosure
Document
▪ Guide to Life Insurance (from
LIA)
Product ▪ Policy contract ▪ Annual Statement of
Disclosure ▪ Annual Statement of Accounts Accounts
(post-sale) ▪ Annual and Semi-Annual ▪ Annual and Semi-Annual
Report on ILP sub-fund Report
Death Benefit Left to market forces to decide Not applicable

on the appropriate level of death
benefits for ILPs offered in
Singapore
Free-look / ▪ 14 days from the date of ▪ 7 calendar days from the
Cancellation receipt of policy date of signing of the
Period ▪ Insurer entitled to make Purchase Agreement
adjustments to reflect ▪ Relevant person entitled to
changes in market values of an adjustment to reflect
underlying assets the change in market
values of the units held by
the investor
Treatment of Refer to Notice No: MAS 307 (last Refer to Code on Collective
rounding revised on 28 June 2021) Clauses Investment Schemes (last
differences and 77 to 82 revised on 3 March 2022)
compensation
for
computational
errors
Business Specific requirements spelt out Specific requirements spelt
conduct in Notice No: MAS 307 out in the Securities and
requirements Futures Act 2001.
for sub-fund
managers
CHAPTER
07
INVESTMENT-LINKED LIFE INSURANCE POLICIES
(ILPS): TYPES, FEATURES, BENEFITS AND RISKS

Investment-linked Life It is a life insurance policy which provides a combination of protection and
Insurance Policies (ILPs) investment. Premiums buy life insurance protection and investment units in
professionally managed investment-linked sub-funds.
Investment-Linked Sub- It is a professionally managed investment fund, usually by an insurance company
Fund (insurer) or external fund manager. An investment-linked sub-fund pools together
the premiums paid by policy owners with similar investment objectives. The
aggregate sum is then used by the fund to build a diversified investment portfolio
of assets which consists of stocks, bonds and other assets according to the
investment objective of the fund. The price of each unit in a fund depends on how
the investments in that fund perform.
Investment-Linked Whole This policy is similar to a traditional Whole Life Insurance policy because it is
Life Insurance Policy designed to provide lifetime coverage. For a regular premium policy, the policy
owner can choose to vary the level of insurance cover.
Investment-Linked Annuity An Investment-Linked Annuity or Variable Annuity policy generates a regular stream
Policy of income for the policy owner for as long as he is alive, or till all units in the policy
have been cashed out.
Features of Investment- • Protection
Linked Policies • Top-ups
• Sub-fund switch
• Partial / full surrender
• Premium holiday
• Riders
These features will be elaborated below.
Protection Since ILPs are developed and distributed by life insurers, the basic and minimum
protection benefit is the death protection. The protection element may take the
form of death (or accidental death) or total and permanent disability.
Top-Ups During the policy term of an ILP, the policy owner has a choice to do a top-up
anytime by investing an additional premium. This top-up can be on a regular or ad
hoc (for a particular purpose) basis. Most insurers have a 100% premium allocation
for top-up premiums.
Sub-Fund Switch This feature enables a policy owner to do a sub-fund switch according to his
personal circumstances. Sub-fund switch is just switching from one investment sub-
fund to another investment sub-fund.
Partial / Full Surrender The policy owner has the right to surrender part or the whole of the units allocated
to him. This is attractive to the policy owner who wants to have easy access to the
sub-funds.
Premium Holiday It is a period when the policy owner does not pay any premium, and yet enjoy the
benefits that are defined in the policy.
16
Differences Between An
ILP And A Traditional Life Traditional Life Insurance
Insurance Policy ILP
Policy
Bonuses The value of the ILP depends For participating whole life and
on the performance of the endowment plans, bonuses
chosen sub-funds. may be payable depending on
the insurer’s profits. Bonuses
are not guaranteed. However,
once they are declared by
the insurer, they become
guaranteed additions to the
sum assured of the plans.
Investment The investment risk is usually There are two categories of
Returns borne entirely by the policy benefits - guaranteed and non-
owner. guaranteed. For guaranteed
benefits, the insurer bears the
investment risk. However, for
non-guaranteed benefits, such
as bonuses, benefits depend
on the performance of the
insurer’s participating sub-
fund.
Premium The amount of the premium The premium amount used
Breakdown used for insurance coverage, for insurance coverage, other
other charges and the charges and investment are
purchase of units are bundled up. They are not
unbundled and transparent. separately identified in the
They are disclosed in the Product Summary and Policy
Product Summary and Policy Contract.
Contract.
Investment The part of your premiums All of your premiums go into
Mandate allocated for the purchase of the insurer’s participating sub-
units will be invested in your fund. The insurer decides on
chosen investment-linked sub- the appropriate investment
fund. The sub-fund is invested portfolio for this sub-fund after
according to its specified taking into account the nature,
investment objective. The term and currency of the
performance of the sub-fund insurer’s overall liabilities.
can be tracked through the The performance of the sub-
daily publication of unit prices. fund will depend not only
upon investment performance,
but also upon other factors,
such as claims experience
(whether this is more or less
than anticipated) and expense
levels.
Offer Price It is the price which the insurer uses to allocate units to a policy when premiums
are paid. It is the price of a unit that is sold to a policy owner. If the offer price is S$1
and the whole S$100 premium is to be applied to buy units, it will, therefore, buy
100 units.
Bid Price It is the price which the insurer will give for the units if the policy owner wishes to
cash in or claim under the policy. It is the price of a unit to be sold by the policy
owner. This is always lower than the offer price. For example, if the bid price is
S$0.95, 100 units can be cashed for S$95.
17
Bid-Offer Spread It is one of the initial charges levied when the policy owner purchases a unit in the
sub-fund. It is a charge made by the insurer to cover its expenses in setting up the
policy. Usually, there is a 5% difference between bid and offer prices, although there
are insurers that charge lesser than this rate. The bid-offer spread is sometimes
called the initial sales charge.
Front-End Loading In a front-end loaded plan, a certain amount of the premiums will be used to help
defray the insurer’s expenses, such as distribution and administration costs in the
early years. These expenses decrease over time.
Back-End Loading Under a back-end loaded plan, 100% of the premiums are allocated to purchase
units from the start. To help insurers defray distribution and administration costs,
back-end charges are imposed if the policy owner wishes to surrender his plan, in
whole or in part, within a certain time.
Forward pricing Forward pricing is the most widely used pricing model in the local insurance
industry. It basically means that the number of units that are purchased from the
underlying investment sub-funds shall be determined by reference to the offer
price established on the next valuation date. In essence, it means that the next
available offer price after the premium has been paid.
Sub-Fund Management A sub-fund management fee is paid to the fund manager for portfolio supervision
Fee and for general management of the sub-fund affairs. Such fee also serves to
compensate the manager for the expenses incurred in providing the relevant
services. There will normally be a sub-fund management charge likely to range from
0.5% to 2% per annum. The level of this charge will depend on the competition, the
type of assets under management, and the profit requirements of the life insurers.
Benefit / Insurance These are charges incurred by the client for the insurer to provide coverage for
Charges certain events like death, total and permanent disability or critical illness, etc.
occurring during the policy period of insurance for the ILP.
Policy Fees These cover the administrative expenses of setting up the policy, as well as the
regular running expenses of administering the policy.
Administrative Charges These cover the initial expenses of the policy. The cost of administration is incurred
largely to provide record-keeping and transaction services.
Surrender Charges Surrender charges or back-end loads are the charges that a client would incur
should he decide to cash out a portion or all of his units before a certain period of
time. This serves to compensate the insurer for the costs incurred in the setup and
the administration of the policy. Surrender charges are usually a percentage of the
total surrender value that a client will be cashing out or surrendering. The charges
usually decrease from the first year onwards.
Dollar Cost Averaging Dollar cost averaging simply means investing the same dollar amount in a sub-
fund at regular intervals, regardless of the sub-fund price fluctuations. By regularly
investing specified amounts of money over a period of time, the policy owner is able
to capitalise on market cycles, by purchasing more units when prices are low and
fewer units when prices are high.
18
Comparison Chart
Between ILPs and Unit Item ILPs UTs
Trusts
Investment ILP sub-funds are subject Subject to requirements
Guidelines to the requirements as as specified in the Code
specified in the Insurance on Collective Investment
Regulations – Insurance Act Schemes and regulated
1966 and Notice No: MAS under the Securities and
307 Futures Act 2001.
Product Disclosure • A Copy Of The Cover Prospectus / Profile
(at point of sale) Page Statement
• Product Summary
• Policy Illustration
• Bundled Product
Disclosure Document
• Guide to Life Insurance
(from LIA)
Product Disclosure • Policy contract • Annual Statement of
(post-sale) • Annual Statement of Accounts
Accounts • Annual and Semi-Annual
• Annual and Semi-Annual Report
Report on ILP sub-fund
Death Benefit Left to market forces to Not applicable
decide on the appropriate
level of death benefits for
ILPs offered in Singapore
Free-look / • 14 days from the date of • Seven calendar days
Cancellation receipt of policy from the date of
Period • Insurer entitled to make signing of the Purchase
adjustments to reflect Agreement
changes in market • Relevant person entitled
values of underlying to an adjustment to
assets reflect the change
in market values of
the units held by the
investor
Treatment of Refer to Notice No: MAS Refer to Code on Collective
rounding 307 (last revised on 28 June Investment Schemes (last
differences and 2021) Clauses 77 to 82 revised on 3 March 2022)
compensation for
computational
errors
Business conduct Specific requirements spelt Specific requirements spelt
requirements for out in Notice No: MAS 307 out in the Securities and
sub-fund Futures Act 2001.
managers
19
Part I Chapter 8. Investment-Linked Sub-Funds
PART I CHAPTER 8
INVESTMENT-LINKED SUB-FUNDS
CHAPTER OUTLINE
1. Purpose And Benefits Of Investment-linked Sub-Funds

2. Structures Of Investment-linked Sub-Funds
3. Definitions Of Investment-linked Sub-Funds
4. Types Of Investment-linked Sub-Funds
5. Investment Strategy Or Policy
6. Switching Facility
7. Monitoring
LEARNING OUTCOMES

 understand the purpose and benefits of investment-linked sub-funds
 understand the two structures of investment-linked sub-funds
 know the definitions and types of investment-linked sub-funds
 understand the investment strategies of investment-linked sub-funds
 understand the switching facility under ILPs
 know how a policy owner can monitor the investment performance of investment-
linked sub-funds
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. PURPOSE AND BENEFITS OF INVESTMENT-LINKED SUB-FUNDS ............................ 3
2. STRUCTURES OF INVESTMENT-LINKED SUB-FUNDS................................................ 3
A. Accumulation Structures ........................................................................................... 3
B. Distribution Structures ............................................................................................... 3
3. DEFINITIONS OF INVESTMENT-LINKED SUB-FUNDS ................................................. 3
A. Mother Fund ............................................................................................................... 3
B. Feeder Fund ................................................................................................................ 3
C. Mirror Fund................................................................................................................. 4
D. Portfolios .................................................................................................................... 4
4. TYPES OF INVESTMENT-LINKED SUB-FUNDS ............................................................ 4
A. Equity Funds ............................................................................................................... 4
B. Fixed Income Or Bond Funds .................................................................................... 4
C. Cash Funds ................................................................................................................. 4
D. Managed Funds.......................................................................................................... 4
E. Property Funds ........................................................................................................... 5
F. Geographically Specialised Unit Funds .................................................................... 5
G. Specialised Unit Funds .............................................................................................. 5
H. Capital Guaranteed Funds ......................................................................................... 5
I. Managed Portfolios .................................................................................................... 6
5. INVESTMENT STRATEGY OR POLICY .......................................................................... 7
A. Managed Fund ........................................................................................................... 7
B. Equity Fund................................................................................................................. 7
C. Bond Fund .................................................................................................................. 7
6. SWITCHING FACILITY .................................................................................................... 7
7. MONITORING ................................................................................................................. 8
1. PURPOSE AND BENEFITS OF INVESTMENT-LINKED SUB-FUNDS
1.1 The benefits of investing in investment-linked sub-funds include:

 diversification of investment portfolio;
 different investment fund options;
 professional expertise;
 ease of transactions;
 liquidity; and
 flexibility
2. STRUCTURES OF INVESTMENT-LINKED SUB-FUNDS
2.1 There are two possible structures of investment-linked sub-funds, namely

Accumulation Structures and Distribution Structures. The comments that follow
in this chapter also apply to unit trusts which are another form of collective
investment schemes.
A. Accumulation Structures
2.2 The investment income of these funds is ploughed (put) back into the fund.
Hence, the unit prices will be enhanced.
B. Distribution Structures
2.3 The investment income of these funds is distributed to the policy owners. The
unit prices will still vary as a result of capital gains or losses. However, the policy
owners will regularly receive income in the form of additional units or dividend
payments.
2.4 The full benefits and risks of ILPs are passed on to the policy owners, regardless
of whether the units are applied, based on the accumulation or distribution
structures.
3. DEFINITIONS OF INVESTMENT-LINKED SUB-FUNDS
3.1 Here are some key definitions that are sometimes used to describe the nature
of a fund or a relationship between funds.
A. Mother Fund
3.2 A mother fund is an existing fund that was incepted at an earlier point in time.
It may eventually be tapped into by subsequent funds.
B. Feeder Fund
3.3 A feeder fund is a fund that feeds into an existing fund (i.e. the mother fund).
Although the size of the feeder fund may actually differ from that of the mother
fund, it taps directly into the mother fund.
3.4 As a result of this, the feeder fund experiences the same level of fluctuation in
terms of unit price movements.
C. Mirror Fund
3.5 Some funds are designed according to an existing fund. A mirror fund follows
closely the composition of an existing fund. The mirror fund will attempt to
duplicate the composition of the existing fund in terms of asset, geographical
and sector allocation, as well as in terms of investment selection.
D. Portfolios
3.6 In order to help investors overcome the complexities of investment selection,

insurers and financial institutions sometimes offer a preset mix of funds to
investors (based on the investor’s risk profile). This preset mix of funds is
referred to as a portfolio.
4. TYPES OF INVESTMENT-LINKED SUB-FUNDS
4.1 Investment-linked sub-funds can be invested in most financial instruments up

to the maximum as allowed by the MAS. Broadly, the types of funds are as
follows:
A. Equity Funds
4.2 These are funds that concentrate their investments in equity assets, which
generally aim for capital appreciation.
B. Fixed Income Or Bond Funds
4.3 These funds invest in corporate bonds, government securities and other forms
of fixed income instruments. The assets of these funds are chosen on the basis
of their income producing characteristics.
4.4 Most risks of fixed income funds include interest rate risk, credit risk and
reinvestment risk.
C. Cash Funds
4.5 These funds are also known as Money Market Funds. They invest only in cash
and its equivalents. As a result, the capital values of these funds are unlikely to
have high volatility.
D. Managed Funds
4.6 These tend to have a "managed" basket of assets, usually comprising a higher
proportion of equities and a lower proportion of fixed income instruments.
Sometimes, property or other assets can be part of the portfolio. They are also
known as Balanced Funds, when there is an apportionment of investments
between equity and fixed income instruments, within a pre-determined range.
E. Property Funds
4.7 These funds invest in properties and property shares. As property is an illiquid
asset, it is not always possible to liquidate the assets quickly, when policy
owners want to sell their units. Hence, property funds normally include a
provision under which unit redemptions, except on death, can be deferred
typically up to 12 months by the fund manager.
F. Geographically Specialised Unit Funds
4.8 Some funds diversify investments over the world or restrict investments to a
particular country or region, for example:
 ASEAN Growth;
 Japan; and
 European.
G. Specialised Unit Funds
4.9 Other funds restrict investments to particular industries or sectors, for example:
 gold;
 finance;
 technology;
 commodities; and
 small capitalisation companies.
4.10 These funds are also known as Sector Funds.
H. Capital Guaranteed Funds
4.11 With Capital Guaranteed Funds, policy owners are offered a combination of
security, as well as investment opportunity. Capital Guaranteed Funds are funds
that promise to return a minimum amount, usually after a certain period of time,
or at some particular points of time.
4.12 In most structures, a significant amount of the funds collected is invested into
fixed income instruments (usually bonds), in order to preserve a portion of the
capital of the policy owners. In order to give potential investment growth to the
funds, the balance of the funds is then used to purchase derivatives (usually
options, which are standardised contracts giving the buyer the right, but not the
obligation, to buy or sell an asset at a specified time and at a pre-set price).
Capital Guaranteed Funds are commonly closed-end funds meaning that they
have a limited subscription period, as well as a fixed maturity date. They are
commonly issued with a tenure (holding period) of around four to seven years.
I. Managed Portfolios
4.13 Managed Portfolios (also known as Risk Rated or Lifestyle Funds) come with a
pre-set mix of funds. Depending on the objective of the portfolios, the
investment manager will then decide on the amount of investment to be put
into an Equity Fund and / or Fixed Income Fund.
4.14 This should not be confused with a Managed Fund, where there is only one
fund and one fund manager. In a Managed Fund, the fund manager decides on
which asset to invest in. With Managed Portfolios, there are potentially multiple
funds and one investment manager. Here, the investment manager decides on
which fund or funds to invest in.
4.15 Table 8.1 shows some of the more common types of funds available along with
an indication of their risk characteristics. The risk classification can only be a
very broad guide, since the risks associated with any fund will depend upon
how, precisely, it is invested. For example, a Bond Fund specialising in low
investment grade bonds will be a high-risk investment. More information on
the risk classification of funds authorised to participate in the CPF Investment
Scheme is available on the CPF website.
Table 8.1: Some Common Types Of Funds And Their Risk Characteristics
Type General Description Risk Category Minimum
Time Horizon1
Equity Funds Primarily invested in Medium to Ten years plus
company stocks with the High
general aim of capital
appreciation
Income, Fixed Invested in corporate Medium Four years
Interest And bonds, government plus
Bond Funds securities and other fixed
income securities
Cash Funds Sometimes known as Low Up to three
Money Market Funds – years
invested in cash, bank
deposits and other
money market
instruments
Balanced Combining equity Medium Four years
Funds investment with fixed plus
interest instruments
Geographically Investments restricted to High Ten years plus
Specialised a particular country or
Funds region
1
The policy owner should check the allocation rate of his ILP as not all premiums may be invested. Also
note that actual returns would depend on the performance of the respective investment-linked sub-
fund(s).
5. INVESTMENT STRATEGY OR POLICY
5.1 Each fund will pursue a publicly stated investment strategy or policy. This
strategy is normally prominently stated in the sales promotion literature. Some
samples described investment strategies are as follows:
A. Managed Fund
5.2 "The objective of this fund is to maximise returns consistent with a portfolio of
70% equities and 30% corporate bonds. The fund is expected to outperform
fixed deposit savings rate in the medium to long term."
B. Equity Fund
5.3 "The strategy of this fund is to maximise capital growth through equities as
listed in the Singapore Stock Exchange. Income will not be a consideration."
C. Bond Fund
5.4 "The fund will invest in investment grade corporate bonds and government
securities denominated in Singapore dollars. It is expected that the fund will
outperform cash deposits in the medium term, and that the capital value will be
relatively secured."
6. SWITCHING FACILITY
6.1 If the insurer offers more than one fund to its policy owners, it will normally
include a switching facility. The switching facility allows a policy owner freedom
to move part or all his money from one fund to another. Such switching usually
does not incur any cost, and the units are transacted at bid-to-bid price. When
selecting or switching an investment-linked sub-fund, it is important that a
policy owner takes his risk profile, investment objective and time horizon into
consideration.
6.2 Normally, a policy owner will be entitled to a limited number of switches in a

year, without incurring charges.
6.3 The switching facility can be very useful in retirement and child education
planning. As the date on which money is required approaches, it is advisable
for policy owners to switch assets in the equity type funds (which are more
variable in returns) to Cash or Fixed Income Funds, where the capital values are
more stable. (Do note that the capital value of a Fixed Income Fund is still
subject to interest rate risk, credit risk and reinvestment risk.)
6.4 Do not confuse fund switching with improper product switching, where the
client is advised to surrender one product and buy another, and such a switch
produces no real benefit to the client. Errant advisers do this to churn extra
commissions. Representatives of financial advisers are prohibited to engage in
such misconduct for their own selfish interests.
7. MONITORING
7.1 A policy owner can monitor the investment performance of investment-linked

sub-funds by checking the unit prices regularly. Unit prices of investment-linked
sub-funds are published in a number of publications, including The Straits
Times, The Business Times and Lianhe Zaobao. Some insurers also publish unit
prices on their websites.
CHAPTER
08
INVESTMENT-LINKED SUB-FUNDS

Accumulation Structures The investment income of these funds is ploughed (put) back into the fund. Hence,
of Investment-linked Sub- the unit prices will be enhanced.
Fund
Distribution Structures of The investment income of these funds is distributed to the policy owners. The unit
Investment-linked Sub- prices will still vary as a result of capital gains or losses. However, the policy owners
Fund will regularly receive income in the form of additional units or dividend payments.
Mother Fund A mother fund is an existing fund that was incepted at an earlier point in time. It
may eventually be tapped into by subsequent funds.
Feeder Fund A feeder fund is a fund that feeds into an existing fund (i.e. the mother fund).
Although the size of the feeder fund may actually differ from that of the mother
fund, it taps directly into the mother fund. As a result of this, the feeder fund
experiences the same level of fluctuation in terms of unit price movements.
Mirror Fund A mirror fund follows closely the composition of an existing fund. The mirror fund
will attempt to duplicate the composition of the existing fund in terms of asset,
geographical and sector allocation, as well as in terms of investment selection.
Portfolios To help investors overcome the complexities of investment selection, insurers and
financial institutions sometimes offer a preset mix of funds to investors (based on
the investor’s risk profile). This preset mix of funds is referred to as a portfolio.
Equity Funds These are funds that concentrate their investments in equity assets, which generally
aim for capital appreciation.
Fixed Income Or Bond These funds invest in corporate bonds, government securities and other forms of
Funds fixed income instruments. The assets of these funds are chosen on the basis of
their income producing characteristics. Most risks of fixed income funds include
interest rate risk, credit risk and reinvestment risk.
Cash Funds These funds are also known as Money Market Funds. They invest only in cash and
its equivalents. As a result, the capital values of these funds are unlikely to have
high volatility.
Managed Funds These tend to have a "managed" basket of assets, usually comprising a higher
proportion of equities and a lower proportion of fixed income instruments.
Sometimes, property or other assets can be part of the portfolio. They are also
known as Balanced Funds, when there is an apportionment of investments between
equity and fixed income instruments, within a pre-determined range.
Property Funds These funds invest in properties and property shares. As property is an illiquid
asset, it is not always possible to liquidate the assets quickly, when policy owners
want to sell their units. Hence, property funds normally include a provision under
which unit redemptions, except on death, can be deferred typically up to 12 months
by the fund manager.
Specialised Unit Funds Funds restrict investments to particular industries or sectors, for example:
• gold;
• finance;
• technology;
• commodities; and
• small capitalisation companies.
20
Capital Guaranteed Funds With Capital Guaranteed Funds, policy owners are offered a combination of
security, as well as investment opportunity. Capital Guaranteed Funds are funds
that promise to return a minimum amount, usually after a certain period of time, or
at some particular points of time.
Managed Portfolios They are also known as Risk Rated or Lifestyle Funds, andcome with a pre-set mix
of funds. Depending on the objective of the portfolios, the investment manager will
then decide on the amount of investment to be put into an Equity Fund and / or
Fixed Income Fund.
Common Types Of
Funds And Their Risk Minimum
Characteristics Risk
Type General Description Time
Category
Horizon
Equity Funds Primarily invested in company Medium Ten years
stocks with the general aim of to High plus
capital appreciation
Income, Fixed Invested in corporate bonds, Medium Four years
Interest And government securities and plus
Bond Funds other fixed income securities
Cash Funds Sometimes known as Money Low Up to three
Market Funds – invested in years
cash, bank deposits and other
money market instruments
Balanced Funds Combining equity investment Medium Four years
with fixed interest instruments plus
Geographically Investments restricted to a High Ten years
Specialised particular country or region plus
Funds
Switching Facility The switching facility allows a policy owner freedom to move part or all of his
money from one fund to another. Such switching usually does not incur any cost,
and the units are transacted at bid to bid price. When selecting or switching an
investment-linked sub-fund, it is important that a policy owner takes his risk profile,
investment objective and time horizon into consideration. Normally, a policy owner
will be entitled to a limited number of switches in a year, without incurring charges.
21
Part I Chapter 9. Investment-Linked Life Insurance Policies: Computational Aspects
PART I CHAPTER 9
INVESTMENT-LINKED LIFE INSURANCE
POLICIES: COMPUTATIONAL ASPECTS
CHAPTER OUTLINE
1. Introduction
2. Interpreting The Timeline – Growth Rate
3. Death Benefit
4. Allocation Rates – How Premiums Are Allocated To Purchase Units
5. Mortality Charges
6. Computation Of Units To Be Allocated
7. Withdrawal Benefit
8. Surrender Benefit
9. Return On Gross Premium
Appendix 9A - The Time Value Of Money Concept
LEARNING OUTCOMES

 know how to interpret the timeline and growth rate
 explain the four methods of computing the death benefit
 understand and compute how premiums are allocated to purchase units
 understand and calculate the mortality charges
 understand and calculate the units to be allocated
 calculate the number of units upon withdrawal
 calculate the surrender value
 calculate the return on gross premium
 understand the time value of money concept
 know how to use the future value interest factor table
 calculate the future and present values of a single sum
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. INTRODUCTION .............................................................................................................. 3
2. INTERPRETING THE TIMELINE – GROWTH RATE ........................................................ 3
3. DEATH BENEFIT ............................................................................................................. 4
A. Comparison Between DB3 And DB4 ......................................................................... 5
4. ALLOCATION RATES-HOW PREMIUMS ARE ALLOCATED TO PURCHASE UNITS ... 6
5. MORTALITY CHARGES .................................................................................................. 6
A. DB3.............................................................................................................................. 7
B. DB4 .............................................................................................................................. 7
6. COMPUTATION OF UNITS TO BE ALLOCATED ........................................................... 7
A. Application Of Premium ............................................................................................ 8
B. Top-ups ..................................................................................................................... 11
7. WITHDRAWAL BENEFIT ............................................................................................... 12
8. SURRENDER BENEFIT.................................................................................................. 12
9. RETURN ON GROSS PREMIUM .................................................................................. 13
Appendix 9A ...................................................................................................................... 14
1. INTRODUCTION
1.1 In this chapter, we will be discussing the time value of money (TVM) concept
and the computational aspects of Investment-linked Life Insurance policies
(ILPs). We will cover the following computations in this chapter:
 Death benefits;
 Allocation rates;
 Mortality charges;
 Premium allocated – Number of units purchased;
 Top-up – Number of units allocated;
 Withdrawal and surrender; and
 Return on gross premium.
1.2 The TVM concept is used by insurance companies to make decisions daily.
Representatives of financial advisers need to understand the TVM concept, as
it is used in Traditional Life Insurance policies, Investment-linked Life Insurance
policies, etc., and they can then better explain these products to their clients.
1.3 It is important to first understand the TVM concept which is covered in

Appendix 9A, as this concept is used throughout this chapter. However, in this
Appendix, we will provide only the foundational knowledge on time value of
money. There are more complex and advanced calculations relating to time
value of money found in other SCI programmes, such as the Chartered Financial
Consultant (ChFC) programme.
2. INTERPRETING THE TIMELINE – GROWTH RATE
2.1 Before proceeding to see how ILPs work, you need to understand the concept
of growth by examining the timeline. Let us look at one example.
2.2 How many units will be purchased at the beginning of the 4th year of a Regular
Premium ILP, assuming that the growth rate is 6% per annum and that the
regular premium is S$2,000 per annum?
1 2 3 4 5 6
Start of Year 1 End of Year 3

Bid & Offer Price as at Bid & Offer Price has
inception compounded 3 times
Example 9.1
2.3 Based on the timeline, the offer price at the beginning of the 4th year can be
arrived at as follows:
Year 1 Offer Price (OP) = S$1.50

Bid Price (BP) = S$1.43
Offer Price = Offer Price x (1+i)n

Beginning Of Year 4
= S$1.50 x (1+0.06)3
= S$1.50 x 1.1910
=S$1.79
where i = Growth rate

n = No. of years
Number of units purchased at beginning of 4th year
Regular Premium
=
Offer Price at 4th year
= S$2,000
S$1.79
= 1,117.32 units
3. DEATH BENEFIT
3.1 There are many methods of computing the death benefit payable depending on
the type of ILP purchased. Generally, they can be any one of the following:
 Death Benefit 1 (DB1) = Value of the units remaining in the ILP sub-fund;
 Death Benefit 2 (DB2) = Sum assured as determined by the policy owner;
 Death Benefit 3 (DB3) = Value of the units + Sum assured; or
 Death Benefit 4 (DB4) = Higher of the value of the units or sum assured.
3.2 In this chapter, we will cover only the third and fourth methods of computing
the death benefit, as the first two methods are relative easy to understand.
3.3 Table 9.1 gives a pictorial view of the difference between DB3 and DB4.
Table 9.1: Death Benefit Distinction Between DB3 And DB4

DB3 DB4
Higher of
Death Sum Death Value of
Benefit
Value of
Assured O Sum
Units (u) Benefit Units Assured
(DB) (v) (DB) (u) R (v)
Death Benefit Death Benefit
DB3 = u + v DB4 = higher of (u or v)
where u = value of units at bid price; and

v = sum assured
A. Comparison Between DB3 And DB4
3.4 Let us now take a closer look at the computation of the death benefit between
DB3 and DB4 via Example 9.2 below.
Example 9.2: Computation Of Death Benefit For DB3 And DB4

Number of units remaining in the ILP = 5,000 units
Single Premium = S$10,000
Bid price = S$3.04
Sum Assured = 150% of Single Premium
Using DB3 Method Using DB4 Method
=u + v = Higher of (u or v)
=(Bid price x No. of units in account) + =(Bid price x No. of units in account) OR
(150% x Single premium) [150% x (Single premium)
=(S$3.04 x 5,000) + =(S$3.04 x 5,000) OR
(150% x S$10,000) [150% x S$10,000]
=S$15,200 + S$15,000 = S$15,200 OR S$15,000
=S$30,200 The Death Benefit using Method DB4 is
The Death Benefit using Method DB3 only S$15,200.
is S$30,200.
CONCLUSION: DB3 will yield a higher death benefit because the sum assured
for both cases are the same. A higher sum assured translates to higher
mortality charges.
4. ALLOCATION RATES – HOW PREMIUMS ARE ALLOCATED TO PURCHASE

UNITS
4.1 For Single Premium ILPs, the premium received by the insurer is used to
purchase units after deduction of fees and charges. Thus, there is no
apportionment as the full premium is allocated to purchase units.
4.2 However, for a Regular Premium ILP, allocation rates will apply, particularly to
ILPs which have a front-end load; i.e. fees and charges are deducted before
allocation of units to the policy owner. Let us look at another example (Example
9.3) to see how the allocation rates will apply to a Regular Premium ILP.
Example 9.3: Allocation Of Premium To Purchase Units

Allocation Rates: 15% in policy year 1
30% in policy year 2
50% in policy year 3
100% in policy year 4 to 9
102% thereafter
Assume Regular Premium = S$100 / month
Year Allocation Rate Monthly Premium Allocated To Purchase
Units
1 15% S$15
2 30% S$30
3 50% S$50
4-9 100% S$100
≥ 10 102% S$102
4.3 As seen in Example 9.3 above, in the initial three years, only a small amount of
premium is used to purchase units in the ILP sub-fund. It is only in Year 4
onwards that 100% of the premiums are used to purchase units. We can also
see from this example that from Year 10 onwards, an additional 2% has been
allocated to purchase units.
4.4 Some insurers provide bonus units in the later years to encourage policy
owners to continue with their premium payments.
5. MORTALITY CHARGES
5.1 Mortality charges (or the insurance cover) are dependent on the Death Benefit
method applied. They are charged on a periodic basis (e.g. monthly) and can
be different from the frequency of premium payment.
5.2 Mortality charge for a Regular Premium ILP can be expressed as follows:
Mortality Charge =Annual Cost of Life Cover x Sum Assured

=(S$x per S$1,000) x Sum Assured
where the annual cost of life cover is dependent largely on the age of the life
insured.
A. DB3
q
Monthly Mortality Charge = xv
12
where q = the annual cost of life cover; and

v = the sum assured.
B. DB4
5.3 For DB4 , a portion of the death benefit is met by the value of the units. The
mortality charge will then be based on the excess of the sum assured (v) over
the value of units at (u).
5.4 The Mortality Charge will be:

Monthly Mortality Charge
q
x (v-u) if v>u
12
0 (Zero) if v<u
where q = the annual cost of life cover;

v = the sum assured; and
u = the value of units.
5.5 As the mortality charges are calculated periodically based on the frequency of
premium payment, and are deducted from the premium received, insurers do
allow the policy owner to vary the sum assured over time, subject to
underwriting. Charges for other benefits like critical illness, total and permanent
disability and accidental benefits are also calculated in the same way.
6. COMPUTATION OF UNITS TO BE ALLOCATED
6.1 There are two methods of applying policy fees, administrative charges and
mortality charges, namely:
 to deduct these charges before allocation of units; or
 to deduct these charges after allocation of units.
6.2 The key difference between the two methods is that when fees and charges are
deducted after the purchase of units, it will be subject to the bid-offer spread.
Hence, the number of units that is allocated to the policy owner will be lower.
6.3 In this chapter, we will use the commonly applied method, where the fees and
charges are deducted AFTER units have been allocated.
A. Application Of Premium
6.4 In the next two examples (i.e. Example 9.4 and Example 9.5), we will be
computing how to calculate the number of units that can be purchased, when
the premiums (Single Premium and Regular Premium) are received.
Example 9.4: Single Premium ILP
Assumptions:
All fees and charges are deducted at the commencement date of the policy.
Single Premium = S$10,000

Sum Assured = S$15,000
Offer Price = S$1.50
Policy Fee = S$150
Administrative and mortality charge = 2.5% of Single Premium (in practice

this will normally be dependent on the entry age)
Bid-offer spread is at 5%.
The single premium will be used to purchase units at the effective offer price
on the date that the premium is received.
Based on the above information, the method of calculation is shown below:
Number of units purchased or allocated

Single Premium
=
Offer Price
S$10,000
=
S$1.50
= 6,666.67 units
Bid Price
= (1- bid-offer spread) x Offer Price
= 0.95 x S$1.50
= S$1.43
Administrative and mortality charge
= 2.5% of Single Premium
= 2.5% of S$10,000
= S$250
Number of units to be cancelled for payment of charges

Total fees and charges
=
Bid Price
= S$150 + S$250
S$1.43
= 279.72 units
Hence, the number of units left after the fees and charges are deducted:
= (6,666.67 – 279.72) units
= 6,386.95 units
Example 9.5: Regular Premium ILP
To calculate the number of units that will be purchased at the beginning of

Year 3, assume the following:
Offer Price (Year 1) = S$1.49
Growth Rate = 4% per annum
Regular Premium = S$2,000 per annum
Allocation Rate (Year 3) = 75%
Bid offer spread = 5%
Number of units remaining (end of 2nd year) = 380 units.
Annual Mortality Charge for life cover = S$1.50 per S$1,000
Sum Assured = S$100,000
Monthly Policy Fee = S$5.00
Offer price at beginning of Year 3 (i.e. end of Year 2)

= S$1.49 x 1.042
= S$1.49 x 1.0816
= S$1.61
Bid price at beginning of Year 3 (i.e. end of Year 2)

= S$1.61 x 0.95
= S$1.53
Number of units purchased

75% x S$2,000
=
S$1.61
= 931.68 units
Using Method DB3 Using Method DB4

(where DB3 = u + v) [where DB4 = Higher of (u or v)]
Value of units (u) Value of units (u)
= 380 units x S$1.53 = 380 units x S$1.53
= S$581.40 = S$581.40
A portion of the death benefit is covered by the value of units (u). Mortality
charge is applied to the balance of the death benefit not covered, which for:
Method DB3: is equal to (u + v) - u = v
Method DB4: is equal to higher of (u or v) - u = v - u, as v > u in this
example

=u+v = Higher of (u or v)
= S$581.40 + S$100,000 = Higher of S$581.40 or
= S$100,581.40 S$100,000
= S$100,000
Monthly mortality charge Monthly mortality charge

q q
= xv = x (v-u)
12 12
1
= x S$1.50 x S$100,000 (v) = 1 x S$1.50 x [S$(100,000
12 S$1,000 12 S$1,000
– S$581.40)]
= S$12.50
= S$12.43
Total charges (monthly mortality Total charges (monthly

charge and monthly policy fee) mortality charge and monthly policy
= S$12.50 + S$5.00 fee)
= S$17.50 = S$12.43 + S$5.00
= S$17.43
Number of units to be cancelled Number of units to be cancelled

S$17.50
= = S$17.43
S$1.53 S$1.53
= 11.44 units = 11.39 units
Total number of units remaining Total number of units remaining

= (380 + 931.68 - 11.44) units = (380 + 931.68 - 11.39) units
= 1,300.24 units = 1,300.29 units
B. Top-ups
6.5 Following Example 9.4, we will now compute the number of units that can be
purchased, when there is a top-up of S$5,000 made at the end of the third year
after the policy inception.
Assumption:
Top-up = S$5,000
Growth Rate = 7% per annum
Initial Offer Price = S$1.50
Top-up fee = S$80
Administrative Charge (with mortality charge) for top-up = 1.5% of top-up
premium
Bid-offer spread is at 5% throughout.
Offer price in 3rd year

= S$1.50 x 1.073
= S$1.50 x 1.2250
= S$1.84
Bid price in 3rd year
= S$1.84 x 0.95
= S$1.75
Number of additional units purchased after the top-up
S$5,000
=
S$1.84
= 2,717.39 units
Administrative charge (with mortality charge) for top-up
= 1.5% x S$5,000
= S$75
Total charges for top-up
= S$80 + S$75
= S$155
Number of units to be cancelled
S$155
=
S$1.75
= 88.57 units
Number of units allocated after deduction of charges
= (2,717.39 - 88.57) units
= 2,628.82 units
Total number of units
= Original Units allocated after Single Premium paid + Units after top-up
= 6,386.95+2,628.82
= 9,015.77 units
7. WITHDRAWAL BENEFIT
7.1 The policy owner may make partial withdrawal at any time. However, it is
subject to the minimum balance required to be maintained in the ILP account.
7.2 Assume now that the policy owner wishes to do a partial withdrawal of S$3,000,
and the bid price is S$2. Following the above calculation in Section B,
Paragraph 6.5 of this chapter, the number of units that will be cancelled is:
Withdrawal Amount
Withdrawal Benefit=
Bid Price
= S$3,000
S$2.00
= 1,500 units
Number of remaining units after withdrawal is:

= (9,015.77 - 1,500) units
= 7,515.77 units
8. SURRENDER BENEFIT
8.1 The policy owner is normally allowed to surrender at any time all the units in
the fund at the bid price.
8.2 Following the example in Section B, Paragraph 6.5 of this chapter, the surrender
value can be computed based on the formula below. Assume that the bid price
applicable at the time of surrender is S$2.20, and that there are no surrender
charges, then the surrender value is:
Surrender Value = Number of units in account x Current Bid Price

= 9,015.77 units x S$2.20
= S$19,834.69
9. RETURN ON GROSS PREMIUM
9.1 Return on gross premium is the growth rate of your initial single premium over
a period of time, to provide you with the surrender value at the end of the
period. The rate is measured on a compound interest rate basis. The method
of calculation is shown below.
9.2 Assuming that the Single Premium is S$10,000,
let i be the return on gross premium per annum; and

n be the number of years.
Initial Single Premium (1+i)n = Cash value in n year
S$10,000 (1+i)10 = S$ 17,947.33

S$17,947.33
(1+i)10 =
S$10,000
(1+i)10 = 1.7947
approximately
i 0.06
equals to
9.3 Refer to Table 1 - Future Value Interest Factors For One Dollar at the end of this
Study Text. At Year 10 (i.e. n=10) and Factor 1.7947, the closest factor is 1.7908.
Hence, the interest rate is 6% per annum.
9.4 The return on gross premium per annum in 10 years’ time is 6%.
APPENDIX 9A
THE TIME VALUE OF MONEY CONCEPT
1. THE BASICS OF TIME VALUE OF MONEY
Some people erroneously believe that a dollar is a dollar regardless of time. The fact
is that dollars to be paid or received in different time periods have different values.
A person would prefer to collect rent from the tenant at the beginning of the month
than at the end of the month. A company would choose to maximise the credit period
given by paying the supplier later. This is because people and companies have an
opportunity to earn a return on any money that they have in hand, and generally, the
longer they hold the money, the more they expect to earn on it. So receiving money
earlier or keeping it longer gives an additional opportunity to earn more.
Earning a return on money can be done in many ways, including depositing it with
a bank or investing in a new business or buying shares, although of course, some
methods are riskier than others.
The above examples illustrate the time value of money (TVM). TVM is the concept
that a sum of money will increase over time as a result of earning a return on the
money while it is being held. This also implies that to pay a sum of money in the
future, less than that sum needs to be held now, because of the return that can be
earned on the money being held now.
The TVM concept is used by financial institutions such as

insurance companies to make decisions daily. Insurers use it to
calculate the cost of claim benefits, determine the premiums and
invest the premiums. Insurance involves a legal promise of a
financial benefit in the future in exchange for a policy owner’s
payment of a premium now or at regular intervals in the future. It is important for
insurers to price the premiums correctly as the premium cannot be changed once a
policy is issued, and the contract cannot be cancelled by the insurer if the policy
owner fulfils his obligations.
Representatives of financial advisers need to understand the TVM concept as it is

used in many financial products, such as traditional life insurance policies,
investment-linked life Insurance policies, etc., so that they can then better explain
these products to their clients.
Do note that normally for more complex time value of money problems, a financial
calculator or a spreadsheet would be used to obtain the various values. For simple
problems, a mathematical formula can be directly applied to the data. For the
purpose of this Study Text, only the application of the formula would be discussed.
A calculator would still be useful for this purpose.
The TVM concept can be used to calculate present and future income streams of a
plan, e.g. the value of a series of monthly premium payments. Complex problems
that involve uneven cash flows or payment frequency can also be analysed using the
TVM concept. You should be able to apply this concept into the various investment
decisions or the planning for your clients.
1.1 The Role Of Interest
Interest can be viewed as the cost of “renting” money, and is paid by the
borrower to the lender. We are all familiar with the idea that if you borrow
money from a bank, you will have to pay interest on the loan. When we
deposit money with a bank, we are actually lending our money to the bank,
although we do not usually think of it in this way. In this case, since we are
the lender and the bank is the borrower, the bank pays us interest.
Suppose an investor puts S$5,200 in an account that

pays 6% interest per year. The interest earned will be
derived by multiplying the principal by the interest rate
as shown below:
Interest earned = S$5,200 x 6%

= S$5,200 x 0.06
= S$312
1.1.1 Simple Interest Versus Compound Interest

There are two ways of computing interest. Simple interest is
computed by applying an interest rate to only an original principal
sum. Compound interest is computed by applying an interest rate
to the total of an original principal sum and interest credited to it in
earlier time periods.
To illustrate the difference, assume S$100 is deposited in an

account that earns 6% simple interest per year. At the end of each
year the account will be credited with S$6.00 of interest. At the end
of five years, there will be S$130 in the account (if no withdrawals
have been made), as shown in Table 9A.1.
Table 9A.1: Accumulation Of S$100 In Five Years At

6% Simple Interest Per Year
Simple Interest (S$)
Year Principal Interest Ending Balance
Sum
1 100.00 6.00 106.00
2 100.00 6.00 112.00
3 100.00 6.00 118.00
4 100.00 6.00 124.00
5 100.00 6.00 130.00
If instead, the account earns 6% compound interest per year, it will

grow to a larger amount, as shown in Table 9A.2. The extra S$3.83
in the account when it is credited with compound interest is the
interest earned on previous interest earnings.
Table 9A.2: Accumulation Of S$100 In Five Years At

6% Compound Interest Per Year
Compound Interest (S$)
Year Principal Interest Ending Balance
Sum
1 100.00 6.00 106.00
2 106.00 6.36 112.36
3 112.36 6.74 119.10
4 119.10 7.15 126.25
5 126.25 7.58 133.83
For the account which was credited using simple interest, the
balance grows by a constant amount at S$6.00 per year.
For the account which was credited using compound interest, the
balance grows by an increasing amount each year, because interest
is being earned on the interest being accumulated. Assuming no
withdrawal and given the same interest rate, it is clear that
compound interest will result in a higher balance over the end of a
period of time than simple interest.
Note that, in this compound interest example, the interest is

compounded yearly. Interest can also be compounded at shorter
intervals, such as quarterly, or monthly.
For the purpose of this Study Text, we will only look into compound
interest, as this is used far more commonly than simple interest.
1.1.2 Compounding Versus Discounting

The process by which money today, a present value, grows over
time to a larger amount, a future value, is called compounding. The
process by which money due in the future, a future value is reduced
over time to a smaller amount today, a present value, is called
discounting.
Figure 9A.1: Compound Interest As The Link Between Present

Value And Future Value
Dollar
amounts Future Value
($)
Present
Value
Number of periods
Figure 9A.1 shows how compound interest acts as a link between

the present and future value. Compounding may be viewed as a
movement up the curve, while discounting may be viewed as a
movement down the curve. The relationship is a curve rather than
a straight line, reflecting the application of compound interest,
rather than simple interest. When compound interest is used, the
future value rises each year by an increasing amount of money, as
one moves up the curve (or the present value declines by a
decreasing amount of money, as one moves down the curve).
As the number of periods increases, the difference between the

present value and the future value also increases. This is reflected
in the curve constantly moving higher, as it moves to the right. Also,
although not illustrated, the greater the interest rate, the steeper the
slope of the curve will be. Thus, if the interest rate increases, the
difference between the present value and the future value, for the
same time period, also increases.
These relationships among the number of periods (n), the interest

rate (i), the future value of money (FV), and the present value of
money (PV) are the main variables, when considering problems
involving the time value of money and may be summarised as
follows: In compounding, FV moves in the same direction as n and
i (it increases as they increase); In discounting, PV moves in the
opposite direction from n and i (it decreases as they increase).
1.2 The Power Of Compound Interest
The effect of compound interest is extremely powerful, especially in cases

involving high interest rates, or over a long period of time.
Imagine one had deposited S$10 in a bank account 500 years ago, as shown
in Table 9A.3. Assuming the bank pays a 3% compound interest per year, the
account would have grown to about S$26 million at the end of 500 years!
Table 9A.3: Accumulation Of S$10 In 500 Years At

3% Compound Interest Per Year
Year Approximate Ending Balance
(S$)
1511 10
1611 192
1711 3,693
1811 70,985
1911 1,364,237
2011 26,218,772
1.3 Frequency Of Compounding Or Discounting
So far, it has been assumed that the interest rate is applied once per year or,
in other words, interest is compounded annually. However, interest can be
compounded at shorter intervals, and this must also be taken into
consideration, in addition to the interest rate and the length of time.
In many cases, interest rates can be applied semi-annually (twice a year,

quarterly (4 times a year), monthly (12 times a year), or even daily (365 times
a year).
1.3.1 Effective Interest Rates

Nominal interest rates are quoted when the effects of
compounding is not taken into consideration. “Nominal” actually
means “in name only”. For example, when a bank quotes you an
interest rate, it quotes a nominal interest rate, say 6% per annum.
The interest rate that includes the effects of compounding is known

as the effective interest rate. The effective rate of interest is greater
than the nominal rate of interest because of the effects of
compounding.
To illustrate, assume you have borrowed S$500 at a 10% nominal

annual interest. You may expect to pay S$50 in interest. However,
the bank may say that the interest is payable twice a year. This
means that, after six months, you are charged 5%, and then, after
another six months, you are charged the remaining 5%. However,
since the interest is compounded, the calculation is as follows:
Loan repayable after first six months:

S$500 x 1.05 = S$525
Loan repayable after second six months:

S$525 x 1.05 = S$551.25
The loan is repayable in a lump sum of S$551.25 at the end of one

year.
Interest = S$551.25 – $S500 = S$51.25
Effective interest rate = S$51.25 / S$500

= 0.1025 or 10.25%
Notice that the effect of compounding is to make the effective interest rate a
quarter percentage point greater than the nominal interest rate.
The greater the frequency with which compounding or discounting occurs,

the greater is the effect on the growth of a future value or the decline of a
present value. For example, a S$1,000 principal sum that is credited with 8%
compound interest will grow to a future value of S$1,166.40 in two years if
compounding occurs annually. If compounding occurs semi-annually, on the
other hand, it will grow to S$1,169.86; and if compounding occurs monthly, it
will grow to S$1,172.89. Conversely, the present value of S$1,000 due two
years from now is S$857.34 if an 8% annual interest rate is applied once per
year. However, if the discounting is applied semi-annually, the present value
is only S$854.80.
1.4 Measuring The Number Of Periods
The number of periods has to be accurately reflected for

the compounding or discounting process. It greatly
depends on the period when the process started;
whether it is at the beginning or the end of the period.
Refer back to Table 9A.3. In that illustration, the account

balance for year 1511 was S$10. It was assumed that
S$10 was deposited at the beginning of year 1511 and the account balance
was computed at the end of year 1511. Therefore, the first year would have
produced S$0.30 of interest.
On the other hand, if the initial S$10 was deposited at the end of year 1511,
the ending account balance would have been S$10. No interest would have
been earned in that year.
Referring back to Table 9A.3, imagine if the compounding was to start one
year later, the amount available on 2011 is only S$25,455,118 as compared to
S$26,218,772. That is a difference of about S$763,654!
To assist in counting the number of periods (n), it is useful to draw time lines
such as those in Figure 9A.2. The timing should be marked with vertical
arrows along the time line and the timing of unknown dollar values to be
marked with question marks.
For example, the upper time line depicts a case where you need to calculate
the future value (FV) as of the beginning of the sixth period (which is the same
as the end of the fifth period) of a deposit made at the beginning of the first
period. The lower time line depicts a situation in which you need to compute
the present value (PV) as of today (the start of period one) of a series of
payments that will occur at the end of each of the next four periods. Time
lines are useful for all types of time value of money calculations.
Figure 9A.2: Time Lines As A Help In Counting Number Of Periods Of

Compounding Or Discounting
1 2 3 4 5 6 7 8 9 10
$
$ $ $ $
1 2 3 4 5 6 7 8 9 10
?
2. FUTURE VALUE OF A SINGLE SUM
The simplest form of time value of money problems involves obtaining the future
value (FV) from a present value (PV) of a single sum. Determination of this future
value entails a process of compounding a present value with an interest rate (n) for
a certain number of periods (n).
We refer back to Table 9A.1, where a S$100 deposit made today (present value) will
grow to S$133.83 (future value) at the end of five years at 6% compound interest.
This can be related to a common interest-bearing account with a financial institution.
2.1 Basic Time-Value Formula
The basic formula for computing the future value of a single sum of money is
as follows:
FV = PV x (1 + i) n
where: FV = the future value of a single sum

PV = the present value of a single sum
i = the compound annual interest rate, expressed as a decimal
n = the number of periods during which compounding occurs
We will next discuss a simple problem to recognise the need to understand

both conceptually and mathematically, in order to come up with a solution.
For example, assume that S$5,000 is placed on

deposit today in an account that will earn 9%
compound annual interest. What will be the future
value of this sum of money at the end of year 7? The
problem is depicted on a time line in Figure 9A.3.
For purposes of consistency among the time lines

used to depict various types of problems, present
values will be depicted below the line, as will periodic
cash outflows. Future values and periodic cash
inflows will be shown as above-the-line factors.
First, we would come up with the time line, indicating a present value of
S$5,000, a period of seven years, and a question mark (future value) at the
end of year 7.
FV = S$5,000 x (1.09x1.09x1.09x1.09x1.09x1.09x1.09)
= S$9,140.20
Typically, shorthand notation is used to express the multiplied interest rates.

For example,
1.09x1.09 = 1.092
1.09x1.09x1.09 = 1.093
1.09x1.09x1.09x1.09 = 1.094
1.09x1.09x1.09x1.09x1.09 = 1.095
and so on. The superscript – the small, raised number at the end – means “the
power of.” In the example above, 1.09 is multiplied by itself the number of
times indicated by the superscript, so that 1.09 to the seventh power is written
as 1.097 and means 1.09x1.09x1.09x1.09x1.09x1.09x1.09.
The basic time-value formula can also be used to compute the solution as
follows:
FV = PV x (1 + i)n
= S$5,000 x 1.097
= S$5,000 x 1.828039
= S$9,140.20
Figure 9A.3: Time Line Depiction Of FV Problem
1 2 3 4 5 6 7 8 9 10
$5,000
The time line also illustrates the basic trade-off present in all time value of
money problems. Here, the trade-off is a cash outflow today (the deposit
shown below the time line) for a larger cash inflow later (the account balance
at the end of the seventh year, shown above the time line).
Using the formula, what would happen to the FV if the value of i or n were to
be increased? In either case, (1 + i)n would be larger than 1.828039 and when
multiplied by S$5,000 the FV would be larger than S$9,140.20. That is, future
value increases as the interest rate or the number of years increases, and it
falls as either of them is lowered. Graphically, it had been shown earlier in
Figure 9A.1.
For instance, if the interest rate in the above example is increased to 10%:
FV = PV x (1 + i)n
= S$5,000 x 1.107
= S$5,000 x 1.948717
= S$9,743.59
However, if the interest rate in the above example is decreased to 5%:
FV = PV x (1 + i)n
= S$5,000 x 1.057
= S$5,000 x 1.4071
= S$7,035.50
2.2 Using A Future Value Interest Factor (FVIF) Table
A future value interest factor (FVIF) is a factor equal to the future value of a
S$1 sum after a given number of compounding periods at a given interest
rate. You can multiply the present value of a sum by these factors to
determine the future value. The method of finding the right factor to use in a
FVIF table is fairly simple. For example, the future value interest factor for a
2% interest rate compounded for two periods is 1.0404 This is found as
follows:
Refer to the Table 9A.4 below which shows a section of the FVIF table. Notice
the shaded number in Table 9A.4. It is at the point where the two periods (n=2)
row intersects the 2% column. It can be seen that the FVIF is 1.0404. The FVIF
table is available at the end of this Study Text as Table 1 Future Value Interest
Factors For One Dollar.
Table 9A.4 Future Value Interest Factors For One Dollar
FVSS Factor = (1 + i)n where i = rate and n = periods
i= 0.5% 1% 1.5% 2% 3%
n=1 1.0050 1.0100 1.0150 1.0200 1.0300
2 1.0100 1.0201 1.0302 1.0404 1.0609
3 1.0151 1.0303 1.0457 1.0612 1.0927
We will look at another example. Assume that you have placed S$100,000 in
a single premium policy with a maturity value of S$103,000 at the end of Year
3. Calculate the annual compound interest rate.
Using the Time Value formula;
Initial Single Premium (1 + i)n = Maturity value at end of Year 3

S$100,000 (1+i)3 = S$103,000
(1+i)3 = 1.03
Using Table 9A.4, the closest factor is 1.0303. Hence, the interest rate is close
to 1% per annum.
3. PRESENT VALUE OF A SINGLE SUM
We now reverse the question to find out the sum of money needed today if we were
able to assume the future amount needed.
For example, assume that in four years’ time, you will need S$100,000 as a
downpayment for your new house. How much money should you have today in an
account which earns 4% compound interest in order to reach S$100,000 in four
years?
3.1 Using The Time-Value Formula
You learned earlier that FV can be calculated using the formula:
FV = PV x (1 + i)n
By rearranging the formula above, the formula for present value (PV) is as
follows:
 1  FV
PV = FV ×  =
n 
 (1 + i)  (1 + i)
n
Figure 9A.4: Time Line Representation Of PV Problem
S$100,000
1 2 3 4 5 6 7 8 9 10
Figure 9A.4 shows a problem in which you are asked to determine the present
value of a S$100,000 single sum due in four years.
If you can earn 4% compound interest, you should set aside today an amount
of S$85,477.39 as calculated below:
 1  S$100,000 S$100,000
PV = S$100,000 ×  =
 =
 (1.04 ) (1.04 )
4 4
 1.1699
= S$85,477.39
This amount, accumulating at 4% compound annual interest, will grow to the

S$100,000 needed in four years.
Note the effect of a change in i or n on PV. If either of these is increased, the

denominator of the formula increases and the resulting PV declines. In the
example above, if the interest rate is increased to 5%. the present value
decreases to S$82,270.67 as calculated below:
 1  S$100,000 S$100,000
PV = S$100,000 ×  = =

 (1.05 ) (1.05 )
4 4
 1.2155
= S$82,270.67
On the other hand, a decrease in either i or n, will cause PV to rise. For

instance, if the S$100,000 is needed in three years’ time instead of four years,
and the interest rate remains at 4%, the present value increases to
S$88,896.79 as calculated below:
 1  S$100,000 S$100,000
PV = S$100,000 ×  = =

 (1.04 ) (1.04 )
3 3
 1.1249
= S$88,896.79
We can see that this is logical: If we can earn a higher rate of interest, then we
do not need as much money now. Similarly, if we have a shorter period over
which we can earn interest, we need to start with more money.
CHAPTER
09
INVESTMENT-LINKED LIFE INSURANCE POLICIES:
COMPUTATIONAL ASPECTS

Allocation Rates - How • For Single Premium ILPs, the premium received by the insurer is used
Premiums Are Allocated to purchase units after deduction of fees and charges. Thus, there is no
To Purchase Units apportionment as the full premium is allocated to purchase units.
• For a Regular Premium ILP, allocation rates will apply, particularly to ILPs which
have a front-end load; i.e. fees and charges are deducted before allocation of
units to the policy owner.
Mortality Charges Mortality charges (or the insurance cover) are dependent on the Death Benefit
method applied. They are charged on a periodic basis (e.g. monthly) and can be
different from the frequency of premium payment.
Computation Of Units To Two methods of applying policy fees, administrative charges and mortality charges,
Be Allocated namely:
• to deduct these charges before allocation of units; or
• to deduct these charges after allocation of units.
Withdrawal Benefit The policy owner may make partial withdrawal at any time. However, it is subject to
the minimum balance required to be maintained in the ILP account.
Surrender Benefit The policy owner is normally allowed to surrender at any time all the units in the
fund at the bid price.
Return On Gross Premium Return on gross premium is the growth rate of your initial single premium over a
period of time, to provide you with the surrender value at the end of the period.
The rate is measured on a compound interest rate basis.
Time Value Of Money TVM is the concept that a sum of money will increase over time as a result of
(TVM) earning a return on the money while it is being held. This also implies that to pay a
sum of money in the future, less than that sum needs to be held now, because of
the return that can be earned on the money being held now.
The TVM concept can be used to calculate present and future income streams of a
plan, e.g. the value of a series of monthly premium payments. Complex problems
that involve uneven cash flows or payment frequency can also be analysed using
the TVM concept.
The Role Of Interest Interest can be viewed as the cost of “renting” money, and is paid by the borrower
to the lender.
If someone borrows money from a bank, he will have to pay interest on the loan.
When he deposits money with a bank, he is actually lending his money to the bank,
although he does not usually think of it in this way. In this case, since he is the
lender and the bank is the borrower, the bank pays him interest.
Simple Interest It is computed by applying an interest rate to only an original principal sum.
Compound interest It is computed by applying an interest rate to the total of an original principal sum
and interest credited to it in earlier time periods.
Compounding The process by which money today, a present value, grows over time to a larger
amount, a future value, is called compounding.
Discounting The process by which money due in the future, a future value is reduced over time
to a smaller amount today, a present value, is called discounting.
Nominal interest rates Nominal interest rates are quoted when the effects of compounding is not taken
into consideration. “Nominal” actually means “in name only”. For example, when
a bank quotes you an interest rate, it quotes a nominal interest rate, say 6% per
annum.
22
Effective Interest Rates The interest rate that includes the effects of compounding is known as the effective
interest rate. The effective rate of interest is greater than the nominal rate of
interest because of the effects of compounding.
Basic Time-Value Formula The basic formula for computing the future value of a single sum of money is as
follows:
FV = PV x (1 + i) n
where: FV = the future value of a single sum
PV = the present value of a single sum
i = the compound annual interest rate, expressed as a decimal
n = the number of periods during which compounding occurs
Future Value Of A Single The simplest form of time value of money problems involves obtaining the future
Sum value (FV) from a present value (PV) of a single sum. Determination of this future
value entails a process of compounding a present value with an interest rate (n) for
a certain number of periods (n).
Present Value Of A Single It is to find out the sum of money needed today if we were able to assume the
Sum future amount needed.
Formula for Present Value
1 FV
PV = FV x ((1 + i) ) = (1 + i)
n n
23
Part I Chapter 10. Annuities and Other Life Insurance Products
PART I CHAPTER 10
ANNUITIES AND OTHER LIFE INSURANCE
PRODUCTS
CHAPTER OUTLINE
1. What Is CPF LIFE?

2. How Do Annuities Work?
3. Types Of Annuities
4. Variations Of Annuity Policies
5. Benefits And Limitations Of Annuities
6. Other Life Insurance Products
LEARNING OUTCOMES

 understand what annuities are and how they work
 explain the two main types of annuities
 describe the variations of annuities based on their contract provisions
 discuss the benefits and limitations of annuities
 understand what universal life are, how they work, benefits and limitations
 understand the differences between universal life and whole life insurance
 understand the function, benefits and limitations of premium financing
CONTENTS
CHAPTER OUTLINE ......................................................................................................... 1
1. WHAT IS CPF LIFE?..................................................................................................... 3
A. CPF LIFE Plans ........................................................................................................ 3
2. HOW DO ANNUITIES WORK? .................................................................................... 6
3. TYPES OF ANNUITIES................................................................................................ 7
A. Immediate Annuities .............................................................................................. 7
A1. Before The Annuity Payments Commence .................................................... 7
A2. After The Annuity Payments Commence....................................................... 7
A3. Reasons Why People Buy Immediate Annuities ........................................... 8
B. Deferred Annuities ................................................................................................. 8
4. VARIATIONS OF ANNUITY POLICIES.......................................................................10
A. Payout Options ......................................................................................................10
A1. Life Annuities..................................................................................................10
A2. Temporary Annuities .....................................................................................12
B. Bonus Entitlement.................................................................................................13
C. Number Of Lives Covered ....................................................................................13
C1. Single Life Annuity .........................................................................................14
C2. Joint Life Annuity ...........................................................................................14
C3. Joint And Survivor Annuity ...........................................................................14
D. Increasing Rate Annuity........................................................................................15
5. BENEFITS AND LIMITATIONS OF ANNUITIES ........................................................15
6. OTHER LIFE INSURANCE PRODUCTS......................................................................15
A. Guaranteed Income ..............................................................................................15
B. Universal Life ........................................................................................................16
B1. Premium Financing ........................................................................................16
1. WHAT IS CPF LIFE?
1.1 Started in 2009 by the Government, the CPF Lifelong Income for the Elderly (CPF
LIFE) is a national longevity insurance annuity scheme that will provide the CPF
member with a monthly payout from his Payout Start Age (currently between 65
and 70 years old), no matter how long he lives. The CPF member’s savings in his
Retirement Account will be used to purchase a CPF LIFE annuity.
CPF LIFE is an insurance product, which helps to protect members against the
risk of running out of retirement savings, so that they may continue receiving
monthly retirement income no matter how long they live. CPF LIFE addresses
the dispersion of life expectancy – although some people live longer and some
shorter, members do not have to worry that they will outlive their savings.
1.2 CPF members will be automatically included in CPF LIFE if they are Singapore
Citizens or Permanent Residents born in 1958 or after, and have at least S$60,000
in their Retirement Account when they start their monthly payouts1.
1.3 A CPF member who is not automatically included in CPF LIFE can apply to join
CPF LIFE anytime between his Payout Eligibility Age (currently 65 years old) and
one month before he turns 80 years old.
A. CPF LIFE Plans
1.4 There are currently three CPF LIFE plans for CPF members to choose from – the
LIFE Escalating Plan, the LIFE Standard Plan and the LIFE Basic Plan. The plans
differ in terms of the monthly payout the CPF member would receive.
Each CPF LIFE plan provides different types of monthly payouts to cater to
members with different retirement income needs. Members can choose a CPF
LIFE plan based on their desired retirement lifestyle. Members should consider
the impact of inflation on their retirement expenses when selecting their CPF
LIFE plan – whether they wish to maintain their lifestyle with rising prices or
adjust their lifestyle and buy less as prices rise. The CPF LIFE Escalating Plan
monthly payouts will increase by 2% every year to protect against inflation.
1.5 Members can choose their CPF LIFE plan any time they are ready to start their
payouts from their Payout Eligibility Age to age 70. Members who do not choose
a plan will be placed on the LIFE Standard Plan, which is the default plan.
1
Members who turned 55 between 1 Jan 2013 and 30 Apr 2016 with at least S$40,000
in their Retirement Accounts at age 55 will also be auto included in CPF LIFE. Their
payouts will also automatically start at age 65 if they do not defer starting payouts at a
later age (up to age 70).
Source: CPF website
1.6 The CPF LIFE Escalating Plan provides payouts that increase by 2% each year to
protect members against rising prices. Escalating Plan payouts start lower initially
but will eventually be higher than Standard Plan and Basic Plan payouts. This
helps member to generally keep his standard of living even as things become
more expensive in their retirement years.
1.7 The CPF LIFE Standard Plan provides level payouts. It is suitable for people who
are willing to cope with rising prices in the years ahead by buying less and living
a more modest lifestyle. Payouts start higher than the Escalating Plan if a member
joins with the same CPF LIFE premium, but will remain the same for the rest of his
life and will eventually be lower than Escalating Plan payouts.
1.8 Unlike the CPF LIFE Standard Plan that gives higher and level monthly payouts,
Basic Plan2 monthly payouts are lower and will get progressively lower when
combined CPF balances eventually fall below S$60,000. This is because the extra
interest earned on the first $60,000 of members’ combined CPF balances is
credited to the Retirement Account (RA) and paid as part of their monthly payouts.
As balances fall due to payouts, the extra interest earned and subsequent payouts
will decline as well.
1.9 After deciding on a suitable CPF LIFE plan, the next step is to work out the amount
of monthly payouts the member will need to support his desired retirement
lifestyle. Members can use the CPF LIFE Estimator to find out how much savings
he needs for his desired monthly payouts under his chosen plan. If a member is
short on the retirement savings required, he can consider making cash top-ups
and/or CPF transfers to his Retirement Account, or defer his payouts (up to age
70).
2
Basic Plan is a legacy plan carried over from the time CPF LIFE was first introduced in
2009. Prior to 1 Jan 2013, there were four CPF LIFE plans – CPF LIFE Basic Plan, CPF LIFE
Balanced Plan, CPF LIFE Plus Plan and CPF LIFE Income Plan. Members under legacy
plans can switch to the Standard or Escalating Plan by submitting their request to CPF
Board.
1.10 The table below shows the retirement savings a member needs for different levels
of monthly payouts.
Desired monthly CPF LIFE Savings you Savings you

payout from 65 premium at 65 need at 60 need at 55
(Savings you
need at 65)
$540 - $570 $97,300 $75,900 $60,000
$820 - $870 $154,500 $123,000 $99,400
$960 - $1,030 $184,400 $147,500 $120,000
$1,510 - $1,620 $298,800 $241,600 $198,800
$2,210 - $2,370 $443,100 $360,200 $298,200
Note: These monthly payouts are estimates based on the CPF LIFE Standard
Plan, for members who turn 65 in 2033, computed as of 2023. Payouts may also
be adjusted to account for long-term changes in interest rates or life
expectancy. Such adjustments (if any) are expected to be small and gradual.
Source: CPF website
1.11 To receive a monthly payout of $1,510 - $1,620, a member will need $298,800 in
his Retirement Account (RA) at age 65. A much lesser sum of $198,800 is required
if he sets aside the amount in his RA at 55. This is because CPF interest rates of
up to 6%3 will help him grow his savings through compound interest.
1.12 The CPF LIFE premium and payout levels are determined by an independent
actuarial consultant. They depend on factors such as:
(a) Gender;
(b) Age;
(c) CPF interest rates; and
(d) Mortality rates
1.13 While CPF LIFE payouts are designed to be stable, the monthly payouts are not
fixed. The payout amount will be reviewed annually. The CPF Board may adjust
the payout owing to changes in the mortality experience, interest rate and
transactions in the member’s Retirement Account balance. This will ensure that
the CPF LIFE annuity fund is sustainable in the long run.
3
Based on the current 4% interest rate floor on Special, MediSave and Retirement
Account monies.
Members can choose to start their payouts anytime between their Payout
Eligibility Age and age 70. For every year of deferred payouts, their CPF LIFE
monthly payouts will increase by up to 7%. If members have not started their
payouts by age 70, the CPF Board will automatically start payouts, as their
CPF savings are meant to fund retirement and not to be kept indefinitely.
Members who have no immediate use of their monthly payouts after age 70
may invest them outside the CPF system if they wish.
1.14 Since November 2021, CPF LIFE members who receive inflows in RA, such as via
cash top-ups, CPF transfers or housing refunds, will see an automatic increase in
their CPF LIFE monthly payouts. Members started receiving these higher payouts
since July 2022. Prior to this, they had to apply to annuitise these inflows to
increase their CPF LIFE monthly payouts.
1.15 Any remaining CPF LIFE premium balance together with any remaining savings
in the CPF member’s CPF accounts will be paid to the CPF member’s beneficiaries,
according to his CPF nomination.
1.16 For more details of the CPF LIFE scheme and eligibility requirements, please refer
to the CPF website at: www.cpf.gov.sg.
2. HOW DO ANNUITIES WORK?
2.1 The annuity owner (who is usually the annuitant, i.e., the recipient of the periodic
benefit payout) makes a single premium or a series of premium payments to the
insurer. If a single premium is paid, it is often referred to as the purchase price or
consideration. The insurer invests the premiums collected to earn interest. If the
annuity remains in force until a specified date, the insurer starts making a series
of payments to the annuitant. The period of time between the first (or single
premium) being paid and the time that the payments to the annuitant starts is
called the accumulation period. These payments are called the annuity income
benefits, and the period of time during which the income benefits are paid is called
the payout period. Figure 10.1 summarises the basic way that an annuity
functions.
Figure 10.1: How Does An Annuity Work?

Payout Period
Accumulation $$$
Period
Annuity Annuitant
Owner $$$ Insurer $$$
Annuity owner pays $$$

premiums to insurer. Insurer invests
premiums. Insurer pays annuity income benefits to
the annuitant (usually the annuity owner).
3. TYPES OF ANNUITIES
3.1 There are two main categories of annuities based on when the annuity payments
begin. These are Immediate and Deferred Annuities. Let us look at each of them
in turn.
A. Immediate Annuities
3.2 Annuities that start paying out (almost) immediately after the policy starts are
called “Immediate Annuities”. The income stream starts immediately one
payment period after the annuity is purchased. For example, if the annuity
payments are monthly, then the payments begin one month after the purchase of
the annuity. Figure 10.2 illustrates how an Immediate Annuity works.
Figure 10.2: How Does An Immediate Annuity Work?
$
PAYOUT PERIOD
Insurer makes payments until the
annuitant dies or for a fixed period.
2011
3.3 Keep in mind that since the annuity payments under an Immediate Annuity start
“immediately”, the purchaser must pay for the entire contract at once, i.e. an
Immediate Annuity must be paid in one lump sum (single premium) upfront.
3.4 You will also need to know what happens if the annuitant dies or decides to
surrender his policy before and after the annuity payments begin.
A1. Before The Annuity Payments Commence
(i) Annuitant Dies

The insurer will usually refund the purchase price with or without interest,
depending on the policy terms.
(ii) Annuity Owner Wishes To Cancel The Policy

The insurer will usually refund the purchase price with or without interest,
depending on the policy terms.
A2. After The Annuity Payments Commence
(i) Annuitant Dies

If survivor or refund benefits are provided, they will be paid to the
beneficiary and the policy will be terminated.
If there is a minimum guaranteed payment period, the payments will

continue until the end of this period, after which the policy will be
terminated.
If no such additional benefits apply or there is no minimum period, then the

policy is terminated and payments cease.
(ii) Annuity Owner Surrenders His Policy

Most insurers will usually pay a surrender value to the annuity owner if he
surrenders his policy during the guarantee period. No surrender is allowed
after the guarantee period (or if there is no guarantee period).
A3. Reasons Why People Buy Immediate Annuities
3.5 An Immediate Annuity gives one peace of mind, because it allows the buyer to
convert a sum of money (the consideration paid for the immediate annuity) into a
regular fixed income that he will receive for the rest of his life contractually, no
matter how long he lives. In this way, the annuitant ensures that he does not
outlive the sum of money.
B. Deferred Annuities
3.6 Deferred Annuities differ from Immediate Annuities in that the annuity payments
begin only on a certain date, usually at least a few years in the future, after the
policy start date.
3.7 The annuities which CPF members can purchase with their CPF Minimum Sum
are examples of Deferred Annuities. The CPF Board allows its members to
withdraw their Minimum Sum to buy Deferred Annuities (immediate annuities are
not allowed) at the age of 55 years for the income stream payments to begin from
the age of 65 years (the applicable draw-down age). From 2013, CPF members
are automatically included to participate in CPF LIFE when they reach the age of
55 years and have at least S$40,000 in the Retirement Account, or have at least
S$60,000 in their Retirement Account when they reach the age of 65 years.
3.8 Figure 10.3 shows how a Deferred Annuity works.
Figure 10.3: How Does A Deferred Annuity Work?
Contract owner pays ten equal premiums for an annuity.
$ $ $ $ $$$ $ $ $ $
$
ACCUMULATION PERIOD
2015
1995 2005
PAYOUT PERIOD
Insurer makes payments

for life or for a limited period.
3.9 Unlike an Immediate Annuity which can be purchased only by way of a single
premium, a Deferred Annuity can be paid by single premium or regular
premiums.
(a) Single Premium

This is the most common way of payment. The insurer will usually specify
a minimum amount (otherwise the resultant annuity will be too small to be
useful).
(b) Regular Premiums

Regular premiums are suitable for those who do not have a lump sum of
money for purchasing an annuity or who wish to pay the premium over,
say, their working years. The annuity owner may pay on a yearly, half-
yearly, quarterly or monthly basis.
3.10 With Deferred Annuities, several possible events may occur during either the
accumulation period or the payout period. Let us look at some of them.
(i) During The Accumulation Period

 Annuity Owner Stops Paying Premiums
An annuity owner may decide to stop paying the premiums. In such a
case, the insurer will either:
– refund the premiums paid (with or without interest) to the annuity
owner; or
– pay a reduced annuity income to the annuitant on the annuity
starting date.
 Annuitant Dies Before Annuity Starting Date
The annuitant may die before the annuity starting date. In such a case,
the insurer will either:
– refund the premiums paid (with or without interest) to the
beneficiary; or
– pay the annuity income to the beneficiary depending on the type of
annuity purchased.
 Annuitant Lives To Annuity Starting Date
If the annuitant is alive on the annuity starting date, the insurer starts
to pay the annuity income to him. This is the most common scenario.
(ii) During The Payout Period

In the event that the annuitant dies after the annuity starting date, the policy
will be terminated, unless a guarantee period or refund benefits are
provided. These are described in section 4 below.
(iii) Reasons Why People Buy Deferred Annuities

It is possible to arrange something similar to a deferred annuity by
accumulating assets in some other way (e.g., through an endowment
policy) and then purchasing an immediate annuity with those assets.
However, sometimes the deferred annuity product offers guarantees or

additional benefits which make the eventual annuity payments more
attractive.
4. VARIATIONS OF ANNUITY POLICIES
4.1 Both of the two broad categories which we have just discussed can have many
variations based on their contract provisions as follows:
 payout options;
 bonus entitlement (i.e. participating or non-participating);
 number of lives covered under the policy; and
 increasing rate annuity.
4.2 The various types of annuities under the two broad categories basically function
in the same way. Let us now look at each of the categories in turn.
A. Payout Options
4.3 There are various ways in which the annuity benefits are paid out.
4.4 Let us begin by looking at Life Annuities.
A1. Life Annuities
4.5 Under a Life Annuity, the payout is guaranteed for life. This is the most common
type of annuity sold and can be sub-divided into two main classes, namely Pure
Life Annuity and Guaranteed Minimum Payout Annuity.
A1A. Pure Life Annuity

4.6 Under this option, the insurer pays income benefits until the annuitant dies,
whatever age that may be. Upon the death of the annuitant, the insurer pays no
further benefits and has no further liability under the contract. Figure 10.4
illustrates how this annuity works.
Figure 10.4: How Does A Straight Life Annuity Work?
Death of
Annuitant
$ $ $ No further payments
Payout Period
4.7 Suppose an annuitant has made a single purchase payment of S$100,000 for an
immediate Pure Life Annuity which provides payments of S$500 monthly. If the
annuitant dies after receiving two years payments (i.e. S$500 x 24 =S$12,000), the
annuitant would have paid S$88,000 more than he received. This possible loss
could dissuade many people from buying an annuity. Insurers recognise this, so
they also provide payout options that guarantee a minimum return, called a
“Guaranteed Minimum Payout Annuity”, which is explained below.
A1B. Guaranteed Minimum Payout Annuity

4.8 This type of annuity guarantees a minimum number of payments (irrespective of
whether the annuitant is alive to receive them), or a refund of the some of the
consideration in the event of the annuitant’s premature death. It is far more
popular than the Pure Life Annuity. However, as part of the premium paid is
applied towards meeting the cost of guaranteeing a minimum amount of benefits,
the periodic income payment will be lower than that of a Pure Life Annuity. Let us
look at the two common types of annuities that guarantee a minimum payout
option.
 Life Annuity With Period Certain

With this option, the insurer also provides annuity payments for as long as
the annuitant lives, but if the annuitant dies before the end of a specified
period (the period certain), the benefits will continue to be paid to the
beneficiary until the end of the period certain. Figure 10.5 illustrates how
this annuity works.
Figure 10.5: How Does A Life Annuity With Period Certain Work?
Scenario 1 Scenario 2
 Period certain has not  Period certain has

expired. expired.
 Annuitant dies.  Annuitant is alive.
Beneficiary receives benefit
Annuitant receives benefit
payments until end of period certain.
payments until he dies.
Scenario 3
 Period certain has expired.
 Annuitant dies.
Benefit payments cease.
 Life Income With Refund Annuity

A Life Income With Refund Annuity also provides annuity payments for as
long as the annuitant lives, but if the annuitant dies before the total
payments made exceed the purchase price, then the insurer pays a refund
to the beneficiary. The refund is equal to the difference between the
purchase price of the annuity and the amount paid out to the annuitant.
Figure 10.6 illustrates how this annuity works.
Figure 10.6: How Does A Life Income With Refund Annuity Work?
 Purchase price has not been fully used up.  Purchase price has
 Annuitant dies. been fully used up.
 Annuitant is alive.
Beneficiary receives a lump sum payment
equal to the difference between the purchase Annuitant receives
price and the total amount paid to the benefit payments until
annuitant. he dies.
Scenario 3
 Purchase price has been fully used up.

 Annuitant dies.
A2. Temporary Annuities
4.9 In contrast to Life Annuities, which continue the annuity for as long as the
annuitant lives, temporary annuities do not guarantee a lifetime income. Instead,
the insurer limits the annuity payment period in various ways.
A2A. Fixed Period Payments

4.10 This product provides annuity payments until the expiry of a specified period or
the annuitant dies, whichever occurs first. Figure 10.7 illustrates how this annuity
works.
Figure 10.7: How Does A Fixed Period Payment Annuity Work?
• Period of payment • Period of payment
is not up yet. expires.
• Annuitant dies. • Annuitant is alive.
Annuity payment ends Annuitant no

and policy terminates. longer receives
any payments.
4.11 Like a Life Annuity, a Fixed Period Payment Annuity can also be issued with a
guarantee period or a refund option.
A2B. Fixed Amount Payment

4.12 This product provides annuity payments until the total payments exceed a
specified maximum amount or the annuitant dies, whichever occurs first. This
product may also have a guarantee period or refund option. Figure 10.8 illustrates
how this annuity works.
Figure 10.8: How Does A Fixed Amount Payment Annuity Work?
Scenario 1
 Maximum amount has not
been used up.
 Annuitant dies.
Benefit payment ceases.
Scenario 2
 Maximum amount been fully used up.

 Annuitant is alive.
4.13 Like a Life Annuity, a Fixed Amount Payment Annuity can also be issued with a
guarantee period or a refund option.
B. Bonus Entitlement
4.14 Annuities can also be classified according to whether they are participating or
non-participating annuities. Participating annuities are entitled to share in the
profits of the insurer’s participative fund, in the form of bonuses. For example, the
bonuses may be credited to the policy yearly and paid out to the annuitant in the
same year. The bonuses usually start after one year of benefits has been paid.
Example 10.1 illustrates how a Participating Annuity works.
Example 10.1: How Does A Participating Annuity Work?
Age Monthly Payments

62 : Receives S$552 per month.
63 : Receives S$563 per month (insurer declares a 2% bonus that year).
64 : Receives S$568 per month (insurer declares a 3% bonus that year)
and so on …
4.15 The monthly payments under a participating annuity fluctuate each year
depending on the bonuses declared, but at no time will they be less than the
minimum guaranteed, which is S$552 as illustrated in the above example.
4.16 Non-participating annuities, which are the most common, do not share in the
profits of the insurer and the annuity payments remain fixed.
C. Number Of Lives Covered
4.17 Annuities can be issued to cover a single life or more than one life. Let us now
look at each of them in turn.
C1. Single Life Annuity
4.18 Under a Single Life Annuity the payment of annuities is dependent on one life.
This is the most common form of annuity.
C2. Joint Life Annuity
4.19 A Joint Life Annuity provides that the periodic benefits will be paid only for as
long as both of two designated annuitants are alive. The payment ends when one
of the joint annuitants dies. Figure 10.9 illustrates how this annuity works.
Figure 10.9: How Does A Joint Life Annuity Work?
Death Of One Of The Annuitants
Payment ends and the surviving

$ $ $ annuitant receives nothing.
Payout Period
C3. Joint And Survivor Annuity
4.20 A Joint and Survivor Annuity, also called a Joint and Last Survivor Annuity,
provides periodic benefits to two or more individuals with financial relationships,
e.g. parents plus a disabled child. Very often though, they are purchased by
couples. The benefits under this annuity continue until both or all the individuals
die. There are many variations of such an annuity. For example, for some Joint
and Survivor Annuities, the periodic benefit amount remains the same after the
first annuitant dies, while for other Joint and Survivor Annuities, the periodic
benefit falls to a certain percentage, often 50%, of the original benefit after the
death of the first annuitant. Figure 10.10 illustrates how a Joint and Survivor
Annuity works.
Figure 10.10: How Does A Joint And Survivor Annuity Work?

Death of Death of
First Annuitant Second Annuitant
No
S$800 S$400 further
payments
Payout Period Payments continue
4.21 In the above example, while both annuitants are alive, they receive one single
payment of S$800 per month. Upon the death of one of the annuitants, the
survivor receives a payment of S$400 per month until he dies. Nothing is payable
after the death of the second annuitant.
4.22 This form of annuity is very rarely offered in Singapore.
D. Increasing Rate Annuity
4.23 An increasing rate annuity increases each year at a certain percentage, e.g. 1% or
2% simple interest. This type of annuity is useful for hedging against inflation, but
is rarely offered.
5. BENEFITS AND LIMITATIONS OF ANNUITIES
5.1 The benefits of annuities are as follows:

(i) Annuity payouts are free from income tax, unless they are received from the
following sources:
 Partnership;
 Supplementary Retirement Scheme (SRS); and
 Annuity policy bought by the employer of the employee, in place of a
pension or other employment benefits payable to him during his
employment or upon retirement.
(ii) They provide guaranteed income.
(iii) Investment returns earned during the accumulation period are tax-free.
(iv) Capital may be guaranteed depending on the type of annuity purchased.
5.2 The limitations of annuities are as follows:

(i) They cannot be used for death protection, and should be purchased only after
provision for premature death is in place;
(ii) They cannot be used to provide for major illness protection;
(iii) Most annuities are weak at mitigating the effect of inflation in the long term;
and
(iv) Usually, there is no attaching benefit rider.
6. OTHER LIFE INSURANCE PRODUCTS
A. Guaranteed Income
6.1 Insurers also offer a form of life insurance policy where the insured pays a
premium for a limited period (accumulation period) and will be guaranteed a
lifetime payout of income. Some insurance plans offer a payout for a certain
period and/or a lump sum cash at the end of the payout period. There are various
classifications as described earlier under annuities or endowment plans.
6.2 This is sometimes marketed as a guaranteed income retirement plan. The

premium of this type of insurance policy is highly dependent on the amount of
the guaranteed income required during the retirement years. The guaranteed and
non-guaranteed returns of such plans depend on the client’s current age, chosen
retirement age, premium payment period and the amount of the income payout.
6.3 These plans, together with CPF Life, provide a steady stream of retirement income
for the client.
B. Universal Life
6.4 Universal Life insurance (UL) is very different from whole life and term products.
While each form of life insurance provides a death benefit to beneficiaries for the
purpose of mitigating financial loss of an incoming earning family member, the
other features are different.
6.5 A whole life insurance contract has level premiums that stay the same for the life
of the policy. It has cash value accumulation and this cash value is guaranteed by
the insurance company once declared.
6.6 ULs do not have minimum cash value guarantees. Their premiums are not level.
They are also not “participating” policies, so the insureds do not have a right to
benefit from the life insurance companies’ participative funds earnings. UL is a
form of life insurance which offers the insured a form of term life cover, as well as
an element for cash value build up. It offers flexibility to the insured in terms of
premium allocation, premium payable, amount of sum assured (subject to the
insurer’s approval), costs and also other extra features, as compared to the
traditional Whole Life Insurance. Some of these extra features include:
(i) Minimum Credit interest

The insurer guarantees an interest rate to the insured for amounts in the
cash value account.
(ii) No-Lapse feature

This feature allows the UL to be in-force even if the cash value of the UL is
zero and the insured is not required to top up any money at all.
6.7 An insured actually has the choice to pay any amount in premium that they wish,
as long as he pays enough to cover the cost of the life insurance. Alternatively,
the cash value account has enough money to cover the cost (all payments
technically first go to the cash value account, and all insurance charges are taken
from the cash value account). Any excess premium gains interest in the cash value
account. As long as the minimum cost of insurance is covered, either by paying
premiums or deducting from the accumulated cash value, the policy will stay in-
force. If the insured does not consistently pay more in premium than the cost of
insurance (mainly owing to higher mortality costs as the insured ages) over the
lifetime of the contract, maintenance of coverage will eventually not be feasible.
6.8 In order for a UL product to be viable, it has to be funded sufficiently early enough
in the contract such that earnings accumulate at greater rates than increasing
costs of insurance. In some countries, the cash value or interest accumulated over
the years enjoy certain tax benefits or concessions.
B1. Premium Financing
6.9 Premium financing is the borrowing of funds from a financial institution to cover
the cost of a policy. The funds borrowed constitute a contractual debt on the
borrower, who usually is the policy owner. While the life insured is alive, the
policy owner is required to pay the interest of the loan to the lender. When the life
insured dies, the lender will recover the loan principal from the sum assured of
the UL. As most ULs will have cash value from Day One of the policy owing to
the lump sum payment received upfront, this Day One cash value provides a
“collateral” which allows premium financing for UL to be carried out.
6.10 Premium financing is not a way to purchase a UL policy in an affordable way. It is

primarily for clients who have substantial illiquid assets but low in liquidity and
who wish to acquire UL policy usually for estate equalisation, wealth replacement
or estate liquidity purpose. Alternatively, premium financing enables a high-net-
worth client to use his cash assets for other investments instead of locking them
into UL. Premium financing allows the financial institution to offer loans for the
premium payment (typically up to 70% to 80% of the first day cash value). This is
illustrated in the Figure 10.11 and Example 10.2 for a UL policy premium of
USD1.1 million.
Figure 10.11: Premium Financing for Universal Life (UL)
Financial Institution
UL Policy With Premium finances about 70% to
premium amount Financing 80% of first day cash
value
Without Premium Insured pays the

Financing remaining premium
amount and manages to
free up 70% to 80% of
first day cash value for
Insured pays full
other uses
premium amount
Example 10.2: How Premium Financing Works
Premium Amount = USD1.1 million

First Day Cash Value = USD$1 million
Financial Institution finances 70% of the First Day Cash Value =70% x USD$1
million = USD$700,000
Insured will pay in cash the remaining amount of USD$400,000 (USD$1.1

million – USD$700,000) and frees up his cash holdings of USD700,000 for
other uses.
6.11 With premium financing, the insured must maintain sufficient funds to pay the
interest. As the policy is now held by the financial institution, failing to make the
interest payment allows the financial institution to have the right to recover the
outstanding balance of the premium financing from the policy assigned. This may
result in the termination of the UL policy and affect the insured’s financial plan.
The insured may not be able to purchase the same plan, with the same premium
amount, owing to his increasing age or changing health condition.
6.12 The insured is still obliged to repay the financial institution the total outstanding
balance due. In this regard, a premium financed UL is a dual edged sword. It can
work well for an insured that needs a large amount of coverage but lacks liquidity.
On the other hand, the insured may be left in a dire state as discussed above.
CHAPTER
10
ANNUITIES AND OTHER LIFE INSURANCE PRODUCTS

CPF LIFE It is an insurance product, which helps to protect members against the risk of
running out of retirement savings, so that they may continue receiving monthly
retirement income no matter how long they live.
CPF Life Plans Three CPF LIFE plans for CPF members to choose from:
• the LIFE Standard Plan – Higher level monthly payouts
• the LIFE Escalating Plan – Monthly payouts that start lower but increases by 2%
yearly
• the LIFE Basic Plan – Lower monthly payouts
Immediate Annuities Annuities that start paying out (almost) immediately after the policy starts are called
“Immediate Annuities”. The income stream starts immediately one payment period
after the annuity is purchased. For example, if the annuity payments are monthly,
then the payments begin one month after the purchase of the annuity.
Deferred Annuities The annuity payments begin only on a certain date, usually at least a few years in
the future, after the policy start date.
Single Premium This is the most common way of payment. The insurer will usually specify a
minimum amount (otherwise the resultant annuity will be too small to be useful).
Regular Premiums Regular premiums are suitable for those who do not have a lump sum of money
for purchasing an annuity or who wish to pay the premium over, say, their working
years. The annuity owner may pay on a yearly, half-yearly, quarterly or monthly
basis.
Life Annuities Under a Life Annuity, the payout is guaranteed for life. This is the most common
type of annuity sold and can be sub-divided into two main classes, namely Pure Life
Annuity and Guaranteed Minimum Payout Annuity.
Pure Life Annuity The insurer pays income benefits until the annuitant dies, whatever age that may
be. Upon the death of the annuitant, the insurer pays no further benefits and has
no further liability under the contract.
Guaranteed Minimum This type of annuity guarantees a minimum number of payments (irrespective
Payout Annuity of whether the annuitant is alive to receive them), or a refund of the some of
the consideration in the event of the annuitant’s premature death. It is far more
popular than the Pure Life Annuity. However, as part of the premium paid is applied
towards meeting the cost of guaranteeing a minimum amount of benefits, the
periodic income payment will be lower than that of a Pure Life Annuity.
Life Annuity With Period With this option, the insurer also provides annuity payments for as long as the
Certain annuitant lives, but if the annuitant dies before the end of a specified period (the
period certain), the benefits will continue to be paid to the beneficiary until the end
of the period certain.
Life Income With Refund A Life Income With Refund Annuity also provides annuity payments for as long as
Annuity the annuitant lives, but if the annuitant dies before the total payments made exceed
the purchase price, then the insurer pays a refund to the beneficiary. The refund is
equal to the difference between the purchase price of the annuity and the amount
paid out to the annuitant.
Temporary Annuities Temporary annuities do not guarantee a lifetime income. Instead, the insurer limits
the annuity payment period in various ways.
Fixed Period Payments This product provides annuity payments until the expiry of a specified period or the
annuitant dies, whichever occurs first.
Fixed Amount Payment This product provides annuity payments until the total payments exceed a specified
maximum amount or the annuitant dies, whichever occurs first. This product may
also have a guarantee period or refund option.
24
Single Life Annuity The payment of annuities is dependent on one life. This is the most common form
of annuity.
Joint Life Annuity A Joint Life Annuity provides that the periodic benefits will be paid only for as long
as both of two designated annuitants are alive. The payment ends when one of the
joint annuitants dies.
Joint And Survivor Annuity Also called a Joint and Last Survivor Annuity, provides periodic benefits to two or
more individuals with financial relationships, e.g. parents plus a disabled child.
Very often though, they are purchased by couples. The benefits under this annuity
continue until both or all the individuals die. There are many variations of such an
annuity.
Increasing Rate Annuity An increasing rate annuity increases each year at a certain percentage, e.g. 1% or
2% simple interest. This type of annuity is useful for hedging against inflation, but is
rarely offered.
Universal Life insurance • ULs do not have minimum cash value guarantees.
(UL) • Their premiums are not level.
• Not “participating” policies, so the insureds do not have a right to benefit from
the life insurance companies’ participative funds earnings.
• A form of life insurance which offers the insured a form of term life cover, as
well as an element for cash value buildup.
• It offers flexibility to the insured in terms of premium allocation, premium
payable, amount of sum assured (subject to the insurer’s approval), costs and
also other extra features, as compared to the traditional Whole Life Insurance.
Minimum Credit interest The insurer guarantees an interest rate to the insured for amounts in the cash value
account.
No-Lapse feature This feature allows the UL to be in-force even if the cash value of the UL is zero and
the insured is not required to top up any money at all.
Premium Financing Premium financing is the borrowing of funds from a financial institution to cover
the cost of a policy. The funds borrowed constitute a contractual debt on the
borrower, who usually is the policy owner. While the life insured is alive, the policy
owner is required to pay the interest of the loan to the lender. When the life insured
dies, the lender will recover the loan principal from the sum assured of the UL. As
most ULs will have cash value from Day One of the policy owing to the lump sum
payment received upfront, this Day One cash value provides a “collateral” which
allows premium financing for UL to be carried out.
25
Part I Chapter 11. Application And Underwriting
PART I CHAPTER 11
APPLICATION AND UNDERWRITING
CHAPTER OUTLINE
1. Life Insurance Proposal Form

2. Basic Principles Of Underwriting
3. Medical And Non-Medical Proposal Forms
4. Other Sources Of Underwriting Information
5. Underwriting Decision
6. Commencement Of Risk
7. General Underwriting Principles For Group Life Insurance
LEARNING OUTCOMES

 understand the purposes and importance, as well as the various sections of a life
insurance proposal form
 understand the principles of underwriting
 differentiate between medical and non-medical proposal forms
 explain the other sources of underwriting information
 understand how an underwriting decision is reached
 know when the risk cover commences under a life insurance policy
 understand the general underwriting principles for Group Life Insurance
CONTENTS
CHAPTER OUTLINE ............................................................................................................1
1. LIFE INSURANCE PROPOSAL FORM ............................................................................ 4
A. Purposes And Importance Of The Life Insurance Proposal Form ........................... 4
B. Contents Of A Proposal Form .................................................................................... 5
B1. Name And Address Of The Insurer ................................................................... 5
B2. Adviser’s Name, Adviser’s Code And Policy Number...................................... 5
B3. Warning Statement ............................................................................................ 5
B4. Particulars Of The Proposed Life Insured ......................................................... 6
B5. Particulars Of The Proposer ............................................................................... 7
B6. Particulars Of The Policy Applied For ............................................................... 7
B7. Declaration Of And Replacement Of Existing Policy(ies) ................................. 8
B8. Family History Of The Proposed Life Insured ................................................... 8
B9. Medical Details Of The Proposed Life Insured.................................................. 8
B10. Remarks………………………………………………………………………………. .9
B11. Confirmation Of Receipt Of Compulsory Documents .................................... 9
B12. Declarations of Beneficial Owners/Payees/Politically Exposed Persons
.............................................................................. ……………………………….9
B13. Common Reporting System .......................................................................... 10
B14. Declaration ..................................................................................................... 10
C. Amendment To Proposal Form ............................................................................... 11
2. BASIC PRINCIPLES OF UNDERWRITING .................................................................... 11
A. Purpose Of Underwriting ......................................................................................... 11
B. Factors That Affect The Risk .................................................................................... 12
B1. Age……………………….... ................................................................................ 12
B2. Occupation........................................................................................................ 12
B3. Physical Condition............................................................................................ 12
B4. Medical History ................................................................................................ 13
B5. Financial Condition .......................................................................................... 13
B6. Place Of Residence ........................................................................................... 13
B7. Lifestyle……...................................................................................................... 13
3. MEDICAL AND NON-MEDICAL PROPOSAL FORMS .................................................. 13
4. OTHER SOURCES OF UNDERWRITING INFORMATION............................................ 14
A. Attending Physician's Report ................................................................................. 14
B. Specialist's Medical Tests ....................................................................................... 14
C. Adviser's Report ...................................................................................................... 15
D. Questionnaires ........................................................................................................ 15
D1. Medical Questionnaires ................................................................................... 15
D2. Occupation And Pastime (Avocation) Questionnaires ................................... 15
D3. Financial Questionnaire ................................................................................... 16
D4. Lifestyle Questionnaire .................................................................................... 16
5. UNDERWRITING DECISION ......................................................................................... 16
6. COMMENCEMENT OF RISK ........................................................................................ 17
7. GENERAL UNDERWRITING PRINCIPLES FOR GROUP LIFE INSURANCE ................ 18
A. Group’s Reason For Existence ............................................................................... 18

B. Group Stability ........................................................................................................ 18
C. Group Size ............................................................................................................... 19
D. Nature Of Group’s Business ................................................................................... 19
E. Employee Classes ................................................................................................... 19
F. Level Of Participation .............................................................................................. 19
G. Age And Gender Within The Group ....................................................................... 19
H. Expected Persistency .............................................................................................. 19
I. Previous Claims Experience ................................................................................... 20
1. LIFE INSURANCE PROPOSAL FORM
1.1 To apply for a life insurance policy, the proposer (also known as the applicant)
must complete a life insurance proposal form (some insurers refer to it as the
“application form”).
1.2 In Singapore, the proposal form used by the insurers must meet the
requirements of the Monetary Authority of Singapore (MAS) and Life Insurance
Association of Singapore (LIA). Most insurers use different proposal forms for
different types of insurance (e.g. one form for traditional life policies, another
form for Investment-linked Life Insurance policies). Some insurers also use
different forms for adult and juvenile proposals, as well as for medical and non-
medical proposals. It may be necessary to use different proposal forms,
because of the different risks involved and for other administrative or
procedural reasons. Merging all the information for different types of insurance
applications into one form will result in an extensively long form, and can
confuse both the proposer and the representative of the insurer.
A. Purposes And Importance Of The Life Insurance Proposal Form
1.3 The proposal form provides the insurer with the primary source of information
about the risk to be insured.
(a) It enables the insurer to identify the proposer and to elicit material
information on the proposed life insured. The insurer will assess the risk
based on the information and will make a decision as to whether to accept
the application and, if so, the terms to be offered.
(b) It provides details on the type of plan and the sum assured that is currently
applied for, as well as the existing insurance policies that the proposed
life insured has.
(c) It provides detailed information on the risk that the insurer is asked to
underwrite, including statements and representations, as to the proposer
and proposed life insured’s occupation, medical history, habits, family
history, etc.
(d) It gives details of the proposer and / or proposed life insured (if they are
different persons), their names and relationship.
(e) It authorises the insurer to obtain information from other medical sources
about the health of the proposed life insured (but some hospitals / clinics
may still require direct authorisation by the proposed life insured).
(f) It enables the underwriter to compute the appropriate premium payable,
and to sift out those risks that are unacceptable to the insurer.
1.4 As you can see, the insurer places great reliance on the information as
contained in the proposal form which will be incorporated in the policy and
forms part of the insurance contract. It forms the basis for when a claim is filed.
B. Contents Of A Proposal Form
1.5 A typical proposal form for an adult applicant contains the following information:
 Name and address of the insurer;
 Adviser’s name, Adviser’s code and policy number;
 Warning statement;
 Particulars of the proposed life insured (if the person applying for insurance
is not the life to be insured);
 Particulars of the proposer;
 Particulars of the policy applied for, e.g. whether it is a Term Insurance or
Endowment Insurance policy;
 Declaration of and replacement of existing policy(ies);
 Family history of the proposed life insured;
 Medical details of the proposed life insured;
 Remarks;
 Confirmation of receipt of compulsory documents;
 Declarations of Beneficial Owners/Payees/Politically Exposed Persons;
 Common Reporting System; and
 Declaration by proposer and / or proposed life insured.
1.6 We shall discuss each of the above items in turn.
B1. Name And Address Of The Insurer
1.7 The name and address of the insurer are printed on the form, so that the proposer
knows which insurer that he is applying for the insurance contract.
B2. Adviser’s Name, Adviser’s Code And Policy Number
1.8 This section of the proposal form is used for the insurer’s administrative
purposes. The Adviser’s Code and Adviser’s Name enable the insurer to identify
and keep track of the source of sale (from agent, bank, broker, or direct sale
without intermediary) and number of policies brought in by each adviser which
results in a policy being issued. It also enables the insurer to pay the
commission to the respective insurance intermediaries. A unique policy
number is allocated by the insurer for each application submitted. The adviser
and the proposer are required to quote this number, whenever they are making
any enquiries pertaining to the proposal form submitted.
B3. Warning Statement
1.9 Insurers are required under Section 23(5) of the Insurance Act 1966 to display a
warning statement prominently in the proposal form to highlight to the
proposer the importance of disclosing accurately all facts which he knows or
ought to know. This is because failure to do so may give the insurer the right to
void the policy (i.e. cancel the policy from inception), and nothing is payable to
the policy owner should he make a claim on the policy. Thus, it is important that
you highlight and explain this to your client before assisting him to complete
the proposal form.
B4. Particulars Of The Proposed Life Insured
1.10 This section of the proposal form asks for the following information:
 title;
 name;
 address;
 telephone numbers (home, office and / or mobile number);
 race;
 nationality;
 place of birth;
 date of birth;
 marital status;
 gender;
 age;
 source of fund
 source of wealth
 tax residency
 employment status and occupation;
 name and address of company which the proposed life insured works in;
 position held;
 exact nature of duties involved; and
 backdated to (if applicable).
1.11 The above information is mainly for identification and administrative purposes. It
gives the insurer a clearer picture of the proposed life insured. It also enables the
insurer and the adviser to know where and how to contact the proposed life
insured when the need arises.
1.12 The nationality and place of birth will have an impact on the insurer’s
underwriting decision in terms of geographical risk.
1.13 Gender and age will be used to determine the premiums to be charged. They are
also factors that are considered by underwriters in their risk assessment.
1.14 The employment status, occupation, position held and estimated annual income
will enable the insurer to assess whether the amount of insurance proposed for is
justifiable and appropriate for the policy being applied. For example, a proposer
who earns a nominal salary is applying for a large sum assured policy, and this
may present the likelihood of moral hazard.
1.15 The name and address of the company in which the proposed life insured works
in, as well as the exact nature of duties involved, are important underwriting
information, as the risk posed by some jobs may warrant a higher premium to be
charged, or may even be uninsurable. Hence, it is important that you get the
proposed life insured to state clearly the exact nature of his work.
1.16 The “Backdated to” section needs to be completed only if the proposed life
insured wishes to backdate (i.e. to have the policy commenced on an earlier date
than the proposal form date) his policy. Most of the time, people backdate their
policy to just before their last birthday, so as to enjoy lower premium rates. Most
insurers allow backdating of a maximum of six months and charge their
premiums on a next birthday basis. You should note that the backdating option
may not be available for certain types of policies, e.g. ILP.
B5. Particulars Of The Proposer
1.17 This section of the proposal form only needs to be completed if the policy
applied for is a third-party policy. For first-party policies, only the Particulars of
the Proposed Life Insured need to be filled up. Typical examples of third-party
policies are: parents who purchase insurance on the lives of their children
(below 16 years of age), or a husband on the life of his wife, or vice versa. For
example, if the parent is the proposer (policy owner eventually) of the policy,
his particulars have to be given in this section.
1.18 You should take note that Section 146(1) and (2) of the Insurance Act 1966
provides that a life policy insuring the life of another, other than the person
effecting the insurance or a person connected with him (a person’s wife or
husband, child or ward being under the age of majority (i.e. 18 years old) at the
time the insurance is effected, and of anyone on whom that person is at that time
wholly or partly dependant) shall be void, unless the person effecting the
insurance has an insurable interest in that life at the time the insurance is effected.
Furthermore, it provides that the policy monies paid under such a policy shall
not exceed the amount of that insurable interest at that time.
1.19 As the information pertaining to this section of the proposal form on the
proposer is applicable to a corporation or an individual, most insurers ask the
same set of questions as those for the proposed life insured, but with the
following additional questions:
 relationship between the proposer and the proposed life insured; and
 if the policy applied for is in respect of a loan / credit facility, to state the
amount of loan outstanding / credit facility given, e.g. Mortgage Reducing
Term Insurance policy.
1.20 Relationship to the proposed life insured is an important piece of information that
will help the underwriter to determine and ensure that insurable interest exists
before the issuance of the policy.
B6. Particulars Of The Policy Applied For
1.21 This section of the proposal form is meant for the proposer to indicate the details
of the policy that he is applying for. He needs to provide his choice of the:
 basic plan;
 sum assured;
 riders to be attached to the policy (if any);
 duration (term) of the policy and riders;
 frequency of premium payment; and
 method of premium payment.
1.22 The above information is important for underwriting purposes. The sum assured
will be used in conjunction with the age to determine whether the proposed life
insured needs to undergo a medical examination. The type of plan and sum
assured applied for are important factors in the risk assessment process.
B7. Declaration Of And Replacement Of Existing Policy(ies)
1.23 This section of the proposal form is a requirement as stipulated in Notice No:
MAS 318. The insurer has to state clearly the disadvantages of replacing a
current policy with a new one. If the proposer has an existing policy, he is
required to provide the details of the existing policy, including the sum assured,
the terms that the policy was offered e.g. extra premium charged, exclusion
imposed or whether they were postponed or rejected. He must also confirm
whether he is purchasing the additional policy, or replacing the current policy
with a new one. The total sum assured of all existing policies, including the
proposed policy, that the proposed life insured has is important to the insurer
in the financial risk assessment process.
1.24 It is important that you explain the disadvantages of replacement of policies to

your client, and get him to provide the correct details of his existing policies.
Such information is meant to help underwriters determine whether there is any
risk of improper switching of products, and whether moral hazard is present.
1.25 Where it is a case of replacement of policy, the insurer of the new policy shall write
to the policy owner informing him of the disadvantages of lapsing his existing
policy, and offering to return premiums paid on the new policy if the policy owner
decides not to replace his existing policy.
B8. Family History Of The Proposed Life Insured
1.26 The proposed life insured is supposed to provide information on his parents and
siblings’ state of health, as well as the age at onset of the illness, current age and
age at death (if applicable). The reason for this is that some illnesses are
hereditary, and that the proposed life insured may contract the illness too. Family
history is an important underwriting factor, especially for Critical Illness Insurance.
B9. Medical Details Of The Proposed Life Insured
1.27 This section of the proposal form is usually divided into two parts.
1.28 The first portion comprises a series of questions meant to find out the proposed
life insured’s medical history and lifestyle.
1.29 The second portion is applicable only to female proposed lives insured. Some
insurers require only these two sections to be completed if the proposed life
insured does not have to undergo a medical examination. The reason for this is
that the same set of questions will be asked in the medical examination proposed
form.
1.30 It is important that the client answers the questions in this section accurately and
truthfully, as the information is critical for the assessment of the risk by the
underwriter.
B10. Remarks
1.31 If the proposed life insured has answered “Yes” to any of the questions pertaining
to his health, he is required to elaborate in this section. You should advise your
client to provide information, such as:
 When was the onset of the illness?
 Has he ever been hospitalised as a result of the illness, or if any surgery
was performed? If so, the relevant dates and address of the hospital / clinic
where he was treated and the name of the attending doctor.
 Is he still receiving medical treatment? If so, what treatment is he
undergoing and what is the name and address of his attending doctor?
 Does he have any medical report? If so, obtain a copy from him and submit
it together with the proposal form to the underwriter.
1.32 By obtaining the above relevant information, you will help to speed up the
underwriting process, as you are giving the underwriter a clearer picture of your
client’s illness. That will help the underwriter to decide on what has to be done
next. Otherwise, in the absence of such additional information on the illness, the
underwriter may need you to make clarifications with your client, and this will
then delay the underwriting process. Depending on the proposed life insured’s
pre-existing condition, the underwriter may require additional health
questionnaires to be answered, or request for a more detailed medical report from
the attending physician of the proposed life insured.
B11. Confirmation Of Receipt Of Compulsory Documents
1.33 This section of the proposal form is meant to highlight to the client that he is
supposed to receive the required documents from you during the sales process,
and that you have explained them to him. These documents are:
 Cover Page;
 Policy Illustration;
 Product Summary;
 Bundled Product Disclosure; and
 “Your Guide To Life Insurance” or “Your Guide to Health Insurance”
(applicable to Health Insurance products).
B12. Declarations of Beneficial Owners/Payees/Politically Exposed Persons
1.34 Under MAS Notice 314, the life insurer is obligated to take measures to help
mitigate the risk of the Singapore life insurance industry from being used for
money-laundering or terrorist financing.
1.35 The ultimate responsibility and accountability for ensuring the life insurer’s
compliance with anti-money laundering and countering the financing of terrorism
(“AML/CFT”) laws, regulations and guidelines rests with the life insurer, its board
of directors and senior management.
1.36 A direct life insurer shall exercise due diligence including verification of identity
when dealing with customers, natural persons appointed to act on the customer’s
behalf, connected parties of the customer and beneficial owners of the customer.
B13. Common Reporting System
1.37 Under the Common Reporting Standard (CRS), which has been in effect since 1
January 2017, Singapore-based Financial Institutions are now required to
establish the tax residency status of all their account holders, and report to IRAS,
the financial account information of account holders who are tax residents of
jurisdictions with which Singapore has a Competent Authority Agreement to
exchange the information.
1.38 Policyholders should provide information and supporting documents to establish

their tax residency status. For accounts opened before 1 January 2017, the
insurers may contact the policyholders to confirm their tax residency status if the
FIs hold information that indicates they could be foreign tax residents. For new
accounts opened on or after 1 January 2017, insurers will use a self-certification
form, to be filled in by policyholders, to collect tax residency information.
B14. Declaration
1.39 This section of the proposal form serves a number of purposes. It requires the
proposer and the life insured to make certain declarations and authorisation. It is
important that you explain and provide the information below to your client.
(i) That by signing on this section of the proposal form, they are confirming
that they have declared all material facts that they are aware of. Highlight
the warning statement about the non-disclosure of material facts. It is
important that you ask them if there are any facts in which they are in doubt
as to whether they are material, and ask them to put them down in the
proposal form if there are any. You should also ask them to go through the
proposal form again to ensure that the information which they have given
is in order.
(ii) That this portion of the proposal form will also serve as an authorisation
from them for the insurer to obtain their medical history from any medical
source. However, you should note that clinics and hospitals may request
for a separate authorisation form to be signed by the proposed life insured
before they release medical information to the insurer.
(iii) That he has 14 days from the date of receipt of the policy to go through it,
and that, if he decides not to take up the policy and returns it within the 14
days’ free-look period, he will be able to receive a refund of the premium
paid, less any cost incurred by the insurer in assessing the risk. However,
he will get a full premium refund if his proposal form is being rejected by
the insurer.
(iv) That undischarged bankrupts are not allowed to purchase new life
insurance policies under the Insolvency, Restructuring and Dissolution Act
2018, without the prior consent of the Official Assignee. As such, some
proposal forms will require a declaration that the person applying for
insurance is not an undischarged bankrupt.
1.40 Having explained all the above important matters to your client, you should then
ask your client to go through the proposal form to confirm that all the answers
given are correct, before asking him and the proposed life insured to sign the
proposal form. Note that neither you nor any other person should sign the
proposal form on behalf of the proposer, even if your client has given you the
authorisation or consent to do so.
C. Amendment To Proposal Form
1.41 Occasionally, your client makes a mistake in the information given in the proposal
form and wants to correct it immediately. When this occurs, you have to get your
client to countersign against the changes that he makes on the proposal form.
1.42 The same practice applies when the insurer discovers an error or omission in the
proposal form. You have to go back to your client to have the changes made and
initialled. Note that any changes in a completed proposal form have to be done
with the proposer’s written approval.
1.43 The same practice also applies if you are completing the proposal form on behalf
of your client. Although this practice is not encouraged, some advisers complete
proposal forms on behalf of their clients, as a form of service for those who may
not be able to complete the form on their own. The risk is that at claims stage
there may be a dispute about whether the adviser entered the correct information,
even if the form has been signed by the client. It is very important that you go
through the answers in the completed proposal form with your client, and where
any changes need to be made, you have to get your client to initial against them
too. This is because once your client signs the form, he has confirmed that the
information you have filled in for him is correct. The result is that, if any mistake
is discovered at the point of a claim, the insurer may have a right not to pay the
claim.
2. BASIC PRINCIPLES OF UNDERWRITING
2.1 The completed proposal form is sent to the underwriter who will assess the risk
to see whether the cover can be granted and, if so, on what terms and conditions.
This process is called “underwriting”.
A. Purpose Of Underwriting
2.2 The main purpose of underwriting is to ensure that the premiums charged
correspond closely with the risk that each proposer presents. Proper underwriting
helps to ensure that the insurer has sufficient funds to pay claims.
2.3 The underwriter also checks to make sure that insurable interest exists in third-
party policies. This is a very important factor, as a policy that is issued without any
insurable interest is not a valid policy.
B. Factors That Affect The Risk
2.4 Normally, underwriters determine the insurability of a proposed life insured based
on a number of factors as follows:
 age;
 occupation;
 physical condition;
 medical history;
 financial condition;
 place of residence; and
 lifestyle.
2.5 We shall discuss each of them in turn.
B1. Age
2.6 Life insurance underwriting is concerned with assessing the risks associated with
mortality. The mortality table shows the probability of a person dying at a
particular age. Age is a significant measure of the likelihood of death, i.e. it is the
point of departure in classifying the proposed life insured for insurance. Each
proposed life insured is placed within the proper age classification, and is then
compared to the norm for that age to determine insurability. However, age alone,
regardless of other factors, may render a person uninsurable, as the insurer may
have an upper age limit above which the insurer will not write insurance on any
basis. For example, most Whole Life Insurance policies offered in Singapore have
last entry age ranging from 65 to 75 years next birthday. This explains why age is
a crucial factor in life underwriting.
2.7 It is customary to accept the proposer’s statement of age, unless there is reason
to believe that it is a misstatement. The adviser must verify the age of the
proposer, as well as that of the proposed life insured, when conducting mandatory
verification of personal particulars via the client’s NRIC (identity card) or passport
(for foreign nationals).
B2. Occupation
2.8 There are many occupations that are known to have an adverse effect on
mortality. As such, the insurer may impose an extra charge on any proposed life
insured engaging in any such occupation, i.e. by charging a higher premium. For
example, statistics show that a person who works in an office is much less likely
to be killed on the job than one who works as a test-pilot. Thus, occupation is an
important factor in determining the proposed life insured’s insurability.
B3. Physical Condition
2.9 Physical condition refers to the proposed life insured’s current health status. The
insurer needs to know whether the proposed life insured is presently in good
health, in order to determine the terms of acceptance.
B4. Medical History
2.10 The proposed life insured’s past health record is just as important as his present
health. Certain types of ailments tend to recur (e.g. asthma) and several of these
can be considered serious enough to affect a proposed life insured’s insurability.
This is why the proposed life insured’s past health record has to be considered.
B5. Financial Condition
2.11 The financial condition or affordability of a proposer is a good indicator of whether

moral hazard exists. Although a person has an unlimited insurable interest in his
own life, the burden to prevent over-insurance rests with the insurer. The insurer
will have to carefully examine the proposer’s financial status, in order to make
sure that family circumstances justify the amount of insurance applied for. It will
also find out whether the amount of insurance applied for bears a reasonable
relationship to the proposer’s income, as well as the purpose of the insurance
coverage applied for. If the proposer applies for a significantly large sum assured
while currently drawing an extremely low salary, the insurer will probably
question the proposer’s intention of purchasing insurance for such a large sum.
2.12 Besides, a proposer who cannot pay the renewal premiums is likely to allow his
policy to lapse, before the insurer can recover its expenses in acquiring the policy.
As such, it is an important consideration in underwriting. In other words, the
insurer is not only interested in preventing over-insurance, but also in keeping the
insurance in force once it is issued.
B6. Place Of Residence
2.13 Where the proposed life insured lives are a secondary factor in underwriting,
because the living condition, healthcare, climate, sanitation and political instability
may increase the risk to be insured.
B7. Lifestyle
2.14 People who have potentially dangerous hobbies or leisure pursuits, such as skin
diving and mountain climbing, will increase the risk to be insured. A proposed life
insured who drinks or smokes also increases the risk. This is why lifestyle is also
an important consideration for underwriting, and there are different premium
rates for smokers and non-smokers, especially policies that provide critical illness
coverage.
3. MEDICAL AND NON-MEDICAL PROPOSAL FORMS
3.1 The majority of life insurance proposal forms are underwritten on a non-medical
basis, i.e. no medical examination is required. Whether a proposed life insured is
required to undergo a medical examination is determined by factors, such as age,
the amount of insurance applying for, medical history, etc.
3.2 Where the proposed life insured is required to undergo a medical examination,
you will have to arrange for him to undergo the medical examination with one of
your insurer’s appointed doctors. The medical examination is conducted using a

prescribed medical examination form that is provided by the insurer and usually
consists of three parts. For the first part, the proposed life insured will need to
answer questions related his past medical history and habits. For the second part,
the examiner will conduct a physical examination on the proposed life insured,
including measurement of the proposed life insured’s build, blood pressure,
physical examination, listening of the heart and respiratory sounds, and also a
dipstick urine test. In the final section, it incorporates the examiner’s opinion and
overall assessment of the proposed life insured.
4. OTHER SOURCES OF UNDERWRITING INFORMATION
4.1 Besides the proposal form and medical reports, underwriters may also ask for the
following additional information. The fees associated with medical examinations
and additional medical tests are normally borne by the insurers, but there may be
exceptions depending on the insurers’ practices.
A. Attending Physician's Report
4.2 An Attending Physician's Report gives the history of the illness(es) that the
proposed life insured has suffered or is still suffering from. It is completed by the
attending doctor who has treated the proposed life insured. In this report, the
attending doctor will be asked to provide details on the proposed life insured’s
medical condition, including the degree of severity of the condition, whether the
condition is well controlled, and the proposed life insured’s compliance to the
treatment / medication prescribed. The attending doctor will also be asked for his
opinion on the prognosis of the proposed life insured’s condition.
B. Specialist's Medical Tests
4.3 These are usually required as routine tests based on the sum assured and age.
They are sometimes requested for clarification of the medical examiner’s findings
or for more insights into the current status of a disclosed impairment.
4.4 These tests include:

(a) Electrocardiogram (ECG)
It produces a tracing of heart rhythms and is required, where a cardiac (heart)
problem has been disclosed or discovered.
(b) Chest X-Ray
It shows the skeletal frame and internal organs in the chest. It is required when
there is a known history of chronic respiratory disease.
(c) Micro-urinalysis
It is an analysis of the constituents of urine, and is used to substantiate a
random finding of abnormal urine dipstick result.
(d) Blood Profile Analysis
This gives information on the blood composition, liver function, kidney
function and lipid concentration.
(e) HIV Antibody Test

This test has become a compulsory requirement for certain types of
occupation and at pre-determined levels of sum assured, say, S$1,000,000
and above for all ages.
C. Adviser's Report
4.5 The adviser is normally required to give a report on the proposer to the
underwriter. This gives information about the means and sources of income of
the proposer, the physical appearance of the proposer, as well as whether the
adviser is related to the proposer in any way. It helps the insurer to detect the
presence of any moral and physical hazards.
D. Questionnaires
4.6 Questionnaires are pre-printed forms designed to extract more information from
the proposed life insured about a particular illness, occupation or hobby, as well
as the proposed life insured’s lifestyle and financial status. There are basically four
types of questionnaires, as follows:
D1. Medical Questionnaires
4.7 There are two basic types of medical questionnaires which are classified
according to whether it is to be completed by the attending doctor or proposed
life insured.
(i) To be completed by the attending doctor
It is usually completed by the attending physician, and sometimes, the
medical examiner for conditions, such as hypertension or asthma.
Questionnaires are also used to find out more about past medical history or
treatment. The medical questionnaire may sometimes be attached to the
Attending Physician’s Report for the doctor’s completion.
(ii) To be completed by the proposed life insured
This type of medical questionnaire is often used for illnesses, such as
diabetes or gastritis, which require strict medical treatment adherence by
the proposed life insured. The form is designed to provide the underwriter
with more information on the proposed life insured’s medical condition and
to enable the underwriter to assess the risk.
D2. Occupation And Pastime (Avocation) Questionnaires
4.8 These questionnaires which are usually completed by the proposed life insured
are needed, either because the underwriter requires more detailed information on
an activity disclosed in the proposal form, or where there is uncertainty as to the
exact nature of an occupation or pastime.
4.9 Such questionnaires are commonly used to find out the exact nature of the
proposed life insured’s job, such as, in the armed forces, as well as the extent of
the proposed life insured’s hobby, e.g. diving activities, etc. The information
provided will help the underwriter to ascertain the degree of risk exposure.
D3. Financial Questionnaire
4.10 The underwriter usually requires this questionnaire when the sum assured
applied for, or the aggregate sum assured that the proposer has with the insurer
is large. It is designed to cover a variety of financial aspects, including the
proposed life insured’s income details and business interest(s). The usage is
determined by the proposed sum assured and the purpose of purchasing
insurance. This questionnaire may be completed by both the proposer and his
other advisers (e.g. lawyer or accountant) with relevant supporting documents,
such as income tax returns or company accounts.
D4. Lifestyle Questionnaire
4.11 This questionnaire is used solely for the purpose of assessing AIDS risk. It is
sometimes requested when the sum assured reaches a certain limit, e.g.
S$1,000,000, or if there is a medical history that indicates a higher AIDS risk. The
underwriter may also require this questionnaire to be completed for certain
classes of occupation, such as masseurs and masseuses.
5. UNDERWRITING DECISION
5.1 Having gathered all the necessary underwriting information, the underwriter then
makes a decision on the proposal received. In the majority of the cases, the
proposal are straight-forward (i.e. no adverse medical history, etc.) and will be
accepted at ordinary rate. To accept a risk at ordinary rate means that the proposer
needs to pay only the premium as stated by the insurer to be a standard risk.
5.2 However, if the mortality risk of a proposed life insured is higher e.g. due to
hazardous occupation or medical condition, the insurer cannot afford to insure
him on the same basis as it insures a standard risk. For such a case, the
underwriter may accept it with any one of the following conditions:
(a) at ordinary rate subject to a lien;
(b) at ordinary rate but subject to a change in plan, e.g. Term Insurance only or
with an additional lien imposed;
(c) at ordinary rate subject to an exclusion to the cover; or
(d) with extra premiums.
5.3 When an underwriter accepts a case with a lien, it means that, in the event of the
death of the life insured within the lien period, the amount payable will be the sum
assured less the amount of lien, which is often expressed as a percentage of the
sum assured. In other words, the lien reduces the liability of the insurer. Imposing
a lien is common for juvenile policies covering very young children (e.g. below
the age of five years).
5.4 For a risk that increases with time, but where deterioration occurs only in the later
part of life, the underwriter will normally accept it at ordinary rate, but restrict the
cover only to a specified duration.
5.5 Acceptance with exclusion is normally used when the proposed life insured is
actually qualified for an ordinary rate, except for a specific impairment or hazard
that markedly increases his mortality. One such example will be diving. By
excluding the particular impairment or hazard, the insurer need not pay any claim
that arises as a result of the excluded risk.
5.6 However, some risks require the charging of a higher premium. The additional
premium to be charged may be a specified percentage of the ordinary premium
rate or flat amount, and it may be for the full term of the policy or only for a
specified period of time.
5.7 Risks with additional terms or premiums imposed are said to be sub-standard
risks.
5.8 However, there are times when the risk is so high that the underwriter has to either
defer (postpone) or even decline (reject) the case. Such risks are said to be
uninsurable.
6. COMMENCEMENT OF RISK
6.1 If the case is accepted on standard terms, the insurer will send the proposer a
letter of acceptance, stating that the cover will be effected upon receipt of the first
premium within a certain time frame (such as 30 days), and that a policy will be
issued to him. If the premium has been paid with the application form, cover starts
immediately upon acceptance, and the policy is issued.
6.2 If the underwriter proposes to accept the case on terms other than standard, the
insurer sends the proposer a letter of conditional acceptance, stating the
proposed sub-standard terms. In this case, the proposer is required to sign and
return the letter and pay the premium (or additional premium) within a limited
time frame, in order for the cover to be effected and the policy to be issued to him.
The policy will contain an endorsement or appendix specifying the additional
terms.
6.3 For cases that are deferred or declined, the insurer will return any pre-paid
premiums, without interest, together with a letter of declination to the proposer.
7. GENERAL UNDERWRITING PRINCIPLES FOR GROUP LIFE INSURANCE
7.1 The selection process for Group Life Insurance differs markedly from that for
individual plans. The underwriter assesses the risk based on a number of factors
which include the:
 group’s reason for existence;
 group stability;
 group size;
 nature of group’s business;
 employee classes;
 level of participation;
 age and gender within the group;
 expected persistency; and
 previous claims experience.
A. Group’s Reason For Existence
7.2 The first factor that the underwriter will look out for is to make sure that the reason
for the existence of the group applying for the group coverage must be of some
sort of purpose (e.g. operating a business as in the case of an employer) other
than for purchasing insurance. This is to reduce any anti-selection from the group.
7.3 In addition, the group members must be actively at work on a full-time regular
basis and have fairly predictable incomes.
7.4 Examples of groups eligible for Group Life Insurance include:

 employer-employee groups;
 multiple-employer groups, such as trade associations and labour unions;
 members of professional associations or affinity groups, such as social
recreation clubs; and
 debtor-creditor groups which generally consist of a credit granting
institution, such as a bank and its debtors.
B. Group Stability
7.5 Group stability is an important consideration because usually high turnover rate
in the group membership produces high administrative costs for the insurer. New
members must be enrolled in the group programme, and existing members who
have left the company must be removed from the programme. On the other hand,
a group may become a greater underwriting risk each year, if it has almost no
change in membership over a period of time, e.g. five years, where the members
in the group become older, without any new and presumably younger members
being added to the group.
7.6 In other words, an ideal group for insurers is one in which there is a steady flow
of new members to replace those who leave the group, but not a massive influx
or outflow of members.
C. Group Size
7.7 Group size is important as it provides a better spread and

diversification of the risk. It also allows for more efficient administration and lower
costs. However, the gender distribution, age profile and the sum assured of each
insured member are factors directly affecting the premium. The minimum group
size for group insurance is usually three or five, although it varies from insurer to
insurer.
D. Nature Of Group’s Business
7.8 The nature of a group’s business is important because some businesses tend to
be more risky, while there are some that may even be uninsurable. A group from
an adventure sports company is an example of a high-risk group.
7.9 The economic prospects of the industry in which the business operates, as well
as the strength and financial conditions of the business itself, are also important
factors, as they will affect the sustainability and growth potential of the group.
E. Employee Classes
7.10 The underwriter considers the employee classes for the simple reason that over-
representation by a class in which the employees earn low incomes can result in
a higher than desired rate of turnover. This will increase the amount of
administrative work required to update the changes in the employees as covered
by the policy.
F. Level Of Participation
7.11 The underwriter is particularly concerned about the level of participation in a

contributory plan, as members’ participation in such a plan is on a voluntary basis.
In order to guard against anti-selection and to help spread the risk, as well as
administrative costs across a wide range of expected mortality within such a
group, the underwriter normally specifies a minimum participation level
requirement of, say, between 70% to 90% of the eligible group members.
G. Age And Gender Within The Group
7.12 Age, as mentioned earlier, is an important factor in underwriting, as it increases

the mortality of the group to be insured. Gender in the form of the ratio of males
to females is also an important consideration, as females have a lower mortality
rate than males.
H. Expected Persistency
7.13 The underwriter considers the likely persistency of a group application, as the cost
of acquiring group insurance business is expensive, and the insurer needs to
recover this over time. Thus, if a group has a history of changing to a different
insurer every one or two years, the persistency of the policy applied for is likely to
be poor. In such a case, the insurer will either decline the proposal or quote a
higher premium, to recover the initial administrative cost of the policy.
I. Previous Claims Experience
7.14 A group’s claims history with any other insurer is a good indicator of the likely
experience that an insurer will have if it approves the proposal. This enables the
insurer to determine whether to accept the proposal and, if so, to determine what
terms and rates to charge. As such, the insurer usually requires the group
applying for coverage to provide its claims experience over the past three years,
for assessment by the underwriter.
CHAPTER
11
APPLICATION AND UNDERWRITING

Life Insurance Proposal To apply for a life insurance policy, the proposer (also known as the applicant)
Form must complete a life insurance proposal form (some insurers refer to it as the
“application form”).
Contents Of A Proposal A typical proposal form for an adult applicant contains the following information:
Form • Name and address of the insurer;
• Adviser’s name, Adviser’s code and policy number;
• Warning statement;
• Particulars of the proposed life insured (if the person applying for insurance is
not the life to be insured);
• Particulars of the proposer;
• Particulars of the policy applied for, e.g. whether it is a Term Insurance or
Endowment Insurance policy;
• Declaration of and replacement of existing policy(ies);
• Family history of the proposed life insured;
• Medical details of the proposed life insured;
• Remarks;
• Confirmation of receipt of compulsory documents;
• Declarations of Beneficial Owners/Payees/Politically Exposed Persons;
• Common Reporting System; and
• Declaration by proposer and / or proposed life insured.
Basic Principles Of The completed proposal form is sent to the underwriter who will assess the risk to
Underwriting see whether the cover can be granted and, if so, on what terms and conditions. This
process is called “underwriting”.
Purpose Of Underwriting To ensure that the premiums charged correspond closely with the risk that each
proposer presents. Proper underwriting helps to ensure that the insurer has
sufficient funds to pay claims.
Factors That Affect The Underwriters determine the insurability of a proposed life insured based on a
Risk number of factors as follows:
• age;
• occupation;
• physical condition;
• medical history;
• financial condition;
• place of residence; and
• lifestyle.
Other Sources Of • Attending Physician's Report
Underwriting Information • Specialist's Medical Tests
• Adviser's Report
• Questionnaires
Ordinary rate To accept a risk at ordinary rate means that the proposer needs to pay only the
premium as stated by the insurer to be a standard risk.
Lien When an underwriter accepts a case with a lien, it means that, in the event of the
death of the life insured within the lien period, the amount payable will be the sum
assured less the amount of lien, which is often expressed as a percentage of the
sum assured.
In other words, the lien reduces the liability of the insurer. Imposing a lien is
common for juvenile policies covering very young children (e.g. below the age of
five years).
26
Letter Of Conditional If the underwriter proposes to accept the case on terms other than standard, the
Acceptance insurer sends the proposer a letter of conditional acceptance, stating the proposed
sub-standard terms. In this case, the proposer is required to sign and return the
letter and pay the premium (or additional premium) within a limited time frame, in
order for the cover to be effected and the policy to be issued to him. The policy will
contain an endorsement or appendix specifying the additional terms.
Selection process for The underwriter assesses the risk based on a number of factors which include the:
Group Life Insurance • group’s reason for existence;
• group stability;
• group size;
• nature of group’s business;
• employee classes;
• level of participation;
• age and gender within the group;
• expected persistency; and
• previous claims experience.
27
Part I Chapter 12. Policy Services
PART I CHAPTER 12
POLICY SERVICES
CHAPTER OUTLINE
1. Introduction
2. Premium Payments
3. Premium Receipt
4. Premium Notice
5. How Can Advisers Help Their Clients?
6. Why Are Policy Alterations Necessary?
7. Types Of Alteration Of Policy
8. Duplicate Policy
9. Assignment Of Policy
10. Policy Loans
11. Withdrawing Cash Bonus
12. Lapsing Of Policies
13. Reinstatement Of Lapsed Policies
14. Surrendering Of Policy
15. Alternatives To Surrendering Of Policy
16. Effects of Bankruptcy on Life Insurance
LEARNING OUTCOMES

 explain the various frequencies and methods of premium payment
 understand the types of premium receipts and their purposes
 know what premium notice is
 understand how advisers can help their clients in terms of premium matters
 understand the need for policy alterations
 describe the common alterations policy owners make
 know the requirements for the issuance of a duplicate policy
 define an assignment of policy
 understand policy loans
 understand the withdrawal of cash bonus
 understand policy lapsation
 discuss the reinstatement of lapsed policies
 understand the surrendering of policy and its alternatives
 understand the effects of bankruptcy on life insurance policies
CONTENTS
CHAPTER OUTLINE ………………………………………………………………………………..1
1. INTRODUCTION .............................................................................................................4
2. PREMIUM PAYMENTS ................................................................................................... 4
A. Frequency Of Premium Payment .............................................................................. 4
A1. Change In Frequency Of Premium Payment ..................................................... 4
B. Methods Of Premium Payment ................................................................................. 6
B1. By Cash Or Cheque ............................................................................................. 6
B2. By Banker's Order ............................................................................................... 6
B3. By GIRO Deduction ............................................................................................. 6
B4. By Salary Or Payroll Scheme ............................................................................. 7
B5. Using CPF Ordinary And Special Accounts ....................................................... 7
B6. Through Supplementary Retirement Scheme (SRS) ........................................ 7
3. PREMIUM RECEIPT ........................................................................................................ 8
A. Conditional Premium Deposit Receipt ...................................................................... 8
B. Official Receipt............................................................................................................9
4. PREMIUM NOTICE ......................................................................................................... 9
5. HOW CAN ADVISERS HELP THEIR CLIENTS? .............................................................. 9
6. WHY ARE POLICY ALTERATIONS NECESSARY? ....................................................... 10
7. TYPES OF ALTERATION OF POLICY ........................................................................... 10
A. Change Of Address .................................................................................................. 10
B. Change Of Name ...................................................................................................... 10
C. Change In Frequency Of Premium Payment........................................................... 10
D. Reduction In Sum Assured ...................................................................................... 11
E. Increase In Sum Assured ......................................................................................... 11
F. Change In Type Of Policy ......................................................................................... 11
G. Change In Term Of Insurance ................................................................................. 12
H. Removal Of Extra Premiums ................................................................................... 12
I. Extra Benefits (Riders) .............................................................................................. 12
J. Change Of Insurance Nominees Or Beneficiaries................................................... 12
8. DUPLICATE POLICY ..................................................................................................... 13
A. Requirements For The Issuance Of A Duplicate Policy .......................................... 13
9. ASSIGNMENT OF POLICY ........................................................................................... 13
A. What Is An Assignment? ........................................................................................ 13
B. Types Of Assignments ............................................................................................ 13
B1. Assignment By Way Of Gift ............................................................................. 14
B2. Assignment For Valuable Consideration ......................................................... 14
B3. Assignment By Operation Of Law ................................................................... 14
C. Statutory Provisions On Assignment Of Policy ..................................................... 15
C1. Civil Law Act 1909 ............................................................................................. 15
C2. Requirements For The Assignment Of A Policy .............................................. 15
C3. Rights Available To Assignee .......................................................................... 16
C4. Assignment By Minors ..................................................................................... 16
D. Execute An Assignment Of Policy To A Targeted Beneficiary.............................. 16
10. POLICY LOANS ........................................................................................................... 17

A. Requirements For Application Of Policy Loans .................................................. 17
B. Implications On Policy Owners ............................................................................ 18
B1. Payment Of Interest ........................................................................................ 18
B2. On Claim Or Surrender .................................................................................. 18
11. WITHDRAWING CASH BONUS ................................................................................. 18
A. Requirements For Application Of Withdrawal Of Cash Bonus .......................... 18
B. Implications On Policy Owners ............................................................................ 18
B1. On Interest Credited To Policy....................................................................... 18
B2. On Claims And Surrender ............................................................................. 19
12. LAPSING OF POLICIES ............................................................................................... 19
A. Loss On Lapsation ................................................................................................ 19
13. REINSTATEMENT OF LAPSED POLICIES.................................................................. 19
A. Health Evidence .................................................................................................... 20
B. Effects Of Reinstatement Of Policy ...................................................................... 20
14. SURRENDERING OF POLICY ..................................................................................... 20
15. ALTERNATIVES TO SURRENDERING OF POLICY .................................................... 20
A. Documents Required For Surrender Of Policy ................................................... 21
16. EFFECTS OF BANKRUPTCY ON LIFE INSURANCE .................................................. 21
A. Statutory Position of Bankruptcy......................................................................... 21
B. Effects of Bankruptcy on Life Insurance Policies ................................................ 22
1. INTRODUCTION
1.1 Contractually, insurance company bears the responsibility to service policy

owners. However, it is good practice for an adviser to be familiar with policy
servicing matter to provide value added service to the clients out of goodwill.
As an adviser, you are required to service the policy owners to whom you have
sold insurance policies. As the needs of your clients change over time, they may
approach you for assistance to attend to their needs on policy servicing matters.
Therefore, it is important that you familiarise yourself with your insurer’s
practices relating to such matters. In this chapter, we will cover the issues
relating to premium payment, as well as policy changes / alterations.
2. PREMIUM PAYMENTS
2.1 Most insurers give the policy owners the right to select the:
 frequency of premium payment; and
 methods of premium payment.
A. Frequency Of Premium Payment
2.2 At the policy inception, the policy owner has to specify the frequency of premium
payment that he chooses. Regular premiums can be paid via any one of the
following frequencies:
(a) Monthly;
(b) Quarterly;
(c) Half-yearly; or
(d) Annually.
2.3 Depending on the type of policies, some insurers also provide recurrent single
premium option, besides single premium mode.
2.4 You should assist your client in selecting an appropriate frequency of premium
payment, by explaining to him the advantages and disadvantages of each mode.
It is important that you explain to him the consequences of non-payment of
premium, and highlight to him the possibility of the policy lapsing in the initial
years, if he fails to pay the premium within the grace period.
A1. Change In Frequency Of Premium Payment
2.5 Owing to change in financial circumstances, the policy owner may request for a
change in the frequency of premium payment of his policy as follows:
(i) Change from less frequent basis to more frequent basis; or
(ii) Change from more frequent basis to less frequent basis.
2.6 Most insurers allow the change depending on the type of policies. Some insurers
allow a limited choice of frequencies for some types of policies, e.g. Mortgage
Decreasing Term Insurance.
A1A. Change From Less Frequent Basis To More Frequent Basis

2.7 A change in the frequency of premium payment from a less frequent basis of
premium payment to a more frequent basis of premium payment (e.g. monthly)
will only take place after the last annual premium paid has been fully utilised, since
there is usually no refund of the annual premium paid, regardless of when the
change is effected. You need to highlight this to your client before helping him to
effect the change. Figure 12.1 gives an illustration of how the change of frequency
of premium payment from annually to monthly works.
2.8 Thus, if a policy owner is unable to continue paying annually, he can request to
have it changed to monthly or any of the other frequencies. Such flexibility helps
the policy owner to maintain his policy. However, insurers usually set a minimum
amount (e.g. S$25) for monthly premiums, below which they will not allow this
frequency of premium payment to be paid. Thus, if the monthly premium of a
policy works out to be S$20, then the policy owner will not be allowed to pay on
a monthly basis and has to pay on a less frequent basis (e.g. quarterly).
Figure 12.1: Change Of Frequency Of Payment From Annually To Monthly
Annual premium Request for change of Monthly payment

paid premium to monthly starts here
payment
Year 1 Year 2 Year 3 Year 4
A1B. Change From More Frequent To Less Frequent Basis

2.9 On the other hand, if the change is from a more frequent to a less frequent basis
of payment, e.g. from monthly to annual mode, due to the improvement of the
client’s financial situation, the policy owner will have to pay up the balance of
premiums that make up one annual premium before the annual premium can be
effected.
2.10 As such, you need to explain to your client that the annual premium can take effect
only at the next policy anniversary date, and that he has to pay the remaining
premiums in a lump sum, in order to effect the change. However, if he does not
want to do so, then he can continue to pay the monthly premium until one month
before the policy anniversary date, and make the change.
2.11 An illustration of the change of frequency from monthly to yearly as shown in

Figure 12.2.
Figure 12.2: Change Of Frequency Of Premium Payment
From Monthly To Annually
Annual payment starts here
Request for change of premium
to annual payment
Year 1 Year 2 Year 3 Year 4

Needs to pay up the remaining premiums in a lump sum in order
for the change to take effect on the next policy anniversary date
2.12 However, if the change is from quarterly or half-yearly to monthly, there is no

need to wait until the policy anniversary date for the change to be effected. The
change of frequency will take effect on the next premium due date. For example,
a policy owner who has opted to pay by half-yearly premium has paid up the
premium for the period from January to June two months ago. He now wants to
change it to a monthly premium payment mode. In this case, the monthly
premium will take effect from July.
2.13 Besides the above changes, insurers also allow the policy owner to pay up all
future premiums in a lump sum. This is currently not a common practice, but can
be done by either:
 Paying the actual amount of future premiums in advance, i.e. the actual
amount of instalment premium multiplied by the number of premiums to be
paid; or
 Paying the present value of such future instalment premium, i.e. a discounted
or commuted amount.
2.14 Under the first choice above, premiums are paid in advance and these premiums
would be refunded should the life insured pass away during the term of insurance.
As for the second choice above, the commuted value is calculated based on
interest and mortality. As such, there will be no refund of any portion of the
premiums paid. If only the interest rate factor is taken into account, then part of
the commuted premiums may be returned should death occur.
B. Methods Of Premium Payment
2.15 A policy owner does not have to visit an insurer’s office to pay each renewal
premium due. He can pay his premiums by any one of the following methods:
B1. By Cash Or Cheque
2.16 Policy owner will make premium payment directly to the insurer by cash, cheque,
money order or NETS. Some insurers also allow the payment of premiums via
Internet banking, SAM machines, or AXS terminals. Some insurers have also tied
up with credit card issuers to allow the payment of premiums by credit card.
B2. By Banker's Order
2.17 The policy owner completes a Banker’s Order form which gives the bank written
authority to debit a fixed amount from the policy owner’s bank account on
specified dates (i.e. premium due dates). The amount is then remitted to the
insurer’s bank account.
B3. By GIRO Deduction
2.18 The policy owner may choose to pay his premiums by completing a standing
order to the bank for the regular premiums to be deducted automatically from his
bank account. The personal particulars of the policy owner, such as his name,
policy number, bank account number, premium amount and other details of the
deduction to be made, are saved into a computer tape. The computer tape is then
sent on specified dates each month to the bank for the premium to be deducted
from each policy owner’s bank account. The amount deducted is then credited to
the insurer’s bank account.
2.19 Normally, there are two deductions each month. If the policy owner has
insufficient funds on the first deduction, the insurer will make a second deduction
within the same month.
2.20 If the second deduction fails, the insurer will send a letter to the policy owner to
inform him of the next GIRO deduction date, as well as to remind him to have
sufficient funds in the bank account for the premium deduction, or to pay any
outstanding premium by cash or cheque. Banks may impose a charge for
unsuccessful GIRO deduction. Therefore, you should advise the policy owner to
maintain sufficient funds in the account before the premium deduction dates.
B4. By Salary Or Payroll Scheme
2.21 The policy owner gives his employer written consent to deduct a stated sum from
his salary. The employer then remits the total amount deducted from the salaries
of all employees paying the premiums for their policies by this method to the
same insurer.
2.22 However, this method of premium payment is not common in Singapore, as the
employer (usually a large company) and the insurer will need to have a special
arrangement for the group deduction.
B5. Using CPF Ordinary And Special Accounts
2.23 The CPF Investment Scheme (CPFIS) allows its members to invest their CPF
Ordinary and Special Accounts savings in Endowment Insurance, Annuity and
ILPs. CPF members who wish to invest their Ordinary Account savings will need
to open a CPF investment account with one of the CPF approved agent banks. The
agent bank will liaise with the CPF Board and the insurer on the transfer of funds
from the CPF members’ Ordinary Accounts to pay for their insurance premiums.
However, if a CPF member is investing his CPF Special Account savings, the
insurer will liaise directly with the CPF Board on the transfer of the fund. Under
this CPFIS, the policy owner can only pay the CPF-funded insurance policies by
single premium or recurrent single premium.
B6. Through Supplementary Retirement Scheme (SRS)
2.24 Insurance premiums can also be funded via SRS savings. However, a policy
owner will need to open a SRS account with one of the approved banks. Similar
to the CPFIS, only single and recurrent single premiums are allowed for insurance
payments.
3. PREMIUM RECEIPT
3.1 Generally, most insurers issue two types of receipts to acknowledge the premium
payments received. The two types of receipts are:
(a) conditional premium deposit receipt (depending on the insurer, it may be
known as the interim cash receipt, temporary cash receipt, cash
acknowledgment receipt or temporary receipt); and
(b) official receipt.
3.2 The conditional premium deposit receipt is usually issued by the adviser on behalf
of the insurer to acknowledge the proposer’s first premium payment by cash or
cheque with the proposal form. The issuing of such a receipt by the adviser is
usually at the close of an insurance sale, and is authorised by his principal (the
insurer). Thereafter, the insurer will issue the official receipt. Let us look at each of
them in turn.
A. Conditional Premium Deposit Receipt
3.3 Upon the insurer’s receipt of the premium payment and the proposal form, the
issuing of a conditional premium deposit receipt will bind the insurer to grant
conditional cover only for accidental death (usually for any new proposal), subject
to the specified terms and conditions, before the official acceptance of the
proposal by the insurer. Such a receipt provides conditional cover to the life
insured immediately at the time of application if the premium payment is made
by cash. For any premium payment by cheque, the conditional cover will
commence once the premium deposit is credited to the insurer’s bank account.
3.4 In other words, once the insurer gives the client the conditional premium deposit
receipt, the conditional coverage begins, subject but not limited to the following,
as stated in the conditional premium deposit receipt or policy:
(a) the death must have occurred within a specified period of time (usually 90
days) or until he is notified of the underwriter’s decision, whichever is earlier;
(b) the proposed life insured is not required by the insurer to undergo a medical
examination;
(c) the information in the proposal form is true and complete;
(d) the proposed life insured is insurable and at the insurer’s standard rate of
acceptance; and
(e) the coverage is usually limited to accidental death only and for a specified
sum assured (usually limit to S$500,000) or the sum assured applied for,
depending on whichever is the lower.
3.5 In addition, some insurers specify in such a receipt the conditions under which
they will not be liable to pay the accidental death benefit. Most life insurers issue
this type of receipt. As an adviser, you should explain the terms and conditions of
the receipt to your client, when handing it to him.
B. Official Receipt
3.6 On the other hand, the official receipt is issued by the insurer. It is used to officially
acknowledge receipt of the first premium payment made by the client.
3.7 The practice of issuing an official receipt varies from one insurer to another.
Generally, if payment of the initial premium (or renewal premium) is made by
cash or cheque, an official receipt is issued within one month from the date the
conditional premium deposit receipt is issued (for cash payment), or the date the
client’s cheque is credited to the insurer’s bank account (for cheque payment).
3.8 However, in the case of premium payments via Interbank GIRO, or credit cards as
accepted by some insurers, the relevant entries in the bank statements of the bank
accounts are recognised as legal evidence of the premium payments. As such,
receipts are generally not issued. Also, insurers do not generally issue their own
official receipts for premium payments made via NETS, AXS machines or stations,
telegraphic transfer or Internet banking as arranged by the insurers.
4. PREMIUM NOTICE
4.1 Although the insurers are not legally obligated to issue premium notices, they will
normally send premium notices to policy owners who pay their premiums by cash
or cheque, particularly to those policy owners who have opted for annual
premium mode of payment, to remind them of the premiums due.
5. HOW CAN ADVISERS HELP THEIR CLIENTS?
5.1 If you know that your client has not paid his premium on his policy, you can help
your client by personally calling to remind him of the outstanding premium. You
should also highlight to your client the consequence of not paying his premium
when due, that is, his policy may lapse as a result of the non-payment of the
premium. If your client has financial difficulties in paying the premium, you may
help him by giving him the appropriate advice, such as changing to a more
frequent mode of payment, where the amount that he needs to pay at each
payment is smaller. Some insurers also allow their policy owners to take
“premium holidays” (for ILPs only). For example, some insurers allow their policy
owners to stop paying the premiums during an economic crisis, where many
people lose their jobs. If this facility is provided by your insurer, you can help your
client to apply for such facility, to allow him to stop paying the premium, until he
finds a job. By following up with the client on such matters, you not only help your
client to retain his coverage, but also help you to build a better relationship with
your client.
6. WHY ARE POLICY ALTERATIONS NECESSARY?
6.1 A policy owner purchases a life insurance policy to fulfil his needs given his
circumstances. However, these circumstances may change with time. As such,
alterations to the policy may be necessary.
6.2 The insurer will, generally, not agree to any alteration to a policy which increases
its liability. However, if the insurer does approve of any alteration, then the insurer
may impose some conditions, such as the payment of an additional premium.
7. TYPES OF ALTERATION OF POLICY
7.1 Some of the common alterations which policy owners make are:
 change of address;
 change of name;
 change of frequency of premium payment;
 reduction in sum assured;
 increase in sum assured;
 change in type of policy;
 change in term of insurance;
 removal of extra premiums;
 extra benefits (riders); and
 change of insurance nominees or beneficiaries.
7.2 Insurers usually have prescribed forms for the policy owners to complete to effect
the above changes. Let us look at each of the above changes in turn.
A. Change Of Address
7.3 This does not involve a change in the terms of the contract. The policy owner may
simply write in to inform the insurer of the change, or you can get him to complete
a form. The insurer will update its records and inform the policy owner
accordingly. If you are aware that your client’s address has changed, you should
advise your client to notify the insurer as soon as possible. This is to ensure that
your client receives prompt and accurate information on his policy, e.g. Premium
Notice.
B. Change Of Name
7.4 Documentary proof called the “deed poll” to evidence a legal change of name will
be required. The insurer will send an endorsement to effect the change in name
of the policy owner for his attachment to the policy document.
C. Change In Frequency Of Premium Payment
7.5 As explained earlier, the policy owner may change the frequency of premium
payment for a number of reasons. You will have to advise him of the amount
payable, depending on the frequency of premium payment that he desires, and
arrange for him to complete the prescribed form, before submitting it to the
insurer.
D. Reduction In Sum Assured
7.6 The sum assured may be reduced, provided that it does not fall below the
minimum amount of sum assured as prescribed by the insurer.
7.7 The reduction of sum assured falls into two categories:

 if the policy has not acquired any cash value, the amount of reduction will be
regarded as “lapsed”; or
 if the policy has acquired a cash value, the amount of reduction will be
regarded as “surrendered”.
7.8 Before your client decides to reduce the sum assured, you should show him the
revised policy illustration and explain to him the effect of a reduction in sum
assured. When he agrees, you can then proceed to get him to complete the
prescribed form and submit it to the insurer. When the insurer approves of the
reduction in sum assured, it will send an endorsement to the policy owner and
inform him of the reduction in premium payable as well. Some insurers require a
small administrative fee (e.g. S$20) for such a change.
E. Increase In Sum Assured
7.9 Generally, insurers in Singapore will normally not allow an increase in the sum
assured on a policy, except for ILPs and Universal Life policies. For those insurers
that allow an increase in sum assured for a non-ILP, it is usually allowed within
the first policy year only.
7.10 To increase the sum assured, the policy owner needs to complete a prescribed
form and a health declaration form. If the sum assured is high, or depending on
the proposed insured’s medical history, he may also be required to go through a
medical examination by one of the insurer’s appointed doctors.
7.11 The increase in sum assured may take effect from the inception or anniversary
date of the policy. Once the underwriter approves of the change, you will need to
collect the additional premium plus interest (where applicable) from your client, if
the change is to take effect from the inception date. Upon receipt of the premium,
the insurer will issue an endorsement to effect the change.
F. Change In Type Of Policy
7.12 As mentioned earlier, a client’s needs may change with time, and he may ask you
whether he can change his existing policy to a different plan.
7.13 Unfortunately, such changes are not allowed by most insurers, as the risk of anti-
selection is high. Besides, there will be much administrative work involved.
7.14 Although extremely rare in Singapore, there may be insurers that allow such a
change to be made within the first policy year. The change is, however, subject to
underwriting. You need to arrange for your client to submit a prescribed form, a
health declaration form and the administrative fee. Once approved by the
underwriter, you need to arrange for your client to return the policy document for
endorsement and collect the difference in premium plus interest, if the change in
plan results in an increase in premium.
G. Change In Term Of Insurance
7.15 Such a change is usually not allowed, though some insurers may allow it if the
request is made within a certain period of time (usually 90 days from the inception
date).
7.16 Again, you need to arrange for your client to complete a prescribed form and
health declaration form. Upon approval by the insurer, you need to collect any
difference in premium that the client needs to pay, and an endorsement will be
issued to your client upon approval by the insurer.
H. Removal Of Extra Premiums
7.17 Extra premiums imposed may be removed if any of the following occurs:
 the client changes from a more hazardous occupation (whereby extra
premiums were previously levied) to a less hazardous one; or
 the client has given up a risky sport, such as scuba diving.
7.18 However, extra premiums imposed due to health conditions are generally not
removed, unless there is concrete medical certification that the policy owner has
recovered fully from that condition.
I. Extra Benefits (Riders)
7.19 Riders can be added or cancelled from a policy to cater to the changing needs of
the policy owner. To add a rider, the policy owner needs to submit a declaration
of good health on the life insured and pay the premium, once it is approved.
Depending on the health status or medical history of the proposed life insured, he
may be required to go through a medical examination by one of the insurer’s
appointed doctors. To cancel a rider, the policy owner simply needs to submit a
request to the insurer. An endorsement will be issued subsequently for his
attachment to the policy document.
J. Change Of Insurance Nominees Or Beneficiaries
7.20 Do refer to a later chapter in this Study Text for a detailed discussion on insurance
nomination. With the relevant prescribed forms easily available now, they provide
the policy owners with a fast and convenient means to meet their wishes.
8. DUPLICATE POLICY
8.1 Your client may lose his policy document. In such a case, you can help him to
apply for a duplicate policy. Let us look at how this can be done.
A. Requirements For The Issuance Of A Duplicate Policy
8.2 Here are some of the requirements for issuance of a duplicate policy:
 A written request for issuance of a duplicate policy, stating the circumstances
of the loss;
 A statutory declaration that the policy has not been assigned to any person;
 A copy of the police report if the policy has been stolen;
 An indemnity to indemnify the insurer against any possible loss as a result of
issuance of the duplicate policy;
 The payment of the cost of duplication; and / or
 A declaration that, if the original policy is found subsequent to the issue, it
must be returned to the insurer for cancellation.
8.3 If none of these situations applies to the policy owner, the insurer will then call for
the necessary documents for issuance of the duplicate policy.
8.4 Do note that the policy is merely an evidence of the insurance contract between
the policy owner and the insurer. Hence, even though the policy is lost, the
insurance contract still exists. As such, most insurers will still pay a claim even
though the deceased insured’s beneficiaries cannot produce the original policy
document. However, they are required to complete and sign a letter of
indemnity. In recent years, some insurers have done away with the need for
production of the original policy document before the policy proceeds are paid
out.
9. ASSIGNMENT OF POLICY
9.1 At times, you may encounter a client who needs to assign his policy. Let us take
a look at the meaning of assignment, the types of assignments and the statutory
provisions on assignment of policies.
A. What Is An Assignment?
9.2 The transfer of rights and ownership of an insurance policy from one party to
another party is called an assignment. The person who transfers the rights is
known as the assignor, and the person to whom the rights are transferred is called
the assignee.
B. Types Of Assignments
9.3 Generally, there are two primary types of assignments, namely absolute
assignment and conditional / collateral assignment. However, assignment can
also be by way of sale, gift, mortgage or charge.
 Absolute Assignment
In an absolute assignment, the assignor transfers all his rights and ownership
to the assignee, except that he may choose to continue paying the premiums.
Absolute assignment of a life insurance policy is a feature in a life insurance

policy allowing a policy owner to freely assign (give or sell) a policy to
another person. The fact that life insurance is freely assignable makes it a
useful financial instrument through which to secure a loan.
 Conditional / Collateral Assignment

In a conditional or collateral assignment, the rights revert to the assignor
under certain circumstances, e.g. when a policy is used as collateral for a bank
loan, the rights of the policy will revert to the assignor when the loan is fully
repaid.
9.4 Let us now discuss the various ways in which assignment can take place.
B1. Assignment By Way Of Gift
9.5 This type of assignment is made without consideration. For example, a person
may have bought a life policy where no beneficiary is named. He may wish to see
that the policy proceeds go to his mother in any case. He may decide to make an
assignment. In such a case, the assignment is by way of gift, there being no
valuable consideration involved, and the mother would then become the owner
of the policy.
B2. Assignment For Valuable Consideration
9.6 This type of assignment is commonly used when a person borrows from a bank.
The ownership will be transferred to the bank when assignment is made, although
there may be a clause preserving the right of redemption when the loan is repaid.
B3. Assignment By Operation Of Law
9.7 The two main areas where such an assignment takes place in law relates to death
and bankruptcy.
9.8 On death, where the estate of the deceased is substantial, there will be an executor
to take care of the estate or the administrator will be appointed. The estate of the
deceased will vest in these persons. These persons will be holding the property
as trustees until the estate is distributed or disposed of.
9.9 On bankruptcy, the Insolvency, Restructuring and Dissolution Act 2018 will apply.
However, property held in trust by the bankrupt will not vest with the Official
Assignee. Hence, a trust policy effected before 1 September 2009 under Section
73 of the Conveyancing and Law of Property Act 1886 [which has been vested in
the beneficiary] will not come under divisible property. This also applies to an
irrevocable nomination under the Insurance (Amendment) Act 2009.
C. Statutory Provisions On Assignment Of Policy
C1. Civil Law Act 1909
9.10 In Singapore, Section 4(8) of the Civil Law Act 1909 also makes reference to the
assignment of debts or other legal choses in action. Chose in action is a legal term
referring to the bundle of personal rights over property which can only be claimed
or enforced by action, and not by taking possession. Life insurance is considered
as a chose in action. This provision applies only to absolute assignments and is
generally insisted upon by banks and other financial institutions in Singapore.
9.11 The main provisions are:

(i) it must be absolute;
(ii) it must be in writing; and
(iii) a written notice of assignment must be served on the person liable under the
contract (in this case, the insurer).
9.12 The assignee receives only the rights available to the assignor. If the policy is void
for reason of misrepresentation, the policy is void ab initio (from the beginning).
Thus, the assignor having no legal rights under the policy cannot transfer the
rights to the assignee.
9.13 Although the English Act does not make any mention as to who should serve the
notice of assignment, i.e. the assignee (the party that the policy owner assigns the
policy to) or the assignor (the policy owner), it is presumed in practice that either
one can do so. The assignee, to safeguard his own interests, should serve the
notice of assignment to the insurer if the assignor fails to do so.
9.14 You should warn your client of the consequences of assigning the policy to
someone who is below the age of 18 years, since only someone who has attained
that age has the full capacity to enter into a valid contract. Therefore, an assignee
who is below that age may encounter restrictions imposed by the insurer, when
exercising his rights as a policy owner.
9.15 An assignee may re-assign the policy, subject to the same rules and laws of
assignment.
9.16 It is important to let your client know that no assignment can be made if the policy
is placed under a trust according to Section 73 of the Conveyancing and Law of
Property Act 1886 or Section 132 of the Insurance Act 1966, unless it is done with
the written consent of the beneficiaries as specified.
C2. Requirements For The Assignment Of A Policy
9.17 Most insurers have standard assignment forms which the policy owner has to
complete for the processing of the request to assign his policy. An
acknowledgement letter on the notice of assignment will be issued by the insurer
directly to the assignor and assignee.
C3. Rights Available To Assignee
9.18 An assignor can only validly assign rights which he has under the policy. If the life
policy has any defects at the time of assignment, the assignee will take the policy,
subject to those defects. For example, the rights on a life policy may not be
recoverable because of fraudulent non-disclosure or fraudulent
misrepresentation by the assignor at the time the policy was applied for. In such
a case, the insurer will be able to resist any claim by the assignee because of such
fraud.
C4. Assignment By Minors
9.19 Under the Insurance Act 1966, a person above the age of ten years is given the
capacity to “enter into a contract of insurance”. This may imply that such a minor
can purchase any insurance policy (with or without the consent of the parent or
guardian, as the case may be) but cannot do anything else to the policy; e.g.
surrender or assign the policy. In any event, this may well be against the interest
of the minor.
D. Execute An Assignment Of Policy To A Targeted Beneficiary
9.20 In order to overcome the cost and complexity problems of setting up a trust, the
policy owner can choose to assign the ownership of the life policy to the targeted
beneficiary directly. This technique is allowable under Policies of Assurance Act
1867. This law allows the ownership of a life insurance policy to be assigned, with
or without considerations, to another party. Table 12.1 shows the effect of
assignment.
Table 12.1: Effects of Assignment

S/No. Process Effects of the process Effects of death
1. Ben assigns a The life insurance Since the policy is not
life insurance policy will be legally owned by Ben, the policy
policy to Chris. and beneficially owned proceeds do not need to
by Chris. go through probate. And
(Ben is an insurance company can
assignor in this Ben is still the life pay the proceeds in full
case. Chris is insured of the policy. to Chris, the owner,
the assignee) immediately.
And if the assignment is

done for more than 3
years, the proceeds is
not subjected to Ben’s
estate creditor’s claim.
This ensures there is no

delay in insurance pay-
out, certainty of capital,
and certainty of liquidity.
9.21 Advantage of Assignment – Assignment is a simple and effective way of

transferring the ownership to another party. This allows the life insurance policy
to be used as a collateral for a loan by assigning the policy to the lender (i.e. bank);
sell to a third party for cash (i.e. assignment with considerations); or gift to a third
party as part of planned giving (i.e. assignment without consideration).
9.22 Disadvantages of Assignment – The three disadvantages of assignment is when

assignee dies before the assignor, the assignee divorces, and assignee becomes
a bankrupt.
(i) Assignee dies before the assignor – Under this situation, the policy
ownership will fall into the assignee’s estate and the entitlement of the
policy cash value or subsequent death benefit could be the assignee’s
intestacy or will’s beneficiaries, which might not be the desired outcome for
both the assignor and the assignee.
(ii) Assignee divorces – If the assignee receive the assignment during his
marriage, upon his or her divorce, the policy’s cash value or subsequent
death benefits is considered matrimonial assets to be split amongst the ex-
spouses. This might not be the desired outcome.
(iii) Assignee becomes a bankrupt – If the assignee become a bankrupt, this

policy forms part of the assignee’s bankruptcy estate to be distributed
amongst the creditors by the official assignee. This might not be the desired
outcome.
10. POLICY LOANS
10.1 As you have learned in the earlier chapters, a policy that acquires cash value can
be used as collateral for a policy loan. Let us see how you can go about helping
your client to obtain a policy loan.
A. Requirements For Application Of Policy Loans
10.2 To apply for a policy loan, the policy loan agreement form needs to be completed
by the policy owner and submitted to the insurer. However, for trust policies under
Section 73 of the Conveyancing and Law of Property Act 1886 or Section 132 of
the Insurance Act 1966, both the policy owner and trustee are required to
complete the form.
10.3 The procedures for policy loan applications vary from insurer to insurer. Thus, it
is important that you find out the precise procedures of your insurer, so that you
can advise your clients accordingly.
B1. Payment Of Interest
10.4 The policy owner is required to pay interest on the policy loan at a rate determined
by the insurer. This rate can range from 5% to 8% depending on the insurer. The
interest accrues on a daily basis and is compounded on each policy anniversary
date subsequent to the date of the policy loan. If the policy owner fails to pay the
interest due on the policy anniversary date, this outstanding interest will be added
to the principal of the loan, and will be charged interest at the same rate as that of
the principal. If the total amount of policy loan, including accrued interest exceeds
the cash value of the policy, the insurer will terminate the policy and all premiums
paid will not be refunded. This is an important point that you need to highlight to
your client when he applies for a policy loan.
B2. On Claim Or Surrender
10.5 A policy loan is actually an advancement of the cash value of the policy. Hence, it
will affect the amount payable in the event of a claim or if the policy owner wishes
to surrender his policy. The amount payable in either event will be reduced by the
amount of the policy loan and accrued interest.
11. WITHDRAWING CASH BONUS
A. Requirements For Application Of Withdrawal Of Cash Bonus
11.1 Bonuses are declared on participating policies annually. The cash value of the
bonuses may be withdrawn. The procedure for withdrawing the bonuses varies
among insurers.
11.2 However, the policy owner is generally required to complete a Bonus Surrender
Discharge Voucher or Bonus Payment Voucher. For trust policies, both the policy
owner and the trustee will have to sign on the voucher.
11.3 As there is no standard industry practice, it is important that you find out the
practice of your insurer first, so that you can provide the right information to your
clients.
B1. On Interest Credited To Policy
11.4 For any policy that pays compound reversionary bonus1, the withdrawal of the
cash value of such bonus means that the policy owner will not benefit from the
future compounding effect on any reversionary bonus withdrawn, as the value of
1
It is not common for most insurers to pay compound reversionary bonus now – only reversionary bonus.
Reversionary bonus is an annual bonus that increases the guaranteed benefits and cash value (or
surrender value) of the policy. Once the reversionary bonus is declared and credited into the policy, it is
guaranteed.
compounding on the past bonuses have been lost. This is an important point that
you need to highlight to your clients who wish to cash out their bonuses.
B2. On Claims And Surrender
11.5 Bonuses credited to a policy increase the amount payable on claims and
surrender. Once the cash value of the bonuses is fully withdrawn, the amount
payable under the policy will be the basic sum assured in the event of a death
claim. In the event of a surrender, the amount payable is the cash value which
the policy has accumulated up to the date of surrender, excluding the cash value
of the bonuses previously withdrawn and the compounding effect on the
reversionary bonuses withdrawn, following such withdrawals.
12. LAPSING OF POLICIES
12.1 The policy will lapse under one of the following circumstances:
 When premiums are not paid within the grace period and before a policy has
acquired any cash value; or
 When the policy status is in Automatic Premium Loan and the cash value has
been exhausted.
12.2 Some of the reasons for policy lapsation are:

 The policy owner is in financial difficulty and is unable to pay the premium;
 The policy did not meet the needs of the policy owner, or he was not fully
convinced of the need to buy the policy in the first place, but was induced or
pressured to buy it;
 Poor service rendered by the adviser and / or insurer;
 Churning activity by an errant adviser; and / or
 Twisting by a competing adviser.
A. Loss On Lapsation
12.3 The lapsation of a policy means a loss to both the insurer and policy owner for the
following reasons:
(a) The insurer may not be able to recoup the cost of acquiring the new business.
Examples of the costs involved are expenses on publicity, commissions paid
to intermediaries, salaries of staff members, printing, postage and cost of
creating records in the office; and
(b) The policy owner loses the money which he has paid when his policy lapses.
His family loses the protection that the policy provides.
13. REINSTATEMENT OF LAPSED POLICIES
13.1 An insurer normally allows a lapsed policy to be reinstated (usually within two or
three years from lapsed date).
13.2 However, the policy owner has to pay all the arrears of premium with interest on
the policy. Note that for any regular premium ILP, the policy owner also has to
pay the fees or charges required by the insurer for the reinstatement of the policy.
A. Health Evidence
13.3 To reinstate a lapsed policy, most insurers will require the life insured to provide
a warranty of continuing good health, or provide information on his current health
status by completing a prescribed form.
13.4 If the life insured’s health has changed since the policy lapsed, he will need to
inform the insurer. The insurer will then assess and may reinstate the policy on
differing terms or reject the reinstatement application.
13.5 The life insured may also be required to provide any of the following documents:
 A shorter form of medical report by an appointed medical examiner;
 A full medical report; or
 Any other reports deemed necessary by the insurer.
13.6 Satisfactory evidence of the life insured’s continued insurability is the most
important condition for reinstatement of a lapsed policy. This condition is required
to prevent anti-selection. If no evidence of insurability is required, then people
with poor health or people who have been declined insurance by other insurers
will be more likely to apply for the reinstatement of their policies.
B. Effects Of Reinstatement Of Policy
13.7 A reinstatement of a policy involves the insured being subject to underwriting and
having to pay all the arrears of premiums with interest. It also causes the policy
owner to be subject to the incontestability, suicide and waiting period clauses
once again. These consequences should be pointed out to the policy owner as
soon as practicable or when you learn that your client has the intention to lapse
his policy.
14. SURRENDERING OF POLICY
14.1 According to Section 149 of the Insurance Act 1966, insurers must pay surrender
values (if any) for life policies which have accumulated cash values and have been
in force for a minimum of three years.
14.2 One of the most common reasons for surrender of policies is financial hardship,
although there can be other reasons or causes.
15. ALTERNATIVES TO SURRENDERING OF POLICY
15.1 As a general rule, you must discourage your client from surrendering his policy.
Explain to him that, once he surrenders the policy, he will lose the coverage
provided by the policy, and he cannot reinstate it subsequently.
15.2 Moreover, there is also a danger that he may become uninsurable and will not be
able to obtain any insurance in future. You should, instead, inform him of the
following alternatives:
 Apply for a policy loan;
 Change to a more frequent premium payment mode (e.g. from annually to
monthly premium payment);
 Surrender only the bonuses for cash;
 Convert to a paid-up policy;
 Convert to an extended Term Insurance policy;
 Reduce the premium payable by reducing the sum assured; or
 Apply for premium holiday (applicable only to selected ILPs).
15.3 However, if your client still wishes to surrender his policy, you will have to help
him with the administrative procedures.
A. Documents Required For Surrender Of Policy
15.4 Most insurers will require the following documents to be submitted if the policy
owner decides to surrender his policy:
 A discharge (surrender) voucher or form, whereby the policy owner agrees to
accept a specified sum, as cash surrender value in full satisfaction of all claims
which he may have under the policy. Other than the particulars of the policy
owner, the discharge voucher also contains a declaration that the policy has
not been assigned. The form must be witnessed by a person (above the age
of 21 years) whose identity is established;
 The policy contract which confirms the title of the policy owner (note that
some insurers have waived this requirement); and
 The deed of assignment is required if the notice of any assignment has been
previously lodged with the insurer.
15.5 You have to assist your client with the submission of the above-mentioned
documents, and to follow up with the insurer until the client receives the surrender
value.
15.6 Note that, if your client becomes bankrupt, he cannot surrender his policy, as his
interest in the policy will be vested with the Official Assignee. In fact, you have to
inform your insurer about your client’s bankruptcy position, so that your insurer
can liaise with the Official Assignee accordingly.
16. EFFECTS OF BANKRUPTCY ON LIFE INSURANCE
A. Statutory Position of Bankruptcy
16.1 Bankruptcy laws in Singapore are codified in the Insolvency, Restructuring and
Dissolution Act 2018 (IRDA). Section 273 to 440 of IRDA spell out the obligations
of a debtor, effects of the debtor’s assets and the authorities of official assignees
to take over a debtor’s asset for the benefit of the creditors.
16.2 Unless stated in the law, all of a debtor’s assets are vested onto the official
assignees, who will liquidate them for division amongst the creditors, who have
their debts legally proven. Table 12.2 shows the assets which are creditor
protected by law.
Table 12.2: Assets that are Creditor Protected by Law
S/No. Assets Remarks
1. HDB flat At least one of the owners is a Singapore

citizen.
2. CPF Section 24 of Central Provident Fund Act 1953,

including CPF Life pay-out.
3. Property held by For example, if a bankrupt holds an asset in

you on trust for any trust for your elderly parents, these assets will
other person not be subjected to bankruptcy proceedings.
4. CareShield Life pay- Section 20 of CareShield Life and Long-Term

out Care Act 2019
5. DPS TPD pay-out

Ministry of Law – Insolvency Office, Impact of
6. Compensation Bankruptcy, point 6.
awarded for legal (io.mlaw.gov.sg)
actions in respect of
personal injuries or
wrong acts against
you.
7. Life insurance Section 132(2) of the Insurance Act 1966

policies which are
trust nominated for
benefit of spouse
and/or children
B. Effects of Bankruptcy on Life Insurance Policies
16.3 Life insurance policy has a special position in bankruptcy situation. However,
only a life policy which is trust nominated or is being assigned to a 3rd party is
creditor protected. Table 12.3 will give a clear explanation.
Table 12.3: Effects of Bankruptcy on Life Insurance Policies
S/No. Policy Ownership & Effects of Bankruptcy of the Is the

Beneficiary Structure Policy Owner policy
creditor
protected?
1. A life policy with no Policy will be vested to No

nomination Official Assignee (OA) for
creditors.
2. A juvenile policy where Policy will be vested to OA for No

parent is the policy creditors.
owner, and the policy
owner becomes a
bankrupt.
3. A life policy with S133 Policy will be vested to OA for No

revocable nomination. creditors.
4. A life policy with S132 Policy will not be vested with Yes
trust nomination to OA for creditors.
spouse and/or children.
5. A life policy that is an Policy will not be vested with Yes

absolute assignment to OA for creditors.
a 3rd party with
consideration*.
6. A life policy that is Policy will be vested with OA No

being assigned to a 3rd for creditors.
party without
consideration (i.e. gift) (Source: Section 363 of IRDA)
for less than 3 years of
a bankruptcy order.
7. A life policy that is Policy will not be vested with Yes

being assigned to a 3rd OA for creditors.
party without
consideration (i.e. gift) (Source: Section 363 of IRDA)
for more than 3 years of
a bankruptcy order.
*when one assigns a policy to a 3rd party with consideration means the
receiving party pays a comparable price by accepting the policy. It is like a
transaction.
CHAPTER
12
P OLICY SERVICES

Frequency Of Premium Regular premiums can be paid via any one of the following frequencies:
Payment • Monthly;
• Quarterly;
• Half-yearly; or
• Annually.
Change In Frequency Of The policy owner may request for a change in the frequency of premium payment
Premium Payment of his policy as follows:
(i) Change from less frequent basis to more frequent basis; or
(ii) Change from more frequent basis to less frequent basis.
Methods Of Premium • By Cash Or Cheque
Payment • By Banker’s Order
• By GIRO Deduction
• By Salary Or Payroll Scheme
• Using CPF Ordinary And Special Accounts
• Through Supplementary Retirement Scheme (SRS)
Conditional Premium Upon the insurer’s receipt of the premium payment and the proposal form, the
Deposit Receipt issuing of a conditional premium deposit receipt will bind the insurer to grant
conditional cover only for accidental death (usually for any new proposal), subject
to the specified terms and conditions, before the official acceptance of the proposal
by the insurer. Such a receipt provides conditional cover to the life insured
immediately at the time of application if the premium payment is made by cash. For
any premium payment by cheque, the conditional cover will commence once the
premium deposit is credited to the insurer’s bank account.
Official Receipt The official receipt is issued by the insurer. It is used to officially acknowledge
receipt of the first premium payment made by the client.
Premium Notice Although the insurers are not legally obligated to issue premium notices, they will
normally send premium notices to policy owners who pay their premiums by cash
or cheque, particularly to those policy owners who have opted for annual premium
mode of payment, to remind them of the premiums due.
Types Of Alteration Of Some of the common alterations which policy owners make are:
Policy • change of address;
• change of name;
• change of frequency of premium payment;
• reduction in sum assured;
• increase in sum assured;
• change in type of policy;
• change in term of insurance;
• removal of extra premiums;
• extra benefits (riders); and
• change of insurance nominees or beneficiaries.
28
Requirements For The Some of the requirements for issuance of a duplicate policy:
Issuance Of A Duplicate • A written request for issuance of a duplicate policy, stating the circumstances of
Policy the loss;
• A statutory declaration that the policy has not been assigned to any person;
• A copy of the police report if the policy has been stolen;
• An indemnity to indemnify the insurer against any possible loss as a result of
issuance of the duplicate policy;
• The payment of the cost of duplication; and / or
• A declaration that, if the original policy is found subsequent to the issue, it must
be returned to the insurer for cancellation.
What Is An Assignment? The transfer of rights and ownership of an insurance policy from one party to
another party is called an assignment. The person who transfers the rights is
known as the assignor, and the person to whom the rights are transferred is called
the assignee.
Absolute Assignment In an absolute assignment, the assignor transfers all his rights and ownership to the
assignee, except that he may choose to continue paying the premiums.
Absolute assignment of a life insurance policy is a feature in a life insurance policy
allowing a policy owner to freely assign (give, or sell) a policy to another person. The
fact that life insurance is freely assignable makes it a useful financial instrument
through which to secure a loan.
Conditional / Collateral In a conditional or collateral assignment, the rights revert to the assignor under
Assignment certain circumstances, e.g. when a policy is used as collateral for a bank loan, the
rights of the policy will revert to the assignor when the loan is fully repaid.
Assignment By Way Of Gift This type of assignment is made without consideration. For example, a person
may have bought a life policy where no beneficiary is named. He may wish to see
that the policy proceeds go to his mother in any case. He may decide to make an
assignment. In such a case, the assignment is by way of gift, there being no valuable
consideration involved, and the mother would then become the owner of the policy.
Assignment For Valuable This type of assignment is commonly used when a person borrows from a bank.
Consideration The ownership will be transferred to the bank when assignment is made, although
there may be a clause preserving the right of redemption when the loan is repaid.
Assignment By Operation Two main areas where such an assignment takes place in law relates to death and
Of Law bankruptcy.
• On death, where the estate of the deceased is substantial, there will be an
executor to take care of the estate or the administrator will be appointed. The
estate of the deceased will vest in these persons. These persons will be holding
the property as trustees until the estate is distributed or disposed of.
• On bankruptcy, the Insolvency, Restructuring and Dissolution Act 2018 will
apply. However, property held in trust by the bankrupt will not vest with the
Official Assignee. Hence, a trust policy effected before 1 September 2009 under
Section 73 of the Conveyancing and Law of Property Act 1886 [which has been
vested in the beneficiary] will not come under divisible property. This also
applies to an irrevocable nomination under the Insurance (Amendment) Act
2009.
Advantages and Advantage - Simple and effective way of transferring the ownership to another
Disadvantages of party. Allows the life insurance policy to be used as a collateral for a loan by
Assignment assigning the policy to the lender (i.e. bank); sell to a third party for cash (i.e.
assignment with considerations); or gift to a third party as part of planned giving
(i.e. assignment without consideration).
Disadvantages - The three disadvantages of assignment is when assignee dies
before the assignor, the assignee divorces, and assignee becomes a bankrupt.
Policy Loans A policy that acquires cash value can be used as collateral for a policy loan.
Withdrawing Cash Bonus Bonuses are declared on participating policies annually. The cash value of the
bonuses may be withdrawn. The procedure for withdrawing the bonuses varies
among insurers.
29
Lapsing Of Policies The policy will lapse under one of the following circumstances:
• When premiums are not paid within the grace period and before a policy has
acquired any cash value; or
• When the policy status is in Automatic Premium Loan and the cash value has
been exhausted.
Reinstatement Of Lapsed An insurer normally allows a lapsed policy to be reinstated (usually within two or
Policies three years from lapsed date).
However, the policy owner has to pay all the arrears of premium with interest on
the policy. Note that for any regular premium ILP, the policy owner also has to pay
the fees or charges required by the insurer for the reinstatement of the policy.
Surrendering Of Policy According to Section 149 of the Insurance Act 1966, insurers must pay surrender
values (if any) for life policies which have accumulated cash values and have been in
force for a minimum of three years.
Alternatives To • Some alternatives to surrendering of policy as follows:
Surrendering Of Policy • Apply for a policy loan;
• Change to a more frequent premium payment mode (e.g. from annually to
monthly premium payment);
• Surrender only the bonuses for cash;
• Convert to a paid-up policy;
• Convert to an extended Term Insurance policy;
• Reduce the premium payable by reducing the sum assured; or
• Apply for premium holiday (applicable only to selected ILPs).
Assets That Are Creditor
Protected By Law Assets Remarks
HDB flat At least one of the owners is a
Singapore citizen.
CPF Section 24 of Central Provident Fund
Act 1953, including CPF Life pay-out.
Property held by you on trust for For example, if a bankrupt holds an
any other person asset in trust for your elderly parents,
these assets will be subjected to
bankruptcy proceedings.
CareShield Life pay-out Section 20 of CareShield Life and
Long-Term Care Act 2019
DPS TPD pay-out Ministry of Law – Insolvency Office,
Compensation awarded for legal Impact of Bankruptcy, point 6.
actions in respect of personal (io.mlaw.gov.sg)
injuries or wrong acts against you.
Life insurance policies which are Section 132(2) of the Insurance Act
trust nominated for benefit of 1966
spouse and/or children
30
Part I Chapter 13. Life Insurance Claims
PART I CHAPTER 13
LIFE INSURANCE CLAIMS
CHAPTER OUTLINE
1. Claims Settlement
2. Types Of Claims
3. Role Of Advisers In Claims Settlement
LEARNING OUTCOMES

 understand claims settlement
 discuss the various types of claims
 understand the role of advisers in the claims settlement process
CONTENTS
CHAPTER OUTLINE ............................................................................................................1
1. CLAIMS SETTLEMENT .................................................................................................. 3
A. Proper Claimants....................................................................................................... 3
B. Payment Of Claims Without Probate ....................................................................... 3
B1. Prescribed Amount ............................................................................................ 3
2. TYPES OF CLAIMS.........................................................................................................4
A. Death Claims .............................................................................................................4
A1. Proof Of Death .................................................................................................... 5
A2. Proof Of Age ....................................................................................................... 6
A3. Proof Of Title ...................................................................................................... 6
B. Total And Permanent Disability Claims ................................................................... 7
C. Maturity Claims ......................................................................................................... 8
C1. Documents Required For The Settlement Of Maturity Claims ........................ 8
D. Critical Illness Claims ................................................................................................ 8
E. Hospital Cash (Income) Claims ................................................................................ 8
F. Accidental Death Benefit Claims .............................................................................. 9
G. Accidental Death And Dismemberment Benefit Claims ......................................... 9
H. Annuity Claims .......................................................................................................... 9
H1. Annuity Payout Procedure ................................................................................. 9
H2. Claims Procedure ............................................................................................. 10
3. ROLE OF ADVISERS IN CLAIMS SETTLEMENT ......................................................... 10
1. CLAIMS SETTLEMENT
1.1 Most people purchase life insurance for family protection purposes. In order to
fulfil its responsibilities to its policy owners and beneficiaries, the insurer must
take steps to ensure that claims are paid promptly to the correct party. The insurer
is bound by the insurance contract to pay a claim according to the terms of the
policy.
1.2 In this chapter, we will describe who the proper claimants are and some of the
claims settlement options that the insurer offers, the types of joint ownership, as
well as the types of claims that the insurer may encounter. We will also discuss
the role of advisers in the claims settlement process.
A. Proper Claimants
1.3 Proper claimants under Section 150(12) of the Insurance Act 1966 refers to
persons who are entitled to the policy monies either as executors of the deceased,
or who claim to be entitled to that sum (whether for their own benefit or not) and
are the deceased’s:
 spouse;
 child;
 parent;
 brother or sister; or
 nephew or niece.
1.4 In addition, an illegitimate child will be treated as the legitimate child of his actual
parents under the definition of proper claimants.
1.5 To ensure a proper and valid discharge of the insurer’s obligation, the insurer
should make payment of the proceeds of a life insurance policy only to a proper
claimant upon the death of the life insured.
1.6 The insurer may request for a statutory declaration from the claimant to ensure
that the person making the claim falls within the category of proper claimants as
defined in the Insurance Act 1966.
B. Payment Of Claims Without Probate
1.7 Under Section 150(2) of the Insurance Act 1966, an insurer is permitted to make
an advance payment of up to a prescribed amount to the proper claimants on the
death of the life insured, without insisting on the production of any grant of
probate 1 or letter of administration.
B1. Prescribed Amount
1.8 Under Regulation 7 of the Insurance (General Provisions) Regulations 2004,

S$150,000 is prescribed as the amount of life policy and accident and health policy
monies which may be paid by the insurer to the proper claimant, without the
production of any grant of probate or letter of administration.
1
Probate refers to the judicial determination of the validity of a Will.
2. TYPES OF CLAIMS
2.1 Figure 13.1 shows the various types of claims that an insurer will encounter. These
types of claims are further explained in the subsequent sections.
Figure 13.1: Types Of Claims

Death Claims
Total And Permanent Disability Claims
Maturity Claims
Critical Illness Claims

TYPES OF
CLAIMS Hospital Cash (Income) Claims
Accidental Death Benefit Claims
Accidental Death And

Dismemberment Benefit Claims
Annuity Claims
A. Death Claims
2.2 When a life insured passes away, the insurer must be notified as soon as
practicable. In many instances, the family is too grief-stricken to think of such
matters as notifying the insurer. As the adviser, you should notify the insurer at
the earliest possible moment when you are aware of it.
2.3 Where a death claim is concerned, the insurer will require the claimant to submit
a claimant’s statement and the attending physician’s statement, together with the
following documents:
 certified true copy of the death certificate;
 certified true copy of the deceased’s NRIC or birth certificate;
 certified true copy of claimant’s NRIC;
 proof of claimant’s relationship to deceased e.g. certified true copy of the
deceased’s marriage certificate (where applicable);
 police and / or coroner’s report, post-mortem and toxicology report if death
was due to an accident or unnatural causes; and
 original copy of the insurance policy (note: some insurers have waived this
requirement).
2.4 Note that the claimant’s statement has to be completed by the right person for it
to be valid. The person who completes the claimant’s statement is the person to
whom the policy proceeds are payable.
2.5 The attending physician’s statement, on the other hand, has to be completed by
the physician who has attended to the life insured just before his death. The fees
for this statement usually have to be borne by the claimant.
2.6 Note that, if there is more than one claimant, each of them will have to complete
a separate claimant’s statement.
2.7 The above-mentioned documents are required as proof of death and proof of age
of the life insured. In addition, the insurer requires proof of title, i.e. the right to
receive the policy monies.
A1. Proof Of Death
2.8 The death certificate serves as a proof of the life insured’s death. It is issued by
the relevant authority in a country which registers deaths, and it contains the
following information of the deceased:
 date and place of death; DEATH
 full name and identity card number; CERTIFICATE
 gender;
 date and place of birth;
 usual address;
 cause of death;
 name of the last medical attendant;
 name and status of the person who certified the death; and
 name and address of the informant of the death.
2.9 In Singapore, the death certificate is issued by the Immigration and Checkpoints
Authority (ICA), Registry of Births and Deaths.
2.10 The information provided in the death certificate not only helps the insurer to
establish the identity of the life insured, but also helps the insurer in many other
ways, such as determining whether there is any non-disclosure based on the
cause of death given.
2.11 Note that where the deceased’s name in the death certificate does not tally with
that of the life insured (e.g. due to a change of name where a deed poll has been
obtained), then the claimant must submit a certified true copy of the deed poll for
the insurer’s verification as well.
A1A. Other Relevant Supporting Documents

2.12 Below are examples of additional supporting documents which the insurer may
request the claimant to provide, especially in instances where proof of death is
not straightforward.
A1B. Attending Physician’s Statement From The Last Medical Attendant

2.13 The attending Physician’s Statement from the last medical attendant is required
when there is a need to further determine if there is any misrepresentation or non-
disclosure by the policy owner and / or life insured. This is especially so when a
claim is made shortly after the purchase of the policy. You should note that, before
the Attending Physician’s Statement could be obtained, the claimant would need
to submit a Clinical Abstract Application form as an authorisation for the insurer
to obtain the deceased’s medical history from any medical source.
A1C. Police Report And Coroner's Report

2.14 The police report and / or coroner’s report would be usually required when death
resulted from unnatural or accidental causes. It is especially important in the case
where:
 the policy carries an accidental death benefit; or
 the death has occurred during the period (usually within the first 12 months
of the policy effective date) when the suicide clause is still operative; or
 the cause of death may be related to any violation of law or criminal act.
A1D. Statutory Presumption Of Death

2.15 A person may disappear, and the family may want to make a claim under his
policy. In such circumstances, the claimant may apply for a court order to
pronounce the person dead, if he has disappeared without trace for at least seven
years or more. Such a pronouncement is called a statutory presumption of death.
There are occasions where a court may declare a missing person dead even
before the expiry of seven years. However, statutory presumption of death is not
binding on the insurer, and the insurer can make further independent enquiries.
A1E. Death At Sea And Death Of Service Personnel

2.16 When the life insured passes away while travelling by sea vessel, the insurer will
normally accept a death certificate that is obtained at the next port of call. In the
absence of such a certificate, a certificate signed by the last medical attendant on
board the ship and counter-signed by the captain of the ship may be accepted as
evidence of death.
2.17 In the case of death of service personnel where the physical body of the person is
never found, the insurer may accept a service certificate of death as proof of death.
A1F. Unregistered Death

2.18 Sometimes, death may occur in remote area, where registration is not possible
and where the body is not found. Such a case is considered based on the evidence
available, and the insurer may accept the declaration by one or more authoritative
persons, such as a magistrate or a clergyman, testifying the death before an
authority of government or court, as evidence of death.
A2. Proof Of Age
2.19 The NRIC or birth certificate serves as proof of the life insured’s age. This is
necessary if the age of the life insured has not been admitted2 at the inception of
the policy. The insurer has to verify if there is any misstatement of age before
settling the death claim.
A3. Proof Of Title
2.20 It is important for the insurer to find out who is entitled to the policy money before
making payment, in order to pay the proceeds to the rightful party. Generally
speaking, there are six broad categories as described below.
2
When a life insured submits an official document of identification, e.g. identity card for the verification
of the life insured’s date of birth, his age is deemed to be admitted (i.e. proof of age substantiated by
the insurer).
(i) Policy Owner

In a third-party policy, the policy owner will be entitled to the policy proceeds
in the event of the life insured’s death.
(ii) Assignment
When the policy has been assigned, the assignee will be entitled to the policy
proceeds upon the death of the life insured.
(iii) Trust
The appointed trustee(s) of a policy under Section 73 of the Conveyancing
and Law of Property Act 1886 effected before 1 September 2009, or Section
132 of the Insurance Act 1966 will have the legal right to claim the policy
proceeds from the insurer. Joint discharge from all the beneficiaries may be
required if trustees are not appointed or are dispensed with, provided that all
the beneficiaries have reached the age of majority and have the capacity to
act.
(iv) Will
The policy proceeds, in the case of a policy covered by a Will, will be paid to
the executor who produces the Grant of Probate.
(v) No Will
If there is no Will, the claimant will have to apply to the court for a letter of
administration. The Letter of Administration authorises the person(s) so
appointed to administer the estate of the deceased. The insurer will pay the
policy proceeds to the administrator on production of the letter of
administration.
B. Total And Permanent Disability Claims
2.21 For such a claim, the payout will be made in a lump sum or by instalments to the
policy owner. The relevant supporting documents which the insurer will normally
request for are as follows:

 claimant’s statement giving the personal particulars of the life insured,
details of his occupation, as well as details of his disability;
 physician’s statement to be completed by the life insured’s attending
physician giving full details of the disability; and
 identity card or birth certificate for verification of the life insured’s identity
and age.
2.22 In addition, the insurer may request that the life insured be examined by the
insurer’s appointed doctor before approving the claim. Furthermore, the insurer
reserves the right to ask for any other relevant supporting documents, whenever
deemed necessary.
C. Maturity Claims
2.23 Before an Endowment Insurance policy is due for maturity, the insurer will start
to prepare for the settlement of the claim. The insurer will write to the policy
owner (sometimes as early as one or two months before the maturity date) to
inform him of the amount payable under the policy. A discharge voucher may be
enclosed for the claimant to complete and return. However, some insurers have
waived this requirement.
C1. Documents Required For The Settlement Of Maturity Claims
2.24 The insurer will usually require the following relevant supporting documents to
be submitted before making payment to the claimant:
(i) the original policy document (note that some insurers have waived this
requirement);
(ii) discharge voucher signed by the claimant (some insurers have also waived
this requirement);
(iii) if the claimant is other than the policy owner:
 the deed of assignment; or
 any other document of title;
(iv) proof of age, if not verified at inception; and
(v) proof of survival, in the case of a Pure Endowment Insurance type of cover.
D. Critical Illness Claims
2.25 The procedure for a critical illness claim is quite similar to that of the disability
claim. The claimant is required to submit the following relevant supporting
documents when making such a claim:
 claimant’s statement;
 attending physician’s statement (note that there are different forms to be
completed for different types of critical illness, hence you have to ensure
that you give the right form to your client to complete); and
 any other medical reports (biopsy report) as requested by the insurer.
E. Hospital Cash (Income) Claims
2.26 The relevant supporting documents commonly required for making such a claim
are:
 claimant’s statement; and
 original copy of hospital bill or medical certificate issued by the hospital.
2.27 Depending on the case, the insurer may also request for an attending physician’s
statement to assess the claim.
F. Accidental Death Benefit Claims
are:
 traffic police report, police report, autopsy report, attending physician’s
statement or coroner’s report, depending on the cause of death and
availability of such reports, and the insurer’s practice in this regard; and (if
required)
 incident report (copy) by the employer submitted to the Commissioner of
Workplace Safety and Health, Ministry of Manpower, Singapore, if the
accident causing death happened at work in the workplace.
G. Accidental Death And Dismemberment Benefit Claims
are:
 attending physician’s statement;
 traffic police report or police report, depending on the cause of
dismemberment; and (if required)
 incident report (copy) by the employer submitted to the Commissioner of
Workplace Safety and Health, Ministry of Manpower, Singapore, if the
accident causing bodily injuries happened at work in the workplace.
H. Annuity Claims
H1. Annuity Payout Procedure
2.30 Most of the time, people opt for the Annuity payouts to be made to them on a
monthly basis. The Annuity payouts will usually be credited directly into the
annuitant’s bank account. For Immediate Annuities, a letter will be enclosed with
the policy contract at the Annuity inception, to inform the annuitant when the first
payment will be credited into his bank account. As for Deferred Annuities, the
insurer will usually notify the annuitant one month before the first Annuity
payment is credited into his bank account.
2.31 As the payouts are made on a regular basis over a specified period of time, or
over the lifetime of the annuitant on the condition that the annuitant is still alive,
the insurer will require documentary proof that the annuitant is alive. For this
purpose, some insurers send an “Affirmation Form” to the annuitant, whereby
the annuitant needs to confirm that he is alive. This form has to be duly witnessed
by a person who has attained the age of 21 years, not an immediate family
member, and who is not a joint bank account holder with the annuitant.
H2. Claims Procedure
2.32 In the event of death of the annuitant whose Annuity is with refund feature, the
beneficiary has to inform the insurer as soon as possible. The insurer will require
the beneficiary / nominee to complete a claimant’s statement, and return it
together with the policy contract and the death certificate for the insurer to settle
the claim. Note that the insurer may ask for additional documents to be submitted.
3. ROLE OF ADVISERS IN CLAIMS SETTLEMENT
3.1 The contractual servicing responsibility of claim lies on the insurance company. It
is good practice for adviser to be familiar with the claim procedures to assist the
client or deceased client’s family out of good will. There are various documents
to be submitted to the insurer when making a claim. The procedure differs
depending on the type of claim, e.g. death, disability, etc. The adviser should
assist the client or the claimant with the claims settlement process, by ensuring
that the client or the claimant completes the necessary forms and submits the
relevant supporting documents to the insurer as required. To assist your clients
in the claim process, you need to equip yourself with the basic knowledge of
claims settlement process. Listed below are some questions you should seek to
find out more, in order to better assist your clients.
(a) What documents are needed to be submitted in the event of a:
 death claim;
 disability claim;
 critical illness claim;
 hospital cash claim;
 hospital expense claim;
 maturity claim; and
 annuity claim?
(b) What needs to be done if the client left a Will, or if he does not have a Will?
(c) How are the proceeds of policies purchased under the CPF Investment
Scheme and Supplementary Retirement Scheme paid in the event of death,
maturity or disability?
(d) What needs to be done when the policy cannot be found?
(e) What needs to be done if the policy has been assigned?
(f) What needs to be done when the policy owner of a third-party policy dies?
(g) What is the maximum amount that the insurer will pay without the grant of
probate?
(h) Who are the proper claimants?
(i) How do you extract an attending physician’s statement from the hospital /
clinic?
(j) What needs to be done when the client has not named a trustee to his policy
issued under Section 73 of the Conveyancing and Law of Property Act 1886
before 1 September 2009, or Section 132 of the Insurance Act 1966?
(k) What needs to be done if the nominee / beneficiary is a minor?
CHAPTER
13
LIFE INSURANCE CL AIMS

Proper Claimants Proper claimants under Section 150(12) of the Insurance Act 1966 refers to persons
who are entitled to the policy monies either as executors of the deceased, or who
claim to be entitled to that sum (whether for their own benefit or not) and are the
deceased’s:
• spouse;
• child;
• parent;
• brother or sister; or
• nephew or niece.
Payment Of Claims Under Section 150(2) of the Insurance Act 1966, an insurer is permitted to make
Without Probate an advance payment of up to a prescribed amount to the proper claimants on the
death of the life insured, without insisting on the production of any grant of probate
or letter of administration.
Prescribed Amount Under Regulation 7 of the Insurance (General Provisions) Regulations 2004,
S$150,000 is prescribed as the amount of life policy and accident and health policy
monies which may be paid by the insurer to the proper claimant, without the
production of any grant of probate or letter of administration.
Types Of Claims • Death Claims
• Total And Permanent Disability Claims
• Maturity Claims
• Critical Illness Claims
• Hospital Cash (Income) Claims
• Accidental Death Benefit Claims
• Accidental Death And Dismemberment Benefit Claims
• Annuity Claims
31
Part I Chapter 14. The Insurance Contract
PART I CHAPTER 14
THE INSURANCE CONTRACT
CHAPTER OUTLINE
1. Elements Of A Valid Insurance Contract

2. Duty Of Disclosure
3. Warranties And Representations
4. Material Misrepresentation
5. Doctrines Of Waiver And Estoppel
6. Breach Of Contract
7. Vitiating Factors
8. Contract Provisions In Life Insurance Policies
LEARNING OUTCOMES

 explain the five elements of a valid insurance contract
 understand the duty of disclosure
 know the definitions of warranties and representations, and their differences
 understand material misrepresentation
 understand waiver and estoppel
 describe breach of contract
 explain the six vitiating factors that can render a contract invalid
 describe the contract provisions in life insurance policies
CONTENTS
CHAPTER OUTLINE ............................................................................................................1
1. ELEMENTS OF A VALID INSURANCE CONTRACT ...................................................... 4
A. Offer And Acceptance ............................................................................................... 4
B. Consideration ............................................................................................................5
C. Capacity To Contract ................................................................................................. 5
C1. Minors .................................................................................................................5
C2. Persons Suffering Legal Disability ..................................................................... 6
C3. Drunken Persons ................................................................................................. 6
C4. Undischarged Bankrupts .................................................................................... 6
D. Insurable Interest....................................................................................................... 7
E. Parties Of The Same Mind (Consensus Ad Idem).................................................... 7
2. DUTY OF DISCLOSURE.................................................................................................. 7
A. Prudent Insurer ..........................................................................................................7
B. Inducement ................................................................................................................8
3. WARRANTIES AND REPRESENTATIONS .................................................................... 8
4. MATERIAL MISREPRESENTATION .............................................................................. 9
A. Ambiguous Questions ............................................................................................ 10
B. Proposal Form Versus Policy .................................................................................. 10
C. Unanswered Or Incomplete Answers .................................................................... 10
5. DOCTRINES OF WAIVER AND ESTOPPEL .................................................................. 11
A. Waiver ...................................................................................................................... 11
B. Estoppel ................................................................................................................... 11
6. BREACH OF CONTRACT .............................................................................................. 11
A. Breach By An Insured.............................................................................................. 11
B. Options To The Insurer On The Discovery Of A Breach Of Utmost Good Faith .. 12
C. Insurer's Duty Of Utmost Good Faith ..................................................................... 12
7. VITIATING FACTORS ................................................................................................... 12
A. Misrepresentation ................................................................................................... 13
B. Duress ...................................................................................................................... 13
C. Undue Influence ...................................................................................................... 13
D. Illegal Contract ........................................................................................................ 14
E. Mistake ..................................................................................................................... 14
F. Non Est Factum........................................................................................................ 14
8. CONTRACT PROVISIONS IN LIFE INSURANCE POLICIES ........................................ 15
A. The Policy Owner’s Rights ...................................................................................... 15
B. Heading And Operative Clauses ............................................................................. 15
C. Policy Schedule ....................................................................................................... 15
D. General Provisions .................................................................................................. 16
D1. Entire Contract .................................................................................................. 17
D2. Travel, Residence And Occupation .................................................................. 17
D3. Payment Of Premiums ..................................................................................... 17
D4. Grace Period ..................................................................................................... 17
D5. Age..................................................................................................................... 18
D6. Suicide ............................................................................................................... 19

D7. Incontestability Clause ..................................................................................... 19
D8. Reinstatement ................................................................................................... 19
D9. Assignment ....................................................................................................... 20
D10. Free Look Period ............................................................................................. 21
D11. Policy Loan ...................................................................................................... 21
D12. Non-Forfeiture Options .................................................................................. 21
D13. Automatic Non-Forfeiture Provision ............................................................... 22
E. Endorsements .......................................................................................................... 23
1. ELEMENTS OF A VALID INSURANCE CONTRACT
1.1 A life insurance policy is a contract between the insurer and the insured, and the
formation of that contract is subject to the normal requirements of the law of
contract for it to be valid1. For the formation of a valid insurance contract; the
following elements must be present:
(a) offer and acceptance;
(b) consideration;
(c) capacity to contract;
(d) insurable interest; and
(e) parties of the same mind (consensus ad idem).
1.2 Let us look at each element in detail.
A. Offer And Acceptance
1.3 The first requirement of a contract is the intention of all the parties to enter into a
legal relationship. Without such an intention, the contract cannot come into
existence.
1.4 As a contract is an agreement, there must be a “meeting of minds” or mutual

agreement between the parties to the contract.
1.5 Ordinarily, mutual agreement is evidenced by the making of an offer expressed

either orally, in writing or by conduct by one party (the offeror), and the
acceptance of the offer by another party (the offeree). The offer must be
unconditionally accepted to constitute an agreement. If the acceptance is
conditional, it is only a counter-offer. An offer may be withdrawn by the person
making it before it is accepted by the other party.
1.6 In the case of life insurance:

(a) the proposal form completed by the proposer together with the first premium
payment constitutes an offer; and
(b) when the insurer accepts the proposer’s application and issues the policy
document, it constitutes an acceptance.
1.7 In other words, a life insurance contract commences only after the acceptance of
a proposal application and the receipt of the first premium payment.
1.8 There is a need to draw a distinction between an offer and an invitation to treat.
When a proposer submits a proposal form to an insurer, the former is said to have
made an offer to the latter. On the other hand, an advertisement or a brochure put
up by an insurer containing details of the risks and rates of premium is likely to be
treated as an invitation to treat.
1
Valid. A valid contract is one that is enforceable at law.
Void. The term void is used in law to describe something that was never valid. A void contract is one
that was never enforceable at law.
Voidable. At times, one of the parties to an otherwise enforceable contract may have grounds to reject,
or avoid it. A voidable contract is one in which a party has the right to avoid her obligations under the
contract without incurring legal liability.
B. Consideration
1.9 A contract is ordinarily based on reciprocity (something given or done in return).

When a party promises to do certain thing(s) under a contract, he is called the
promisor. In giving the promise, the promisor must receive something in return,
and what he receives for the promise is called consideration. Consideration can
be in money or money’s worth. It can be a return promise to do certain thing(s),
or to abstain from doing certain thing(s), or to forbear (cease or refrain from doing)
some acts. All these constitute the consideration.
1.10 For example, if a person travels in a bus, the bus-fare that he pays is the
consideration for the right to travel in the bus. The wages paid to an employee are
the consideration for the services rendered by him to the employer.
1.11 A contract is not enforceable at law, unless a consideration has passed from the
promisee to the promisor. In a life insurance contract:
(a) the premium paid is the consideration for the promise as contained in the
policy contract; and
(b) the surrender value is the consideration for the promise by the policy owner
to forgo all rights under a policy of insurance.
C. Capacity To Contract
1.12 A person of legal age, without mental or other incapacity, is legally competent to
enter into a contract. Such a person is said to have contractual capacity. However,
the law limits the capacity of certain persons to do so.
1.13 These are:

(a) minors;
(b) persons suffering legal disability;
(c) drunken persons; and
(d) undischarged bankrupts.
C1. Minors
1.14 Minors cannot ordinarily enter into a contract, though with certain exceptions.
Under the Civil Law (Amendment) Act 2009, effective on 1 April 2009, a contract
entered into by a minor having attained the age of 18 years, shall have the same
effect as that of having attained full age (effect is that such contract will be binding
and enforceable against such a minor).
1.15 However, Section 147(1) of the Insurance Act 1966 lays down special provisions
governing the capacity of minors to enter into life insurance contracts. The section
stipulates that “Notwithstanding any law to the contrary, a person over the age of
10 years shall not, by reason only of his age, lack the capacity to enter into a
contract of insurance; but a person under the age of 16 years shall not have the
capacity to enter into such a contract except with the consent in writing of his
parent or guardian.”
1.16 However, the law does not appear to give any rights to a minor to assign,
mortgage or surrender his insurance policy. Neither does it make any provision
for a policy owner who is still a minor to effect policy transactions which involve
the payment of the policy money to him. Neither can the minor give a valid
discharge in respect of the policy money payable to him under the policy where
he is the policy owner. Instead, the minor, who may be the policy owner, will have
to wait until he has reached the age of contractual capacity of 18 years, before he
can give a valid discharge in terms of the policy money payable to him, upon the
death of the life insured under the policy.
C2. Persons Suffering Legal Disability
1.17 Generally, a contract entered into by a mentally disordered or drunken person is

not binding on him, if at the time of contracting, he was incapable of
understanding the nature of the contract that he was entering into, and the other
party was aware or ought to have been aware of his mental state.
1.18 In Singapore, the Mental Capacity Act 2008 came into effect on 1 March 2010. In
the context of the law of contract, if the party at the time of contracting was
suffering from such a degree of mental disability that he was incapable of
understanding the nature of the contract, he would be considered as a mental
person, and the contract would be voidable at his option, provided that the other
contracting party knew or ought to have known of the mental disability. However,
if the contract was made by him during the time when he was of sound mind, he
would be bound by the contract even if his subsequent disability was known by
other party.
1.19 However, if necessaries are sold and delivered to a mental person, he must pay a
reasonable price for them.
C3. Drunken Persons
1.20 Similarly, if a person who was unable to understand the nature of a contract due
to the influence of alcohol, entered into a contract with another person who was
aware or ought to have known of the first person’s intoxication, that contract
would be voidable at the option of the drunken person. However, the drunken
person may ratify it when he becomes sober. Again, any necessaries which are
sold and delivered to a drunken person at a reasonable price shall be payable by
him.
C4. Undischarged Bankrupts
1.21 The Insolvency, Restructuring and Dissolution Act 2018 places restrictions on the
rights of an undischarged bankrupt to enter into contracts.
1.22 Even if he has entered into a contract earlier, once he becomes a bankrupt, his
interest in any life insurance policies, except policies issued under Section 73 of
the Conveyancing and Law Of Property Act 1886, and policies issued under
Section 132 of the Insurance Act 1966, and all other assets will be vested with the
Official Assignee.
D. Insurable Interest
1.23 In order for the insurance contract to be valid, the policy owner must have an
insurable interest in the life of the proposed insured when the policy is issued. The
concept of insurable interest has been explained in an earlier chapter.
E. Parties Of The Same Mind (Consensus Ad Idem)
1.24 This term means in complete agreement of mind. In any contract, the parties must
be ad idem – of the same mind – as to the subject matter of the contract. In
ordinary commercial contracts, each party is deemed to be equally able to assess
the merits of the bargain offered. As long as a seller makes no misrepresentations,
they are under no duty to the buyer to express any opinion about what is offered
for sale. Hence, the maxim, caveat emptor, let the buyer beware, applies.
1.25 For example, a person selling a vehicle is not required to disclose that the vehicle
was previously involved in a road traffic accident. However, in an insurance
contract, the insured would be under a duty to disclose to the insurer that he was
involved in road traffic accidents before. It also bears emphasis that the duty of
disclosure in an insurance contract applies to both parties, that is, the insured and
insurer.
1.26 In the case of life insurance contracts, as the proposer knows personal facts of
health, occupation and life risks that the insurer cannot possibly know, the “caveat
emptor” rule cannot apply. This is because it is on these facts that the premium is
assessed. This law, therefore, imposes on the proposer the duty of utmost good
faith or uberrima fides. The proposer, thus, has a duty to disclose all material facts
to the insurer. We will explain this duty more fully in the section below.
1.27 The insurer must also observe uberrima fides. By this, it means the party can be
ad idem as to the risk proposed.
2. DUTY OF DISCLOSURE
2.1 As stated above, the proposer must disclose all material facts known by them to
the insurer.
2.2 The duty is to disclose voluntarily, and the proposer cannot withhold a material
fact because no specific question was asked on that point in the proposal or
medical examination. A proposer might, however, be justified in inferring from
the fact that the question was not asked that the information undisclosed was not
regarded as material.
A. Prudent Insurer
2.3 The test of the “prudent insurer” entails that the opinion of the insured is
irrelevant. Therefore, even if the insured believes that he had acted in good faith,
he may still fail to discharge the duty of disclosure.
2.4 It is important to stress that the Courts look at the prudent insurer from an
objective standpoint. Nevertheless, the opinion of the insurer concerned is
relevant as evidence, even though it may not necessarily be decisive.
B. Inducement
2.5 There must be a causal link between the misrepresentation or non-disclosure and
the decision to enter into the contract. A case law established that the insured for
misrepresentation or non-disclosure must show not only that the circumstance
was material to the risk (the prudent insurer’s test), but also that the
misrepresentation or non-disclosure in question induced him to enter into the
contract of insurance.
3. WARRANTIES AND REPRESENTATIONS
3.1 In applying for life insurance, the proposer will be required to complete and sign
a proposal form. The form contains questions designed to provide the insurance
company with relevant information, so that it can decide whether the proposed
insured is an insurable risk. According to the rules of contract law, statements
made by the parties when they enter into a contract can be classified as either
warranties or representations. A warranty is a statement guaranteed to be true in
all respects. In the early days of insurance, statements that an insurance applicant
made were considered to be warranties. If a statement were untrue in any respect,
the contract could be rescinded, the applicant did not know the statement was
untrue and even though the statement was not material. The proposer was
required in the past to warrant the truth of the statements (of facts) given in the
proposal form. The clause which requires him to do so is known as a basis clause.
The clause is a declaration made by the proposer that usually appears at the
bottom of a proposal form. It states that the answers given in the proposal form
are correct and true. This expressed declaration along with the information in the
proposal form becomes the basis of the insurance contract between the proposer
and the insurer. A basis clause in the proposal form, thus, makes it a source of
terms of the insurance contract. Such a clause imposes warranties on the part of
an insured in an insurance contract. An insurer is entitled to avoid a contract ab
initio if the statements are found to be inaccurate after the insured has warranted
the truth of the statements made in the proposal form. When a basis clause exists,
the insurer does not need to show that the misstatement relates to a material fact.
3.2 In Singapore, insurers used to include a basis clause in the proposal form to
enforce the contractual duty of utmost good faith on the part of the proposer.
Note, however, that the Life Insurance Association of Singapore had issued a
“Statement of Life Insurance Practice Binding on All Members” on 1st April 1993.
Under Paragraph (g) of the Statement, the basis clause is no longer allowed for
any life insurance policy insuring the life of the owner. However, the basis clause
is still effective where a person insures the life of another, e.g. in the case of a
person who insures the life of his spouse or child.
3.3 Paragraph 1(g) of the Statement reads as follows:
“A proposal form or a policy of insurance issued by a member shall

not contain any provision which converts or purports to convert
any statement made by the proposer relating to any fact, whether
past or present, into a warranty of that fact except where the
warranty concerns the life to be assured under a “life of another”
policy.”
3.4 A representation, as contrasted with a warranty, is an applicant’s statement of

facts on which the insurer bases its decision to issue, or not to issue the policy
applied for. Unlike a warranty, a representation need not be true in all respects,
but need only be substantially true as to facts material to the risk. If the applicant’s
statements are representations, the insurer ordinarily cannot rescind the contract
or defend a suit for benefits on the ground of misrepresentation of a fact, unless
that fact is material to the risk. If the applicant’s statements were warranties, the
insurer could so defend or rescind, whether or not the misrepresented fact was
material to the risk.
3.5 In Singapore, life insurance policies contain a provision declaring that, in the
absence of fraud, all statements in the application shall be deemed
representations and not warranties. The Life Insurance Association of Singapore
issued a Paragraph 1(g) of the Statement contained a clause which attempted to
do away with the basis clause for life insurance.
4. MATERIAL MISREPRESENTATION
4.1 A false or misleading statement in an application for insurance is known as a

misrepresentation. Some statements contained in the application are more
important to the insurer’s decision to issue a policy than are other statements. A
misrepresentation that would affect the insurance company’s evaluation of the
proposed insured is called a material representation. A misrepresentation is
considered material when, if the truth had been known, the insurer would not
have issued the policy or would have issued the policy on a different basis, such
as for a higher premium or for a lower face value. A misrepresentation in an
application for life insurance gives the insurer grounds to avoid the contract only
if it was a material misrepresentation.
4.2 To protect the interest of the insuring public, Section 23(5) of the Insurance Act
1966 provides that:
“No Singapore insurer shall use, in the course of carrying on

insurance business in Singapore, a form of proposal which does
not have prominently displayed therein a warning that if a
proposer does not fully and faithfully give the facts as he knows
them or ought to know them, he may receive nothing from the
policy.”
4.3 The section essentially imposes a statutory duty on an insurer to prominently

display on a proposal form a warning that, if the proposer does not make full and
faithful disclosure of facts that he knows or ought to know, he may receive nothing
from the policy. The insurer can declare the contract void from inception. In the
case of fraudulent misrepresentation, an aggrieved insurer who has suffered a
loss can sue for damages. Damages may also be recoverable under Section 2(1)
of the Misrepresentation Act 1967 for negligent misrepresentation.
A. Ambiguous Questions
4.4 Where a question in a proposal form is ambiguous, a fair and reasonable

construction will be employed to construe the meaning. Any doubts will be
resolved in the insured’s favour, as the insurer was the one who was responsible
for preparing the proposal form. This is the effect of what is known as the contra
proferentum rule.
4.5 The rule states that where there is ambiguity in the terms of an insurance contract,
the contra proferentem rule dictates that the term is to be construed against the
party who prepared the contract. As an insurance contract is invariably prepared
by the insurer, any ambiguity in the policy of insurance is usually resolved in
favour of the insured. For example, where a question is open to two
interpretations, the one adopted by the insured will be preferred. However, if the
insured understands the purpose of the question, notwithstanding its ambiguity,
he is no longer allowed to rely on the ambiguity.
B. Proposal Form Versus Policy
4.6 In the event of a conflict between a proposal form and a policy, the latter takes
precedence over the former. This is because the policy is a document that is
prepared subsequent to the submission of the proposal form.
C. Unanswered Or Incomplete Answers
4.7 An insured who deliberately avoids answering a question or submits an

incomplete proposal form runs the risk of having the proposal rejected. He would
also have failed to comply with his duty to give disclosure.
4.8 Where an insured submits an incomplete proposal form and the insurer issues a
policy without making any further enquiry, it may be held that the insurer has
waived his right to a more complete answer from the insured.
5. DOCTRINES OF WAIVER AND ESTOPPEL
5.1 Under contract law, where insurance is concerned, there are two important
doctrines called “Waiver” and “Estoppel”.
A. Waiver
5.2 Waiver is the intentional and voluntary relinquishment (giving up, forgoing) of a
known right. It can be based on a written or oral statement that specifically
relinquishes a right (express waiver), or it can be implied by misleading conduct
(implied waiver).
5.3 For example, an insurer may choose to issue a life policy, even though one of the
medical questions in the proposal form may not have been answered, the insurer
will be deemed to have waived its right to obtain the answers.
B. Estoppel
5.4 Estoppel, on the other hand, arises when an insurance professional intentionally
or unintentionally creates the impression that a certain fact exists when it does
not, and an innocent third party relies on that impression and suffers damage as
a result. In this case, the insurer will be estopped (prevented) from denying this
fact. For example, if a claims officer indicates by his actions that a claim will be
paid, the insurer will be estopped from denying the liability.
5.5 The doctrine of waiver and estoppel could result in an insurer being legally liable
to pay a claim that it ordinarily would not have to pay.
6. BREACH OF CONTRACT
A. Breach By An Insured
6.1 An insured may commit a breach of his duty of utmost good faith by one of the
following ways:
 Innocent Non-Disclosure - omission to disclose a material fact inadvertently
(unintentionally) or because the party thought it was not material;
 Fraudulent Non-Disclosure / Concealment - intentional suppression of a
material fact;
 Innocent misrepresentation - inaccurate statements regarding a material
fact, believing them to be true, or are made without any intention to
mislead;
 Negligent misrepresentation - statements made carelessly or recklessly,
where the insured has no reasonable basis to believe it to be true, and yet
has no intention to deceive; and
 Fraudulent misrepresentation - statements made with the intention to
deceive and known by the person making them to be false; note that
negligent misrepresentation may also amount to fraudulent
misrepresentation.
B. Options To The Insurer On The Discovery Of A Breach Of Utmost Good Faith
6.2 The insurer may take any of the following courses of action as shown in Table
14.1 on the discovery of a breach of utmost good faith by the insured:
Table 14.1: Options To The Insurer On The Discovery of A Breach Of Utmost

Good Faith
Innocent Fraudulent
Breach By Breach By The
The Insured Insured
Right to void the policy as a whole? YES YES
Right to keep the premium as well? NO YES
Right to claim damages as well? NO YES

Right to ignore the breach, and allow the
YES YES
policy to stand?
Right to refuse a particular claim, but allow
NO NO
the policy to stand?
C. Insurer's Duty Of Utmost Good Faith
6.3 The principle of utmost good faith also applies to the insurer. The insurer cannot
make any wrong representation about the contract that the insurer is offering.
There should be no difference between the prospectus, advertisement, brochure
or any marketing material and the policy which it eventually issues. Section 23(1)
of the Insurance Act 1966 empowers the Monetary Authority of Singapore (MAS)
to request an insurer, by notice in writing, to submit to the Insurance Department:
 the proposal form and policy used by the insurer; and
 any brochures issued by the insurer describing the terms or conditions of,
or the benefits to be or likely to be derived from the policies.
6.4 If it appears to the MAS that such forms or brochures are likely to mislead, the
MAS may direct the insurer concerned to discontinue their use.
7. VITIATING FACTORS
7.1 An insurance contract which contains the elements required by law as mentioned
above may still be invalid due to the following reasons:
(a) misrepresentation;
(b) duress;
(c) undue influence;
(d) illegal contract;
(e) mistake; and
(f) non est factum.
7.2 When a contract is induced by misrepresentation, duress and undue influence, it

is voidable at the option by the innocent party. This means that the innocent party
has a choice whether to uphold the contract or to call it off. However, a contract
which is illegal or formed by mistake is void, which means that the Courts will
treat the contract as never having existed.
A. Misrepresentation
7.3 A contract is voidable by a party to the contract if he was induced into entering
the contract by misrepresentation on the part of the other party. At common law,
in order for a contract to be invalidated, it must be shown that the
misrepresentation or false statement:
 was a statement of fact as opposed to a statement of opinion, law or belief.
A promise being a statement about the future, is not a statement of fact;
 was made by a party to the contract. A false statement by a non-party to
the contract cannot invalidate a contract;
 was material, such that it would affect the judgement of a reasonable man
or, a prudent insurer in the case of insurance contract;
 induced the other party to enter into the contract. The other party must
have relied on the false statement in deciding to enter into the contract; or
 caused some detriment or disadvantage to the party who relied on it. If no
detriment is caused to the party relying on the false statement, he may elect
to continue with the contract.
B. Duress
7.4 A contract is formed by mutual consent of the parties. Accordingly, if a party is

under coercion to consent, the contract may not be valid as the consent given is
not genuine.
7.5 Traditionally, the Courts have recognised that actual harm or a threat to harm a
person or his loved ones will mount to duress which invalidates the contract.
Hence, if A points a gun at B’s son forcing B to sign the contract, the contract is
invalid. However, the threat must not be so trivial that a person with reasonable
courage will not be coerced. For example, a threat to cut one’s hair may not be
held as duress which vitiates consent.
7.6 The threat must be illegal. Hence, if the threat is to prosecute a crime which has
been committed or to a civil wrong, it does not amount to duress and the contract
cannot be impeached. However, the contract may be void on the grounds of
public policy if it amounts to an agreement which perverts the course of justice.
C. Undue Influence
7.7 When there is inequality between the parties to a contract (such as where relations
between the parties are such that one of the parties is in a position to dominate
the will of the other party), and one of them (i.e. the dominator) takes an unfair
advantage of the situation of the other and forces an agreement upon him, the
contract may be set aside under the doctrine of undue influence.
D. Illegal Contract
7.8 It is important to know that certain types of contract are prohibited by statute or
at common law on the grounds of public policy. No party can enforce such
contracts in Courts. They are void and not voidable at the choice of the parties.
7.9 Section 5 of the Civil Law Act 1909 provides that all contracts or agreements,
whether orally or in writing, by way of gaming or wagering shall be null and void.
Accordingly, no one can sue for recovery of the monies won under such
circumstances. Hence, gaming and waging debts are not legal debts. There is
nothing to prohibit parties from honouring their words in a game or wager, but
the gates of justice would be shut at them.
7.10 Similarly, an insurance contract will amount to a wagering contract if the policy
owner does not have the insurable interest on the insured subject matter and such
policy owner cannot sue the insurer for payment under the policy.
E. Mistake
7.11 Sometimes, parties reach an agreement without knowing that the facts, which
were the very reason for the contract, did not exist, or not knowing the existence
of certain facts, the existence of which would have caused the parties to not enter
into the contract. In such cases, their consent is mistaken and the contract is
therefore void ab initio (i.e. the contract is treated as if it had not existed at all).
F. Non Est Factum
7.12 The term “non est factum” means “this is not my deed”. As a general rule, if a
person who is not a person under any incapacity signs a contract, he will be bound
by the contract whether he has read it or not. However, if he can show that the
document which he signed was not the one he intended to sign and the mistake
was not due to his carelessness, he may be able to avoid the contract on the
ground of non est factum. Fraud is not an element required for the operation of
this law. However, it presents itself in most of the cases involving non est factum.
If A, an old and illiterate lady, was given a document by her grandson to sign, and
told it was for entering a lottery game when it was in fact a guarantee for his debt,
she may claim the defence of non est factum to avoid the contract if she was
subsequently sued on the guarantee.
7.13 The mistake must be a fundamental mistake as to the character or effect of the
document. If a party was careless or ignorant as to what he is signing, he may not
rely on the defence of non est factum to avoid the contract. Thus, if in the same
case the old lady had simply signed the document without asking her grandson
what it was for, she would be bound by the guarantee.
8. CONTRACT PROVISIONS IN LIFE INSURANCE POLICIES
A. The Policy Owner’s Rights
8.1 The policy owner is entitled to certain rights under his policy. Some of the
common rights of a policy owner are listed below.
(a) Naming The Insurance Nominee / Beneficiary
Refer to a later chapter in this Study Text for the discussion on the naming
of insurance nominees.
(b) Selecting How Proceeds Are To Be Paid
Some insurers provide a number of options on the way in which the
insurance benefits may be distributed. In such cases, the policy owner has
the right to determine how the policy proceeds are to be paid out, including
leaving the decision to the insurance nominees / beneficiaries.
(c) Assign Policy Rights
The policy owner has the right to assign the policy, and transfer all or a
stipulated portion of the rights in the policy to another party.
(d) Borrow From The Policy
The policy owner of a non-ILP, such as a Whole Life or Endowment
Insurance policy which acquires cash value, may borrow from the insurer
using the policy’s cash values as collateral.
(e) Receive The Cash Surrender Value
The policy owner is entitled to the cash surrender value, if any, when the
policy is surrendered, after the policy has been in force for a specified
number of years (usually two or three years).
(f) Establish And Change The Frequency Of Premium Payment
The policy owner who pays his premium (other than using the savings in
his CPF account), has the right to select the premium payment mode, i.e.
yearly, half-yearly, quarterly or monthly, and may change the payment
frequency as desired at any time during the term of the policy. He may also
opt to pay by single premium or recurrent single premium depending on
the policy conditions.
B. Heading And Operative Clauses
8.2 This section of the life insurance policy forms the first page of the policy. The
heading refers to the name and address of the insurer. The operative clause
provides information on the sum assured to be paid in the event of the happening
of the insured event.
C. Policy Schedule
8.3 The policy schedule usually contains details of the policy owner and life insured,
as well as the insurance coverage. The information contained in a policy schedule
usually includes the following:
 policy number;
 commencement date of the policy (date at which the policy becomes
effective);
 expiry / maturity date of the policy;

 issue date (date at which the policy is issued);
 currency in which the policy is being issued;
 name, age, gender and NRIC number of the policy owner and life insured;
 name of basic plan;
 types of riders (if any);
 sum assured of basic plan and riders;
 term of coverage for basic plan and riders;
 premium for the basic plan and riders; and
 special provisions / endorsements indicating the types of endorsements
attached to the policy (this practice is not common for all insurers).
8.4 When you deliver the policy promptly to the client, you need to go through this
policy schedule with the policy owner thoroughly, to ensure that there are no
errors and that the insurance coverage tallies with what he has earlier agreed with
you. Finally, you must ensure that all the endorsements (e.g. rider endorsements),
if any, have been attached to the policy.
D. General Provisions
8.5 General provisions cover the basic features that are generally applicable to all life
insurance policies. Certain general provisions (e.g. the “free look period”
provision) are required by law, but the specific wording may vary from one type
of policy to another and from insurer to insurer.
8.6 Below are some of the standard provisions commonly found in Individual life
insurance policies:
 entire contract;
 travel, residence and occupation;
 payment of premiums;
 grace period;
 age;
 suicide;
 incontestability clause;
 reinstatement;
 assignment;
 free look period;
 policy loan; and
 non-forfeiture options (including automatic non-forfeiture privilege) - for
policies that acquire cash value only.
8.7 We will now look at each of the above provisions in turn.
D1. Entire Contract
8.8 The proposal form (including medical evidence), policy contract and all
endorsements that are attached to the policy make up the entire contract.
8.9 The purpose of this provision is to avoid any misunderstanding on what the
insurance contract provides. Attaching a copy of the proposal form to the policy
contract is, for example, to avoid possible controversial issues between the
insurer and the policy owner concerning the information contained in the
proposed application for insurance.
D2. Travel, Residence And Occupation
8.10 This provision defines the scope of coverage under the policy. Most insurers do
not impose any restriction on the life insured with regard to travel, residence or
occupation, unless it is specifically excluded by the underwriter.
D3. Payment Of Premiums
8.11 This provision specifies that premiums are payable yearly, unless the insurer
agrees to other modes of payment (except single premium policies).
8.12 The insurer usually allows a policy owner to pay his premium yearly, half
yearly, quarterly or monthly.
8.13 The provision also highlights to the policy owner the right of the insurer to
deduct any outstanding instalment premiums required to make up a full year’s
premium in the event of a claim. Below is an example of this provision:
“Premiums are payable yearly unless otherwise agreed by the company.
Where premiums are paid other than yearly, the company shall be entitled
to deduct from the proceeds due under the policy in the event of a claim,
the unpaid balance of the premium payable for a full policy year (to be
calculated from the policy anniversary date immediately prior to the date
of claim).”
D4. Grace Period
8.14 The grace period is a period of time (usually 30 or 31 days from the premium due
date) given by the insurer to the policy owner to pay the renewal premium which
has been due but not yet paid. During the grace period, the life insured will
continue to enjoy the insurance cover. Below is an example of the grace period
wording:
“A grace period of thirty (30) days, without interest charge, will be allowed
for the payment of every premium due. During the grace period, the policy
will continue to be in force but if a valid claim is made during the grace
period, the company in determining the amount of the proceeds payable
will deduct any unpaid premium from the amount otherwise payable by
the company as provided above. If any premium remains unpaid at the
end of the grace period, the policy will, subject to the provisions relating
to automatic non-forfeiture privilege, automatically terminate and have no

further value.”
8.15 The following is a summary of how the grace period works:

(i) Premium Paid Within The Grace Period
No interest is charged and the policy owner only needs to pay the outstanding
premium due.
(ii) Premium Paid After The Grace Period
The policy owner needs to pay interest on the overdue premium which is
calculated from the premium due date. If the policy has not accumulated any
cash value, the policy will lapse, and a conditional reinstatement is required.
(iii) Death Occurred Within The Grace Period
The insurer will deduct the outstanding premium for the year from the policy
proceeds.
(iv) Death Occurred After The Grace Period
 No Cash Value Policies
Any policy without cash value will lapse, and nothing is payable.
 Cash Value Policies
In the case of a policy with cash value, the policy will be kept in force
under the automatic premium loan or any other form of non-forfeiture
option. In the former case, the accumulated automatic premium loan
amount plus accrued interest will be deducted from the policy proceeds.
For the latter, the proceeds payable will depend on the specified terms
and conditions of the non-forfeiture options.
D5. Age
8.16 Misstatement of age can occur and it is usually unintentional. Generally, the
insurer does not view such error as material enough to void the policy. As such,
the insurer usually includes in the policy contract a misstatement of age clause
to take care of such a situation. Below is an example of a misstatement of age
clause:
“The assurance age of the life insured specified in the Policy Schedule is
the age, as stated in the proposal, on the birthday immediately following
the effective date of the policy. If the age has been understated, the
amount payable under the policy shall be only such sum as the premium
paid would have purchased according to the rate at the true age. If the age
is overstated, any excess premium paid shall be refunded without
interest.”
8.17 As you can see from the above example, if there is a understatement of age,
e.g. the life insured stated that he is 30 years old instead of 32 years old in the
proposal form, the insurer will reduce the sum assured to that which the
premium paid would purchase. On the other hand, if the age was over-stated,
the insurer will refund the excess premium paid without interest.
8.18 As the insurance adviser, you can help to prevent misstatement of age by
verifying your client’s date of birth in his identity card.
D6. Suicide
8.19 Under this provision, if the life insured commits suicide within a specified period
of time (usually one year) from the issue date of the policy or the date of
reinstatement of the policy, the policy will be void, and the insurer is not liable to
pay any claim. The insurer may refund all the premiums paid from the effective
date or date of reinstatement. The insurer usually does not pay any interest on the
premium refunded, because the interest earned is used to offset part of the costs
that the insurer incurred in issuing the policy. However, once the specified period
expires, the insurer will have to pay the claim, even if the life insured has died as
a result of suicide.
8.20 This provision applies regardless of whether the life insured was sane or insane
at the time that he committed suicide. You must check your insurer regarding the
specific application of this provision, and highlight to your client accordingly.
Below is a sample of the suicide clause wording:
“Death by suicide within one (1) year from the issue date of the policy or the
date of any reinstatement (as the case may be) regardless of the mental
condition of the life insured at the time of death shall render the policy void,
in which event the liability of the company under the policy shall be limited
to only refund of the total premium paid beginning from the effective date,
or if the policy has been reinstated, the total premiums paid beginning from
the date of reinstatement.”
D7. Incontestability Clause
8.21 By this provision, the insurer undertakes not to dispute the validity of a life
insurance contract and void it, after the policy has been in force for a specified
period of time (normally one or two years) with the exception of fraud.
8.22 In other words, this provision stops the insurer from repudiating (rejecting the
validity of) its liability under a policy purely on grounds of breach of utmost good
faith. A typical clause reads as follows:
“The policy shall be incontestable, except for non-payment of premiums
or for fraud, after it has been in force during the lifetime of the life insured
for two (2) years from the issue date or the date of any reinstatement of
the policy, whichever is the later.”
D8. Reinstatement
8.23 Reinstatement is the process by which an insurer puts back into force a life
insurance policy that has either been:
 terminated because of non-payment of renewal premiums; or
 continued under the extended term or reduced paid-up insurance of the
non-forfeiture options.
8.24 This provision spells out the conditions under which a lapsed policy will be
reinstated. The policy owner can reinstate a policy within a certain period of time
(usually 12 to 36 months) after it has lapsed, provided that the following
conditions are met:
(i) the policy owner has submitted a reinstatement application form within the
time frame stated in the reinstatement provision;
(ii) the policy owner has provided the insurer with satisfactory evidence of the
life insured’s continued insurability i.e. a health warranty; and
(iii) the policy owner has paid up all arrears of premiums with interest.
8.25 Lapses that are reinstated within a short period of time tend to be subject to fewer
reinstatement conditions, such as those mentioned above, since adverse selection
against the insurer is likely to be minimal.
8.26 However, the longer the period of lapse, the more the reinstatement conditions
will apply (e.g. the insurer may call for Attending Physician’s Statement, etc.).
When a policy has been reinstated, the original policy is put into effect, and no
new policy is issued.
8.27 Below is a typical example of a reinstatement clause:

“The policy may, if terminated pursuant to the provisions herein relating to
payment of premium or loan or automatic non-forfeiture privilege, be
reinstated at any time within twelve (12) months of termination upon written
application to the company with production of evidence of insurability,
including good health, satisfactory to the company, subject to (a) payment
of all overdue premiums, together with interest thereon up to the date of
reinstatement at a rate which shall be determined by the company from time
to time, and (b) repayment or reinstatement of any loan and any interest due
thereon up to the date of reinstatement at the rate at which the loan
originally granted.”
8.28 Note that most insurers normally do not permit the reinstatement of a policy that
has been surrendered for its cash value, or if the policy has lapsed for a long
period of time (e.g. for more than three years).
D9. Assignment
8.29 The Assignment provision gives the policy owner (assignor) the right to transfer
his ownership rights under a policy to another person (assignee). It also spells out
the steps that the policy owner or the assignee must take in order for the insurer
to acknowledge the assignment, i.e. the policy owner or assignee must inform the
insurer of the assignment in writing.
8.30 Below is an example of an assignment clause:

“No assignment of the policy shall be binding upon the company unless
notice of the assignment together with a copy of the duly executed
assignment has been given to the company and receipt thereof is
acknowledged by the company. In registering the assignment, the company
does not assume responsibility for the validity of the assignment.”
8.31 Note that in the case of a policy with Trust Nomination, your client cannot assign
the policy to anyone, without the prior written consent of the nominee(s).
D10. Free Look Period
8.32 This provision allows the policy owner 14 days to review his policy after the policy
has been delivered to him. If he is not totally satisfied with the policy and returns
it to the insurer within the specified period, he will receive a full refund of the
premium, less any medical fees incurred by the insurer in assessing the insurance
application, if applicable. In the case of an ILP, in determining the amount payable
to the policy owner, the insurer may also make an adjustment to reflect the change
in unit price of the ILP sub-fund purchased.
D11. Policy Loan
8.33 The Policy Loan provision allows the policy owner to apply to his insurer for a
loan as long as the policy has a cash value. The insurer will charge interest on the
policy loan. Below is an example of a policy loan clause.
“After the Policy has acquired a cash surrender value, the Company shall at
the request of the Insured advance as a loan a sum which, allowing for other
indebtedness charged on the Policy (if any), shall not exceed ninety (90) per
cent of the cash surrender value acquired, subject to payment of interest at
a rate to be determined by the Company from time to time and such other
conditions as may be imposed by the Company. All loans, together with
interest thereon, shall constitute a first charge upon the Policy in favour of
the Company in priority to all other claims.
(An assignee of the Policy should check with the Company to establish the
amount of loan outstanding, if any.)”
D12. Non-Forfeiture Options
8.34 Non-forfeiture options are only granted to traditional permanent insurance

policies (e.g. Whole Life and Endowment Insurance) that accumulate cash values.
However, they are not available for ILPs.
8.35 According to Section 149(2) of the Insurance Act 1966, a life insurance policy
which has been in force for a minimum of three years shall not lapse or be
forfeited by reason of the non-payment of premiums. The common non-forfeiture
options provided by most insurers are:
 cash value option;
 reduced paid-up insurance option; and
 extended Term Insurance option.
8.36 Let us look at each of them in turn.
D12A. Cash Value Option

8.37 The policy owner can receive the cash value which has been accumulated under
his policy, if he decides to surrender his policy after two or three years. However,
there are policies that provide for cash accumulation within the first year after the
policy’s inception; as such, the policy owner need not wait for two to three years
before he can surrender his policy.
8.38 Some insurers provide the cash value in a table form in the policy contract. It is
important to note that the amount which the insurer pays the policy owner is the
cash value under the policy less any indebtedness (e.g. policy loan), and if
applicable, administrative fee for terminating the policy. Once the payment is
made, the insurance protection terminates, and the insurer has no further
obligation under the policy.
D12B. Reduced Paid-up Insurance Option

8.39 The policy owner can also use the cash value under the policy to purchase a
single-premium paid-up policy, at the attained age (i.e. the age at the time of
exercising this option), for a reduced amount of cover without medical or financial
underwriting. To exercise this option, the policy owner only needs to notify the
insurer in writing. As the sum assured after the conversion can be small as
compared to the original sum assured, it is important that you highlight this point
to your client before he exercises his right. In addition, you need to inform your
client that the paid-up policy is on a non-participating basis. Some insurers also
show the paid-up value for each anniversary year in a table form in the policy
contract.
D12C. Extended Term Insurance Option

8.40 In addition, the policy owner may also use the cash value accumulation as a single
premium to purchase a paid-up extended Term Insurance policy for a sum
assured equal to that of the original policy without medical or financial
underwriting. However, the length of the term is dependent on the net cash value
available, as a net single premium at the life insured’s attained age to purchase
the extended Term Insurance. As such, a policy with a higher net cash value may
purchase an extended Term Insurance coverage that can remain in force for a
longer period of time.
8.41 You must explain to your client that if he opts to convert the policy to a paid-up or
extended Term Insurance, his coverage will remain in force without him having
to pay any further premium on the converted policy. These options are useful to
clients who may have financial difficulties and are not able to continue to pay the
premium.
D13. Automatic Non-Forfeiture Provision
8.42 If the policy owner fails to elect (decide on) any one of the above-mentioned non-
forfeiture options, the insurer will usually activate the Automatic Premium Loan
(APL) provision. Under this provision, the insurer will advance the cash value
under the policy as a loan to pay the outstanding premium, thus keeping the
policy in force.
8.43 Below is an example of the APL wording:

“If after the policy has acquired a cash surrender value, any premium is not
paid within the grace period, the Company shall, without obligation on its
part to notify the Assured, advance as a loan an amount equivalent to the
unpaid premium to be applied in payment of such unpaid premium so as to
keep the policy in force.”
8.44 In the above sample contract wording, it provides that, if the policy has a cash
value equal to or greater than the premium in default, any premium unpaid
beyond its grace period will be paid by the APL. However, once the cash value
under the policy is insufficient to pay for the full outstanding premium, the policy
will lapse.
8.45 Note that not all policies have the APL feature. For those insurers that provide this
feature, they are treating it as any other loan with interest charged on the loan.
Some insurers limit this provision to only one year, after which they will use the
balance of the cash value to convert the policy into an extended Term Insurance
policy. Hence, it is important that you familiarise yourself with your insurer’s
practice, so that you can advise your clients appropriately.
E. Endorsements
8.46 Endorsements are amendments to an insurance policy that become a part of the
insurance contract, and they expand or limit the benefits payable. For example,
an addition or deletion of riders after a policy has been issued will result in an
endorsement being issued for attaching to the policy. An exclusion imposed on a
policy will also result in an endorsement being issued. Assignment of policies can
also be done by way of an endorsement.
8.47 Endorsements vary considerably in their contents. It is just as important to explain

the endorsements to your client since they actually modify the basic policy. Table
14.2 provides some guidelines on what to highlight to your clients when
explaining the endorsements.
Table 14.2: Guidelines On Explaining Endorsements

Areas to highlight to the client:
(a) What is the purpose of the endorsement?
(b) What are the benefits payable?
(c) Under what circumstances are the benefits payable?
(d) What are the exclusions, if any?
(e) What are the definitions?
(f) What are the claim procedures?
(g) Under what circumstances will the benefit be terminated?
CHAPTER
14
THE INSURANCE CONTRACT

Elements Of A Valid For the formation of a valid insurance contract; the following elements must be
Insurance Contract present:
• offer and acceptance;
• consideration;
• capacity to contract;
• insurable interest; and
• parties of the same mind (consensus ad idem).
Offer And Acceptance The first requirement of a contract is the intention of all the parties to enter into
a legal relationship. Without such an intention, the contract cannot come into
existence.
As a contract is an agreement, there must be a “meeting of minds” or mutual
agreement between the parties to the contract.
Valid contract A valid contract is one that is enforceable at law.
Void contract A void contract is one that was never enforceable at law.
Voidable contract A voidable contract is one in which a party has the right to avoid her obligations
under the contract without incurring legal liability.
Consideration A contract is ordinarily based on reciprocity (something given or done in return).
When a party promises to do certain thing(s) under a contract, he is called the
promisor. In giving the promise, the promisor must receive something in return,
and what he receives for the promise is called consideration. Consideration can be
in money or money’s worth. It can be a return promise to do certain thing(s), or to
abstain from doing certain thing(s), or to forbear (cease or refrain from doing) some
acts. All these constitute the consideration.
Capacity To Contract A person of legal age, without mental or other incapacity, is legally competent to
enter into a contract. Such a person is said to have contractual capacity.
Minors Minors cannot ordinarily enter into a contract, though with certain exceptions.
Under the Civil Law (Amendment) Act 2009, effective on 1 April 2009, a contract
entered into by a minor having attained the age of 18 years, shall have the same
effect as that of having attained full age (effect is that such contract will be binding
and enforceable against such a minor).
Persons Suffering Legal Generally, a contract entered into by a mentally disordered or drunken person is
Disability not binding on him, if at the time of contracting, he was incapable of understanding
the nature of the contract that he was entering into, and the other party was aware
or ought to have been aware of his mental state.
Drunken Persons If a person who was unable to understand the nature of a contract due to the
influence of alcohol, entered into a contract with another person who was aware
or ought to have known of the first person’s intoxication, that contract would be
voidable at the option of the drunken person.
Undischarged Bankrupts The Insolvency, Restructuring and Dissolution Act 2018 places restrictions on the
rights of an undischarged bankrupt to enter into contracts.
Insurable Interest In order for the insurance contract to be valid, the policy owner must have an
insurable interest in the life of the proposed insured when the policy is issued.
32
Parties Of The Same Mind This term means in complete agreement of mind. In any contract, the parties
(Consensus Ad Idem) must be ad idem – of the same mind – as to the subject matter of the contract. In
ordinary commercial contracts, each party is deemed to be equally able to assess
the merits of the bargain offered. As long as a seller makes no misrepresentations,
they are under no duty to the buyer to express any opinion about what is offered
for sale.
Caveat Emptor Let the buyer beware
Duty Of Disclosure The proposer must disclose all material facts known by them to the insurer.
The duty is to disclose voluntarily, and the proposer cannot withhold a material fact
because no specific question was asked on that point in the proposal or medical
examination. A proposer might, however, be justified in inferring from the fact that
the question was not asked that the information undisclosed was not regarded as
material.
Prudent Insurer The test of the “prudent insurer” entails that the opinion of the insured is irrelevant.
Therefore, even if the insured believes that he had acted in good faith, he may still
fail to discharge the duty of disclosure.
Inducement There must be a causal link between the misrepresentation or non-disclosure and
the decision to enter into the contract. A case law established that the insured for
misrepresentation or non-disclosure must show not only that the circumstance was
material to the risk (the prudent insurer’s test), but also that the misrepresentation
or non-disclosure in question induced him to enter into the contract of insurance.
Warranty A warranty is a statement guaranteed to be true in all respects.
Representation A representation is an applicant’s statement of facts on which the insurer bases
its decision to issue, or not to issue the policy applied for. It need not be true in all
respects, but need only be substantially true as to facts material to the risk. If the
applicant’s statements are representations, the insurer ordinarily cannot rescind
the contract or defend a suit for benefits on the ground of misrepresentation of a
fact, unless that fact is material to the risk.
Misrepresentation It is a false or misleading statement in an application for insurance. Some
statements contained in the application are more important to the insurer’s
decision to issue a policy than are other statements.
A misrepresentation that would affect the insurance company’s evaluation of
the proposed insured is called a material representation. A misrepresentation is
considered material when, if the truth had been known, the insurer would not have
issued the policy or would have issued the policy on a different basis, such as for
a higher premium or for a lower face value. A misrepresentation in an application
for life insurance gives the insurer grounds to avoid the contract only if it was a
material misrepresentation
Ambiguous Questions Where a question in a proposal form is ambiguous, a fair and reasonable
construction will be employed to construe the meaning. Any doubts will be
resolved in the insured’s favour, as the insurer was the one who was responsible
for preparing the proposal form. This is the effect of what is known as the contra
proferentum rule.
Waiver Waiver is the intentional and voluntary relinquishment (giving up, forgoing) of
a known right. It can be based on a written or oral statement that specifically
relinquishes a right (express waiver), or it can be implied by misleading conduct
(implied waiver).
Estoppel Estoppel arises when an insurance professional intentionally or unintentionally
creates the impression that a certain fact exists when it does not, and an innocent
third party relies on that impression and suffers damage as a result. In this case, the
insurer will be estopped (prevented) from denying this fact. For example, if a claims
officer indicates by his actions that a claim will be paid, the insurer will be estopped
from denying the liability.
33
How Can an Insured An insured may commit a breach of his duty of utmost good faith by one of the
Commit a Breach of his following ways:
Duty of Utmost Good • Innocent non-disclosure
Faith? • Fraudulent Non-Disclosure / Concealment
• Innocent misrepresentation
• Negligent misrepresentation
• Fraudulent misrepresentation
Innocent Non-Disclosure Omission to disclose a material fact inadvertently (unintentionally) or because the
party thought it was not material.
Fraudulent Non-Disclosure Intentional suppression of a material fact.
/ Concealment
Innocent Inaccurate statements regarding a material fact, believing them to be true, or are
misrepresentation made without any intention to mislead.
Negligent Statements made carelessly or recklessly, where the insured has no reasonable
misrepresentation basis to believe it to be true, and yet has no intention to deceive.
Fraudulent Statements made with the intention to deceive and known by the person making
misrepresentation them to be false.
Insurer's Duty Of Utmost The principle of utmost good faith also applies to the insurer. The insurer cannot
Good Faith make any wrong representation about the contract that the insurer is offering.
Vitiating Factors An insurance contract which contains the elements required by law as mentioned
above may still be invalid due to the following reasons:
• misrepresentation;
• duress;
• undue influence;
• illegal contract;
• mistake; and
• non est factum.
Duress A contract is formed by mutual consent of the parties. Accordingly, if a party is
under coercion to consent, the contract may not be valid as the consent given is not
genuine.
Undue Influence When there is inequality between the parties to a contract (such as where relations
between the parties are such that one of the parties is in a position to dominate
the will of the other party), and one of them (i.e. the dominator) takes an unfair
advantage of the situation of the other and forces an agreement upon him, the
contract may be set aside under the doctrine of undue influence.
Non Est Factum The term “non est factum” means “this is not my deed”. As a general rule, if a person
who is not a person under any incapacity signs a contract, he will be bound by the
contract whether he has read it or not. However, if he can show that the document
which he signed was not the one he intended to sign and the mistake was not due
to his carelessness, he may be able to avoid the contract on the ground of non est
factum.
Contract Provisions In Life • The Policy Owner’s Rights
Insurance Policies • Heading And Operative Clauses
• Policy Schedule
• General Provisions
34
Common S tandard Provisions Commonly
Found In Individual Life Insurance Policies

Entire Contract The proposal form (including medical evidence), policy contract and all
endorsements that are attached to the policy make up the entire contract.
Travel, Residence And This provision defines the scope of coverage under the policy. Most insurers do
Occupation not impose any restriction on the life insured with regard to travel, residence or
occupation, unless it is specifically excluded by the underwriter.
Payment Of Premiums This provision specifies that premiums are payable yearly, unless the insurer agrees
to other modes of payment (except single premium policies).
Grace Period It is a period of time (usually 30 or 31 days from the premium due date) given by
the insurer to the policy owner to pay the renewal premium which has been due
but not yet paid. During the grace period, the life insured will continue to enjoy the
insurance cover.
Age Mis-statement of age can occur and it is usually unintentional. Generally, the insurer
does not view such error as material enough to void the policy.
Suicide Under this provision, if the life insured commits suicide within a specified
period of time (usually one year) from the issue date of the policy or the date of
reinstatement of the policy, the policy will be void, and the insurer is not liable to
pay any claim. The insurer may refund all the premiums paid from the effective
date or date of reinstatement. The insurer usually does not pay any interest on the
premium refunded, because the interest earned is used to offset part of the costs
that the insurer incurred in issuing the policy. However, once the specified period
expires, the insurer will have to pay the claim, even if the life insured has died as a
result of suicide.
Incontestability Clause By this provision, the insurer undertakes not to dispute the validity of a life
insurance contract and void it, after the policy has been in force for a specified
period of time (normally one or two years) with the exception of fraud.
Reinstatement Reinstatement is the process by which an insurer puts back into force a life
insurance policy that has either been:
• terminated because of non-payment of renewal premiums; or
• continued under the extended term or reduced paid-up insurance of the non-
forfeiture options.
Assignment The Assignment provision gives the policy owner (assignor) the right to transfer
his ownership rights under a policy to another person (assignee). It also spells out
the steps that the policy owner or the assignee must take in order for the insurer
to acknowledge the assignment, i.e. the policy owner or assignee must inform the
insurer of the assignment in writing.
Free Look Period This provision allows the policy owner 14 days to review his policy after the policy
has been delivered to him. If he is not totally satisfied with the policy and returns
it to the insurer within the specified period, he will receive a full refund of the
premium, less any medical fees incurred by the insurer in assessing the insurance
application, if applicable. In the case of an ILP, in determining the amount payable
to the policy owner, the insurer may also make an adjustment to reflect the change
in unit price of the ILP sub-fund purchased.
Policy Loan The Policy Loan provision allows the policy owner to apply to his insurer for a loan
as long as the policy has a cash value. The insurer will charge interest on the policy
loan.
35
Non-Forfeiture Options Non-forfeiture options are only granted to traditional permanent insurance policies
(e.g. Whole Life and Endowment Insurance) that accumulate cash values. However,
they are not available for ILPs. According to Section 149(2) of the Insurance
Act1966, a life insurance policy which has been in force for a minimum of three
years shall not lapse or be forfeited by reason of the non-payment of premiums.
Cash Value Option The policy owner can receive the cash value which has been accumulated under his
policy, if he decides to surrender his policy after two or three years.
Reduced Paid-up The policy owner can also use the cash value under the policy to purchase a
Insurance Option single-premium paid-up policy, at the attained age (i.e. the age at the time of
exercising this option), for a reduced amount of cover without medical or financial
underwriting. To exercise this option, the policy owner only needs to notify
the insurer in writing. As the sum assured after the conversion can be small as
compared to the original sum assured, it is important that you highlight this point to
your client before he exercises his right. In addition, you need to inform your client
that the paid-up policy is on a non-participating basis. Some insurers also show the
paid-up value for each anniversary year in a table form in the policy contract.
Extended Term Insurance The policy owner may also use the cash value accumulation as a single premium to
Option purchase a paid-up extended Term Insurance policy for a sum assured equal to that
of the original policy without medical or financial underwriting. However, the length
of the term is dependent on the net cash value available, as a net single premium at
the life insured’s attained age to purchase the extended Term Insurance. As such,
a policy with a higher net cash value may purchase an extended Term Insurance
coverage that can remain in force for a longer period of time.
Automatic Non-Forfeiture If the policy owner fails to elect (decide on) any one of the above-mentioned non-
Provision forfeiture options, the insurer will usually activate the Automatic Premium Loan
(APL) provision. Under this provision, the insurer will advance the cash value under
the policy as a loan to pay the outstanding premium, thus keeping the policy in
force.
Endorsements Endorsements are amendments to an insurance policy that become a part of the
insurance contract, and they expand or limit the benefits payable.
36
Part I Chapter 15. Law OF Agency
PART I CHAPTER 15
LAW OF AGENCY
CHAPTER OUTLINE
1. Agency, Principals And Agents

2. Creation Of An Agency
3. Duties Of An Agent
4. Rights Of An Agent
5. Agent’s Authority
6. Agent Acts Outside The Authority
7. Ratification Of A Contract
8. Termination Of Agency
LEARNING OUTCOMES

 know the definitions of agency, principals and agents
 understand how an agency is created
 describe the duties and rights of an agent
 explain the types of agents’ authority
 understand the implications when an agent acts outside of his authority
 discuss ratification of a contract
 understand how an agency may be terminated
CONTENTS
CHAPTER OUTLINE ............................................................................................................1
1. AGENCY, PRINCIPALS AND AGENTS........................................................................... 3
2. CREATION OF AN AGENCY........................................................................................... 3
3. DUTIES OF AN AGENT .................................................................................................. 3
A. Common Law Duties Of An Agent ............................................................................ 3
B. Fiduciary Duties Of An Agent .................................................................................... 4
C. Intermediaries ............................................................................................................4
4. RIGHTS OF AN AGENT.................................................................................................. 5
A. Remuneration.............................................................................................................5
B. Indemnity ...................................................................................................................5
5. AGENT’S AUTHORITY................................................................................................... 5
A. Actual Or Express Authority ...................................................................................... 5
B. Implied Authority ....................................................................................................... 6
C. Usual Authority ..........................................................................................................6
D. Apparent Or Ostensible Authority ............................................................................ 6
6. AGENT ACTS OUTSIDE THE AUTHORITY ................................................................... 7
7. RATIFICATION OF A CONTRACT .................................................................................. 7
A. Conditions For Ratification ....................................................................................... 7
B. Effects Of Ratification................................................................................................ 8
8. TERMINATION OF AGENCY ......................................................................................... 8
1. AGENCY, PRINCIPALS AND AGENTS
1.1 An agency is a legal contractual relationship by which one party is authorised to

perform certain acts on behalf of another party. The party granting the authority
is called the principal, while the party that receives the authority is called the
agent. The principal and agent may be individuals known as “natural persons”,
or they may be non-natural persons such as corporations. When the agent agrees
to the agency relationship, he becomes a fiduciary for the principal, i.e. he must
act in the best interest of the principal. In the context of insurance, the task of the
agent (representative of the insurer) is to bring about a contract between the
principal (the insurer) and a third party (the client).
1.2 Persons who advise on and / or arrange life insurance policies must comply with
the general law of agency as described in this chapter. In addition, they must also
comply with statutory and regulatory laws which apply specifically to their
business.
2. CREATION OF AN AGENCY
2.1 In the context of insurance sales and advisory practice in Singapore, an agency
may be created by the express or implied agreement of the principal and the
agent, or by ratification by the principal of the agent’s acts done on his behalf.
(a) Express agency is created when the principal or any person authorised by
him expressly appoints the agent by way of a deed, a written contract or
orally. Under Section 64(2) of the Insurance Act 1966, an insurer is required
to have a written agreement signed with its agents.
(b) Implied agency, on the other hand, is created based on the conduct of the
parties. It can be implied when the mutual conduct of the parties makes it
reasonable to suggest that there is intention for the formation of an agency
relationship.
3. DUTIES OF AN AGENT
3.1 Below are the two types of duties of an agent.
A. Common Law Duties Of An Agent
3.2 The common law duties of an agent are as follows:

(a) to carry out mandate (i.e. the authority to act on behalf of his principal) and
act within the scope of his authority;
(b) to exercise due care and skills when carrying out his duties;
(c) to account for the money received on behalf of the principal, i.e. he must
keep the principal’s money and property separate from those of his own;
(d) to act with integrity and honesty;
(e) to inform the principal of material facts (i.e. facts that are relevant and
important to an insurer’s underwriting decision on the issuance of a policy);
and
(f) not collude (co-operate secretly or dishonestly) with the client to conceal
material facts or misrepresent material facts.
B. Fiduciary Duties Of An Agent
3.3 In addition to the common law duties, the agent is required to observe his
fiduciary duties towards his principal. Some of the fiduciary duties of the agent
are:
(a) the duty not to delegate his authority;
(b) the duty not to put himself in a situation, where his duties as agent conflict
with those of his own interest;
(c) the duty not to accept any bribes or secret commission; and
(d) the duty not to take advantage of his position in order to gain benefits for
himself. The agent is also liable to account to his principal for any profit that
he has made, using confidential information acquired in the course of his
agency.
C. Intermediaries
3.4 An insurance intermediary is a person who, as an agent for one or more insurers
or as an agent for insureds or intending insureds, arranges contracts of insurance.
Hence, in legal terms every intermediary is an agent, i.e. one who is authorised by
a party, called the principal, to bring that principal into a contractual relationship
with another, namely a third party.
3.5 Insurance is unusual in so far as the intermediary may possibly act for both the
insurer and the insured. For example, the intermediary is the agent of the insurer
when:
 explaining the policy terms;
 collecting the premium;
 issuing a cover note1;
 passing on a claim payment; and
 acting under delegated authority.
3.6 However, the intermediary is the agent of the insured when:

 advising on the cover required;
 advising on how to make a claim; and
 completing (but not signing) a proposal form on behalf of the insured.
3.7 An insurance agent is defined under the Insurance Act 1966 as a person who is or
has been carrying on an insurance business in Singapore as an agent for one or
more insurers, and includes an agent of a foreign insurer carrying on an insurance
business in Singapore.
3.8 In Singapore, there are three types of agents that act for the insurer – life, non-life
(general) or composite agents, they may be full-time or part-time, and insurance
1
A cover note is an interim documentary evidence of protection for a temporary period between the date
of proposal and date of issue of the policy.
may be their core business or non-core business in the case of Trade Specific
Agents.
3.9 Life agents, i.e. agents of life insurers, are deemed to be “representatives” under
the Financial Advisers Act 2001 and are regulated under that Act.
4. RIGHTS OF AN AGENT
4.1 Under common law, an agent has the following rights in respect of his
relationship by his principal: the right to remuneration and the right to indemnity.
A. Remuneration
4.2 An agent’s right to remuneration is determined by the terms of his contract with
his principal. For an insurance agent, he is usually remunerated by commission,
which can be based on the values of the policies sold or a percentage of the
premiums on the policies sold.
B. Indemnity
4.3 If an agent incurs liability or pays out money in the performance of his duty as an
agent, he has the right to be indemnified by his principal, unless the agency
agreement provides otherwise. However, he loses his right to be indemnified if:
(a) his act is not authorised (or ratified) by the principal;
(b) he is in breach of his duties as an agent;
(c) he incurs liability or expenses solely as a result of his own fault (e.g. the
agent was issued with a traffic summon for parking illegally, while he met
up with his client to discuss about insurance purchase); and / or
(d) the act upon which he claims indemnity is illegal, unless he can prove that
he was unaware of the illegality.
5. AGENT’S AUTHORITY
5.1 The authority of an agent can generally be classified into:

(a) actual or express authority;
(b) implied authority;
(c) usual authority; and
(d) apparent or ostensible authority.
A. Actual Or Express Authority
5.2 An agent’s express authority is determined by the terms of the agency contract
which he has signed with his principal upon his appointment as the
representative. This is the actual authority that he is granted by the principal.
Examples of this type of authority include canvassing for new business and
issuing of cover notes. Representatives are required to adhere to their express
authority.
B. Implied Authority
5.3 Implied authority is that which will be implied from the nature and practice of the
business that the agent is contracted to transact. It is impractical to state in detail
everything that the agent must do in the agency agreement. Therefore, when an
agent has an authority to act, he also has the implied authority to do all the things
necessary in the ordinary course of business for the proper and efficient
performance of his duties. For example, an agent arranges for his client to be
examined by one of the insurer’s panel of doctors (according to the insurer’s
guidelines on large sum assured), so as to expedite the underwriting process.
C. Usual Authority
5.4 An agent has the usual authority to explain the meaning of the questions in a
proposal form and the terms as listed in the policy contract. However, he does not
have the usual authority to enter into, renew or revive any contract of insurance
on behalf of the insurer. In addition, he does not have the usual authority to vary
any of the terms of the insurance contract, or waive any of its conditions.
D. Apparent Or Ostensible Authority
5.5 Apparent authority is created when the agent acts without actual authority from
the principal, but a third party reasonably believes that actual authority exists. This
can happen when the principal allows conditions to exist that lead a third party to
reasonably believe that actual authority exists. The important distinction between
apparent and actual authority is that apparent authority is determined by the
reasonable perception of the third party.
5.6 Examples of apparent authority include when a principal:

(a) allows another person to appear as if he is his agent when in fact he is not;
(b) allows the agent to give the impression that he has more authority than he
actually has;
(c) allows the agent to continue to appear as his agent when, in actual fact, the
agency relationship between them has been terminated; and / or
(d) has placed limits on the agent’s implied authority, but fails to inform third
parties who deal with him of the agent’s limited authority.
5.7 Insurers can, therefore, be held liable to third parties for transactions carried out
based on their agents’ apparent authority.
5.8 For example, an insurer prohibits any of its agents from collecting premiums other
than the first premium, but continues to accept the subsequent premiums
collected by an agent from his neighbours or good friends. Here, the insurer is
deemed to be granting the agent with apparent authority to collect the subsequent
premiums, as the neighbours and friends will come to assume that the agent has
the authority. This example clearly shows that it is the conduct of the principal,
not the agent, that must be the basis for establishing the reasonable belief that
the agency existed.
6. AGENT ACTS OUTSIDE THE AUTHORITY
6.1 When an act done by an agent is not within the scope of the agent’s express or
implied authority, he is said to have acted outside his authority. Hence, the
principal is not bound by, or liable for, the act even though the agency relationship
exists.
6.2 For example, if the agent knowingly falsifies a proposal that induces the insurer
to issue a policy, and the proposer does not report the material misstatement to
the insurer upon delivery, the insurer will be permitted to sue for rescission of the
contract (i.e. the contract is invalid). Also, what is really important for agents to
note is that, if they exceed their authority (actual or apparent), they can incur
personal liability.
7. RATIFICATION OF A CONTRACT
7.1 When an agent acts outside his scope of authority, the principal is not bound by
the act. However, there may be circumstances, whereby the principal may wish
to accept the unauthorised act and retroactively (from a date in the past) to claim
that the person is his agent when carrying out the act. This act of the insurer is
known as ratification, which means the validation of an unauthorised act. It may
be done in an express manner, either in writing or orally, or may be implied from
conduct.
A. Conditions For Ratification
7.2 However, certain conditions must be met before an insurer can ratify an
unauthorised act. These are as follows:
(a) The unauthorised act must have been performed by a person claiming to act
for his principal. In other words, the act must be on behalf of the principal. If
there is no representation of agency, there can be no ratification. This means
to say that an undisclosed principal does not have any rights to ratify an
unauthorised act;
(b) The principal must be in existence at the point that the unauthorised act is
being committed and is capable of entering the contract on its own;
(c) The principal must be ascertainable;
(d) The ratification must not be partial, i.e. the principal must take the entire deal
as negotiated by the agent or disclaim the entire deal. He is not allowed to
ratify only the portion of the agreement that is favourable to him; and
(e) The ratification must occur within a reasonable timeframe which varies with
the type and purpose of the agreement. Thus, a principal who has full
knowledge of the facts of the agent’s unauthorised action and fails to
repudiate it, within a reasonable time, will be deemed to have ratified the
agent’s unauthorised act.
B. Effects Of Ratification
7.3 An effective ratification has the following results:

(a) It places all parties in a position as if the agent has express authority to
perform the act;
(b) It binds the principal to the same extent as if the agent has express authority
to act;
(c) It relieves the agent of the liability to the principal for acting outside the
authority;
(d) It relieves the agent of the liability to the third party for performance of any
of the duties purportedly to be performed by the principal; and
(e) It entitles the agent to the compensation (if any) payable for the acts of an
authorised agent.
7.4 Note that any ratification is effective as of the date of the agent’s act, and not the
date of the principal’s ratification. Also, ratification by a principal of one act done
by an agent in excess of his authority does not extend the agent’s authority, so as
to authorise him to do similar acts in future.
8. TERMINATION OF AGENCY
8.1 An agency may be terminated either by the parties involved or by operation of

law.
8.2 The parties to an agency agreement may terminate the agency by way of a
revocation (cancellation) by the principal, or a renunciation (giving up the right)
by the agent.
8.3 The agency may also be terminated by the operation of law on the happening of
any one of the following events:
(a) on expiration of the time (if any) agreed upon;
(b) on complete performance of the undertaking;
(c) on frustration of the contract, or the happening of an event rendering the
continuance of the agency unlawful; and / or
(d) where either party becomes incapable of continuing the contract by reason
of death, bankruptcy, disability or unsoundness of mind.
CHAPTER
15
L AW OF AGENCY

Agency An agency is a legal contractual relationship by which one party is authorised to
perform certain acts on behalf of another party.
Principal The party granting the authority is called the principal.
Agent The party that receives the authority is called the agent.
Express agency Express agency is created when the principal or any person authorised by him
expressly appoints the agent by way of a deed, a written contract or orally. Under
Section 64(2) of the Insurance Act 1966, an insurer is required to have a written
agreement signed with its agents.
Agency by necessity It is a type of relationship, whereby one party can make essential or critical
decisions for the incapacitated party who is not in a condition to do so.
Intermediaries An insurance intermediary is a person who, as an agent for one or more insurers
or as an agent for insureds or intending insureds, arranges contracts of insurance.
Hence, in legal terms every intermediary is an agent, i.e. one who is authorised by a
party, called the principal, to bring that principal into a contractual relationship with
another, namely a third party.
Rights Of An Agent Under common law, an agent has the following rights in respect of his relationship
by his principal: the right to remuneration and the right to indemnity.
Remuneration An agent’s right to remuneration is determined by the terms of his contract with his
principal. For an insurance agent, he is usually remunerated by commission, which
can be based on the values of the policies sold or a percentage of the premiums on
the policies sold.
Indemnity If an agent incurs liability or pays out money in the performance of his duty as
an agent, he has the right to be indemnified by his principal, unless the agency
agreement provides otherwise.
Actual Or Express An agent’s express authority is determined by the terms of the agency contract
Authority which he has signed with his principal upon his appointment as the representative.
This is the actual authority that he is granted by the principal.
Implied Authority Implied authority is that which will be implied from the nature and practice of the
business that the agent is contracted to transact. It is impractical to state in detail
everything that the agent must do in the agency agreement. Therefore, when
an agent has an authority to act, he also has the implied authority to do all the
things necessary in the ordinary course of business for the proper and efficient
performance of his duties.
Usual Authority An agent has the usual authority to explain the meaning of the questions in a
proposal form and the terms as listed in the policy contract. However, he does not
have the usual authority to enter into, renew or revive any contract of insurance on
behalf of the insurer. In addition, he does not have the usual authority to vary any
of the terms of the insurance contract, or waive any of its conditions.
37
Apparent Or Ostensible Apparent authority is created when the agent acts without actual authority from
Authority the principal, but a third party reasonably believes that actual authority exists. This
can happen when the principal allows conditions to exist that lead a third party to
reasonably believe that actual authority exists. The important distinction between
apparent and actual authority is that apparent authority is determined by the
reasonable perception of the third party.
Ratification Of A Contract When an agent acts outside his scope of authority, the principal is not bound by
the act. However, there may be circumstances, whereby the principal may wish to
accept the unauthorised act and retroactively (from a date in the past) to claim that
the person is his agent when carrying out the act. This act of the insurer is known as
ratification, which means the validation of an unauthorised act. It may be done in an
express manner, either in writing or orally, or may be implied from conduct.
Revocation The parties to an agency agreement may terminate the agency by way of a
revocation (cancellation) by the principal.
Renunciation The parties to an agency agreement may terminate the agency by way of a
renunciation (giving up the right) by the agent.
38
Part I Chapter 16. Income Tax And Life Insurance
PART I CHAPTER 16
INCOME TAX AND LIFE INSURANCE
CHAPTER OUTLINE
1. Introduction
2. Taxable Income
3. Statutory Income, Assessable Income And Chargeable Income
4. Personal Reliefs
5. Rebates
6. Who Will Benefit From Income Tax Relief By Taking Up An Insurance Policy?
7. Tax Benefit For SRS Participants
LEARNING OUTCOMES

 differentiate between taxable income and income that is exempted from tax
 define statutory income, assessable income and chargeable income
 describe the various types of personal reliefs granted to a resident individual
 understand rebates such as parenthood tax rebate
 know who will benefit from income tax relief by taking up an insurance policy
 understand the tax benefit for SRS participants
CONTENTS
CHAPTER OUTLINE ............................................................................................................1
1. INTRODUCTION .............................................................................................................3
2. TAXABLE INCOME ........................................................................................................ 3
A. Exemption From Income Tax ................................................................................... 3
3. STATUTORY INCOME, ASSESSABLE INCOME AND CHARGEABLE INCOME .......... 4
A. Statutory Income....................................................................................................... 4
B. Assessable Income ................................................................................................... 4
C. Chargeable Income ................................................................................................... 5
4. PERSONAL RELIEFS ...................................................................................................... 5
A. Earned Income Relief ................................................................................................ 5
B. NSman (Self / Wife / Parent) Relief .......................................................................... 6
C. Spouse / Handicapped Spouse Relief ...................................................................... 6
D. Qualifying / Handicapped Child Relief ..................................................................... 6
E. Working Mother’s Child Relief ................................................................................. 7
F. Handicapped Brother / Sister Relief ......................................................................... 7
G. Parent / Handicapped Parent Relief.......................................................................... 7
H. Grandparent Caregiver Relief ................................................................................... 8
I. Life Insurance Relief .................................................................................................. 8
J. Central Provident Fund (CPF) / Provident Fund Relief For Employees................... 8
K. CPF Relief For Self-Employed Persons .................................................................... 9
L. Tax Relief for Cash Top-ups To Retirement And Healthcare Savings .................... 9
M. Course Fees Relief................................................................................................... 10
N. Foreign Domestic Worker Levy Relief.................................................................... 11
O. Supplementary Retirement Scheme (SRS) Relief ................................................. 11
P. Matched Retirement Savings Scheme (MRSS) ..................................................... 12
Q. Additional MediSave Contribution Scheme (AMCS) For Employees .................. 12
5. REBATES ...................................................................................................................... 13
A. Parenthood Tax Rebate .......................................................................................... 13
6. WHO WILL BENEFIT FROM INCOME TAX RELIEF BY TAKING UP AN INSURANCE
POLICY?........................................................................................................................ 13
7. TAX BENEFIT FOR SRS PARTICIPANTS..................................................................... 14
A. Tax Concession On Withdrawal ............................................................................. 14
B. Tax Benefits For Annuities Purchased Through SRS ............................................ 14
1. INTRODUCTION
1.1 In this chapter, we will explain how personal income is taxable in Singapore,
the various reliefs granted to an individual who is tax resident 1 in Singapore,
and how life insurance purchase can qualify for income tax relief.
2. TAXABLE INCOME
2.1 In Singapore, income is taxed under the Income Tax Act 1947. Section 10(1) of
the Income Tax Act 1947 provides that income tax may be imposed upon the
income of any person, accruing in or derived from Singapore, or received in
Singapore (from outside Singapore), in respect of the following:
 gains and profits from any trade, business, profession or vocation;
 gains and profits from any employment;
 dividends, interest or discounts;
 any pension, charge 2 or annuity;
 rents, royalties, premiums and any other profits arising from property; and
 any gains or profits of an income nature not falling within any of the
preceding items.
A. Exemption From Income Tax
2.2 As a general rule, capital gains are not taxable under the Income Tax Act 1947.
Receipts, such as gifts, legacies, lottery wins and capital gains are not regarded
as income, and are not chargeable to income tax.
2.3 In addition, certain types of income are specifically exempted from income tax.
Common examples are CPF withdrawals, war pensions, certain approved
pensions, death gratuities, interests on bank deposits and dividends. (Dividends
derived from Singapore are taxable unless they are specifically exempted under
the Income Tax Act 1947).
2.4 Dividends are not taxable if they are:

 Foreign dividends received in Singapore on or after 1 January 2004. This
excludes foreign-source income received through partnerships in
Singapore.
 Income distributions from unit trusts and real estate investment trusts
(REIT), that are authorised under Section 286 of the Securities and Futures
Act 2001 (excluding distributions out of franked dividends) on or after 1
January 2004.
 One-tier exempt dividends from companies under the one-tier corporate
tax system. Under this system, tax paid by a company on its chargeable
1
Individuals who are regarded as tax residents include Singaporeans, Singapore Permanent Residents
and who have established a permanent home in Singapore and foreigners who have stayed or worked
in Singapore for more than 183 days in the tax year.
2
The item “charge” refers to income received by a person by virtue of a deed or court order, for example,
alimony on monthly maintenance under a court order or deed of separation.
income is the final tax. All dividends paid by a company are exempt from
tax in the hands of the shareholders.
2.5 With effect from the Year of Assessment 2012, the income from charge (i.e.
alimony / maintenance payments and income from separation deed or court
order) is also exempt from tax.
2.6 The National Service Recognition Award (NSRA), given out by the Ministry of
Defence and the Ministry of Home Affairs, to recognise the contributions of
Singapore Citizens who serve National Service, is also exempt from tax.
3. STATUTORY INCOME, ASSESSABLE INCOME AND CHARGEABLE INCOME
A. Statutory Income
3.1 According to Section 35 of the Income Tax Act 1947, statutory income refers to
the full amount of income for the year preceding the Year of Assessment from
each source of income (see Section 2, Paragraph 2.1 of this chapter).
B. Assessable Income
3.2 Assessable Income = Total Income - Allowable Expenses - Approved Donations
Example Illustration:
Income Items Amount
Total Income S$60,000
Less: Allowable Expenses (S$3,000)
Less: Approved Donations (S$1,000)
Assessable Income S$56,000
3.3 Only expenses which are incurred for income-producing purposes are
deductible. Notwithstanding this, certain expenses are specifically prohibited
from deduction under the Income Tax Act 1947. A notable example is the
running of a motor vehicle.
3.4 In addition, capital allowances can only be claimed by a taxpayer if the capital
asset concerned (for e.g. computer, furniture, etc.) is used for trading or
business purposes. For example, capital allowances cannot be claimed on
capital assets used for deriving income from an employment or from a passive
rental source.
3.5 A loss arising from a trade or business source can be carried forward to reduce
profits of a later period. A loss that arises from a non-trade or non-business
source cannot be carried forward and is effectively lost.
3.6 Donations to approved charities and institutions are currently deductible at 2.5
times the amount donated. However, the government may from time to time
vary the deductions allowed. In addition, unutilised donations can be carried
forward for up to five years.
C. Chargeable Income
3.7 Chargeable income of an individual is then derived from the remainder of the
assessable income after deducting all personal reliefs, such as earned income
relief, spouse relief, child relief, deductions for CPF and SRS contributions, etc.
Since a company is not able to claim personal reliefs, the assessable income is
the same as the chargeable income.
Example Illustration:
Income Items Amount
Employment S$60,000
Less: Expenses (S$3,000)
Total Income S$57,000
Less: Approved donations (S$1,000)
Assessable Income S$56,000
Less: Personal Reliefs (S$1,000)

Chargeable Income S$55,000
3.8 The tax payable is based on the chargeable income at the rates given in the
Second Schedule attached to the Income Tax Act 1947, which is subject to
change from time to time.
3.9 Singapore adopts a progressive income tax regime for resident individuals.
From the Year of Assessment 2017 onwards, the personal income tax rate for
resident individuals will range from 2 per cent to 22 per cent. No tax is payable
for chargeable income less than or equal to S$20,000. Tax rates for non-resident
individuals will differ from resident individuals. Generally, a non-resident
individual is taxed at a flat rate of 15% or the resident progressive tax rate,
whichever is the higher amount.
4. PERSONAL RELIEFS
4.1 In this chapter, we will focus only on the various personal reliefs granted to
resident individuals. Personal Reliefs are granted only to resident individuals.
As the government varies the reliefs periodically after each “Budget” release, it
is important that advisers are updated on the latest rates / amounts permitted
as they do differ from year to year. The following are the types of reliefs granted
to individuals.
A. Earned Income Relief
4.2 “Earned income relief” is a relief to provide recognition for individuals who
receive income from employment, trade, business, profession or vocation less
allowable expenses.
B. NSman (Self / Wife / Parent) Relief
4.3 “NSman relief” is a relief to recognise the contributions of National Service

men (NSmen) and NS Key Appointment Holders. The relief (self) will be given
when a taxpayer has completed his full-time National Service.
4.4 To recognise the support given by wives to their husbands and parents to their
children, NSman (wife) relief and NSman (parent) relief are granted. Parents of
deceased NSmen are eligible for the relief. Widows of deceased NSmen are
also eligible for the relief unless they remarry.
C. Spouse / Handicapped Spouse Relief
4.5 “Spouse relief” is an expansion of the wife relief to support family formation
and provide recognition to male and female taxpayers supporting their spouses
or ex-spouses.
4.6 With effect from the Year of Assessment 2012, the taxpayer (the husband)
cannot claim the spouse relief for alimony paid to his ex-wife.
4.7 The taxpayer cannot claim this relief if he has already claimed handicapped
spouse relief, or someone is claiming any relief (other than grandparent
caregiver relief) on his wife or ex-wife.
D. Qualifying / Handicapped Child Relief
4.8 “Qualifying child relief (QCR) / handicapped child relief (HCR)” are reliefs given
in recognition of families’ efforts in supporting their children and caring for
handicapped children.
4.9 Each qualifying child is eligible only for either QCR or HCR, and may be shared
with a taxpayer’s spouse, based on the proportion agreed by both parties. The
amount of reliefs will depend on the order of children (based on date of birth or
date of legal adoption).
4.10 The qualifying child must fulfil all the conditions below and must:
 be a legitimate child, step-child or legally adopted child;
 be below 16 years old or studying full-time at any university, college, or
other educational institution; and
 not have an annual income (includes National Service Allowances, income
from internship and attachment but excludes scholarships, bursaries and
similar allowances) exceeding S$4,000 in the previous year. Note that the
income threshold may vary from year to year.
4.11 To claim for HCR, the qualifying child must be mentally or physically
handicapped, in addition to only the first two points above.
E. Working Mother’s Child Relief
4.12 “Working mother’s child relief (WMCR)” is a relief introduced to serve the
following objectives:
 to reward families with children holding Singapore citizenship;
 to encourage parents to take up citizenship for their children; and
 to encourage married women to remain in the workforce after having
children.
4.13 The amount of WMCR claimable for each child is based on a specified
percentage of the working mother’s earned income corresponding to the child
order, subject to a maximum amount. This relief is claimable on the same child,
even if the working mother and / or husband may have already claimed QCR or
HCR. However, the member must satisfy the following conditions.
 QCR/HCR claims will be allowed first (it does not matter whether the claim
is made by the member or his/her spouse)
 The total cap (i.e. QCR/HCR plus WMCR) is $50,000 per child; and
 The WMCR is limited to the remaining balance after the QCR/HCR claim is
allowed.
F. Handicapped Brother / Sister Relief
4.14 “Handicapped brother / sister relief” is a relief given to provide recognition for
individuals supporting their physically or mentally handicapped siblings or
siblings-in-law who lives in Singapore.
4.15 A taxpayer can claim this relief if he has supported his handicapped sibling or
sibling-in-law who lived with the taxpayer in the same household in the
previous year, or he has incurred S$2,000 or more in supporting him/her in the
previous year.
4.16 The taxpayer cannot claim this relief if someone else has claimed any other
reliefs on the same sibling or sibling-in-law. For example, if the taxpayer’s
father has claimed Handicapped Child Relief on his handicapped brother, the
taxpayer and his other siblings cannot claim Handicapped Brother Relief on the
handicapped brother.
G. Parent / Handicapped Parent Relief
4.17 “Parent / handicapped parent relief” is a relief to promote filial piety and
provides recognition to individuals supporting their parents / handicapped
parents in Singapore.
4.18 A taxpayer may claim this relief if he has supported his or his spouse’s parents
and grandparents in the previous year, for up to two dependants.
4.19 Full amount of this relief can be claimed even if the dependant has passed away
in the previous year (provided all conditions as stated above are satisfied).
H. Grandparent Caregiver Relief
4.20 “Grandparent caregiver relief” (GCR) is a relief given to provide recognition for
grandparents who play the role of a caregiver, and to help working mothers
take care of their children.
I. Life Insurance Relief
4.21 “Life insurance relief” is a relief on annual insurance premiums paid on the
taxpayer’s or his wife’s life insurance policies.
4.22 The premiums paid for a life insurance policy are allowed to be deducted from
the assessable income, but are subject to the following conditions:
 the policy must be on the life of the taxpayer or his wife, and in the case of
a female taxpayer, on her life only;
 the policy must be issued by a life insurer which has an office or branch in
Singapore (this condition is not applicable to policies effected before 10
August 1973);
 the amount to be deducted shall not exceed 7% of the capital sum secured
on death from such policy exclusive of any additional benefit by way of
bonus, profits, or otherwise; and
 the taxpayer is not eligible for life insurance relief if his total compulsory
employee CPF contribution and/or voluntary CPF contribution in the
previous year is S$5,000 or more. If his CPF contribution is less than
S$5,000, he can claim the lower of the difference between S$5,000 and the
CPF contribution, or up to 7% of the insured value of his own / his wife’s
life, or the amount of insurance premiums paid, whichever is lower.
J. Central Provident Fund (CPF) / Provident Fund Relief For Employees
4.23 “CPF / Provident fund relief” is a relief given to encourage individuals to save
for their retirement.
4.24 Employees who are Singapore Citizens / Permanent Residents may claim CPF/
Provident Fund relief on compulsory employee CPF contributions or
contributions to an approved pension or provident fund.
4.25 However, no relief is available for:

 voluntary contributions that are made in excess of the compulsory
contributions under the CPF Act;
 CPF contributions made in respect of overseas employment while the
taxpayer is seconded or posted overseas for work; and
 CPF contribution on additional wages that exceed the CPF cap on wages
from related employers (employed concurrently by 2 or more related
employers in a year).
Refer to IRAS website on CPF Relief for employees for more info.
K. CPF Relief For Self-Employed Persons
4.26 It is compulsory for an individual who is self-employed, is a Singapore Citizen

or Singapore Permanent Resident and earns a yearly net trade income of more
than S$6,000 to make MediSave contributions.
4.27 For the year of assessment, the taxpayer’s tax relief for his Medisave and
voluntary CPF contributions will be capped at the lower of:
 37% of his net trade income assessed; or
 CPF relief cap of $37,740; or
 actual amount contributed by him.
4.28 No CPF relief will be allowed in respect of the taxpayer’s compulsory Medisave
or voluntary CPF contributions made in the previous year if he has no
assessable net trade income for the Year of Assessment.
L. Tax Relief for Cash Top-ups To Retirement And Healthcare Savings
4.29 Tax relief is given on cash top-ups to the Special/Retirement/MediSave Account

to encourage individuals to save for their own or their family members’
retirement and healthcare needs.
4.30 For top-ups to the Special/Retirement Account, the tax relief applies to cash top-
ups up to the current Full Retirement Sum. For top-ups to the MediSave
Account, the tax relief applies to cash top-ups up to the individual’s current
Basic Healthcare Sum.
4.31 The relief is given:

 For top-ups to self - if the taxpayer or his employer on his behalf has made
cash top-ups in the preceding year, to his own:
- Special Account (for recipients below age 55); or
- Retirement Account (for recipients aged 55 and above); or
- MediSave Account
 For top-ups to loved ones - if the taxpayer has made cash top-ups in the
preceding year, to his loved ones.
- Parents or Parents-in-law;
- Grandparents or Grandparents-in-law;
- Spouse; and/or
- Siblings.
4.32 To claim tax relief for cash top-ups to the taxpayer’s spouse or siblings, the
recipient must not have an annual income exceeding S$4,000 in the year
preceding the year of the top-up.
4.33 Annual income includes taxable income (e.g. trade, employment and rental),
tax exempt income (e.g. bank interest, dividends and pension) and foreign-
sourced income regardless of whether it has been remitted to Singapore. This
income threshold does not apply to parents, grandparents, physically/mentally
handicapped spouse or siblings.
4.34 For cash top-ups to an employee, the employer will be eligible for an equivalent
amount of tax deductions for the cash top-ups made, while the employee will
also receive tax relief of up to $8,000 per calendar year. The tax relief that the
employee will receive takes into consideration any cash top-ups that he has
made to his own CPF accounts.
4.35 There is a personal income tax relief cap of $80,000, which applies to all tax
reliefs, including tax relief on cash top-up made to CPF accounts.
With effect from 1 January 2022, members who top up their or their loved
ones’ Special/Retirement/MediSave Account in cash will enjoy tax relief of
up to S$8,000 for top ups to their own Special/Retirement/MediSave
Account, and an additional S$8,000 for top ups to their loved ones’
Special/Retirement/MediSave Account.
4.36 For details on tax relief, do visit the IRAS website at:
https://www.iras.gov.sg/taxes/individual-income-tax/employees/deductions-
for-individuals
M. Course Fees Relief
4.37 “Course fees relief” is given to encourage an individual to continuously

upgrade himself, so as to enhance his lifelong employability.
4.38 An individual can claim relief for the current Year of Assessment (YA) in respect
of the course fees incurred in the previous year for:
(a) Any course, seminar or conference he attended in the previous year leading
to an approved academic, professional or vocation qualification;
(b) Any course, seminar or conference he attended in the previous year that is
relevant to his current employment, trade, business, profession or vocation;
or
(c) Any course, seminar or conference that he completed two years before the
previous year which is relevant to your new employment, trade, business,
profession or vocation in the previous year.
4.39 The following courses are not eligible for relief:

(a) Courses, seminars or conferences for recreational, leisure or hobby (e.g.
photography, language and sports courses);
(b) Courses, seminars and conferences for general skills or knowledge (e.g.
Internet surfing course, social media skills, basic website building skills and
Microsoft Office skills); and
(c) Polytechnic/University courses if graduates have never exercised any
employment or carried on any trade, profession or vocation previously.
Vacation jobs or internships are not considered employment for the
purpose of this relief.
4.40 The allowable course fees include registration fees or enrolment fees,
examination fees, tuition fees and aptitude test fees (for computer courses).
4.41 With effect from the Year of Assessment 2009, a taxpayer is allowed to defer
this claim if he is unable to claim relief in the preceding year, because his
assessable income did not exceed S$22,000. This will benefit taxpayers who
may not be able to benefit in the Year of Assessment for which the expense is
actually incurred. The taxpayer should claim the tax relief within two Years of
Assessment, as soon as he has assessable income above S$22,000.
N. Foreign Domestic Worker Levy Relief
4.42 “Foreign Domestic Worker levy relief” is a relief given to encourage married
women to remain in the workforce and to also encourage procreation.
4.43 To qualify for this relief, the taxpayer must be:

 a married woman living with her husband; or
 a married woman, and her husband not being a resident of Singapore; or
 a woman who is separated, divorced or widowed, and living with her
unmarried child for whom she can claim child relief.
4.44 This relief is twice the amount of domestic worker levy paid for one foreign
domestic worker. The wife can claim the relief to be offset against her earned
income, even if the levy is paid by the husband.
O. Supplementary Retirement Scheme (SRS) Relief
4.45 SRS is a voluntary scheme introduced by the Government to encourage

individuals to save more for retirement on top of the contributions made to the
CPF. SRS contributions may be used to purchase various investment
instruments. SRS participants enjoy tax reliefs for contributions made into their
SRS accounts, in the Year of Assessment following the year of contribution.
Investment returns are tax-free before withdrawal and only 50% of the
withdrawals from SRS are taxable at retirement. The SRS contribution rate for
Singaporeans and Singapore Permanent Residents (SPRs) is 15% while the SRS
contribution rate for foreigners is 35% in view of the fact that they do not enjoy
tax relief from CPF contributions. The respective yearly maximum SRS
contributions are also capped. This will help the taxpayer to reduce his
chargeable income and in return reduce the tax payable.
P. Matched Retirement Savings Scheme (MRSS)
4.46 The Matched Retirement Savings Scheme (MRSS) was launched in 2021 to help
senior Singapore Citizens who have not reached the current Basic Retirement
Sum, to build their retirement savings. From 2021 to 2025, the Government will
match every dollar of cash top-up made to eligible members’ Retirement
Accounts, up to an annual cap of $600. Anyone, including family members,
employers or members of the community, can make cash top-ups to eligible
members. These cash top-ups can qualify for the tax relief, subject to the
conditions above.
4.47 Eligibility is assessed automatically annually, and eligible members will be

notified by CPFB in January each year:
 Age 55 to 70 (both inclusive).

 Retirement savings are less than the current BRS.
 Average monthly income is not more than S$4,000. This covers a majority
of senior workers.
 Annual value of residence is not more than S$13,000. This covers most HDB
flats.
 Own not more than one property.
Q. Additional MediSave Contribution Scheme (AMCS) For Employees
4.48 AMCS is a voluntary scheme for employers to contribute more to their

employees' MA to help build up their savings for employees' healthcare needs.
Employers can make contributions under AMCS of any amount up to $2,730 per
employee per year. AMCS contributions are not subject to Annual Limit nor the
employee’s Basic Healthcare Sum (BHS). It is also tax free for the employees
and employers can enjoy certain tax benefits.
5. REBATES
5.1 In addition to the reliefs, the Government may also grant rebates. A rebate is a
reduction of tax otherwise payable by a taxpayer.
A. Parenthood Tax Rebate
5.2 Parenthood tax rebate is a rebate given to married Singapore resident

individuals, to encourage them to have more children. Rebates are given only
if the child is a Singaporean. The rebate can be used to offset the income tax
payable of the parents, in any proportion as agreed by the spouses. Any rebate
unutilised can be carried forward to offset against future tax payable of the
parents.
5.3 The rebates available are:

1st child S$5,000
2nd child S$10,000
3rd child onwards S$20,000
6. WHO WILL BENEFIT FROM INCOME TAX RELIEF BY TAKING UP AN

INSURANCE POLICY?
6.1 The individuals who may benefit most from income tax relief by taking up
insurance policies on their own lives or on their wives’ lives include:
 individuals who are self-employed and who do not make voluntary CPF
contributions, such as businessmen, doctors, lawyers, accountants, etc.
practising as sole proprietors or in partnerships; and
 foreigners working in Singapore being exempted from the CPF contribution
scheme.
6.2 However, it should be noted that the amount of benefit for tax relief for life
insurance premiums is relatively small, being limited to only S$5,000, and due
to the fact that this relief is aggregated with the relief for CPF contributions.
7. TAX BENEFIT FOR SRS PARTICIPANTS
A. Tax Concession On Withdrawal
7.1 Besides enjoying SRS reliefs for contributions made, SRS participants will also
receive tax concessions for withdrawals from their SRS accounts. Only 50% of
the amount withdrawn is subject to tax, if the withdrawal is made:
 on or after the statutory retirement age prevailing at the time of the first
contribution;
 upon the death of the SRS participant;
 on medical grounds; or
 by a foreigner (who is not a Singapore permanent resident) who has
maintained his SRS account for at least ten years from the date of his first
contribution, subject to a withholding tax at the prevailing non-resident tax
rate of 22% at the point of withdrawal. If he is not a Singapore tax resident,
the actual tax payable on his SRS withdrawal will be 15% or the
progressive resident rates, whichever is higher.
7.2 The SRS withdrawal may be made in a lump sum or spread over a maximum
period of ten years.
7.3 For premature withdrawal made before the statutory retirement age, 100% of
the sum withdrawn will be subject to tax. A 5% penalty for premature
withdrawal will also be imposed. This is non-refundable and is separate from
any withholding tax as mentioned above.
B. Tax Benefits For Annuities Purchased Through SRS
7.4 For investments in life annuities, the 10-year withdrawal period does not apply.
So long as the SRS participant continues to receive the annuity payments for
life, 50% of the annuity payments will be subject to tax each year.
CHAPTER
16
INCOME TAX AND LIFE INSURANCE

Taxable Income In Singapore, income is taxed under the Income Tax Act 1947. Section 10(1) of the
Income Tax Act 1947 provides that income tax may be imposed upon the income of
any person, accruing in or derived from Singapore, or received in Singapore (from
outside Singapore).
Statutory Income According to Section 35 of the Income Tax Act 1947, statutory income refers to
the full amount of income for the year preceding the Year of Assessment from
each source of income.
Assessable Income Assessable Income
= Total Income - Allowable Expenses - Approved Donations
Chargeable Income It is derived from the remainder of the assessable income after deducting all
personal reliefs, such as earned income relief, spouse relief, child relief, deductions
for CPF and SRS contributions, etc. Since a company is not able to claim personal
reliefs, the assessable income is the same as the chargeable income.
Personal Reliefs Personal Reliefs are granted only to resident individuals.
Earned Income Relief A relief to provide recognition for individuals who receive income from
employment, trade, business, profession or vocation less allowable expenses.
NSman (Self / Wife / “NSman relief” is a relief to recognise the contributions of National Service men
Parent) Relief (NSmen) and NS Key Appointment Holders. The relief (self) will be given when a
taxpayer has completed his full-time National Service.
Spouse / Handicapped “Spouse relief” is an expansion of the wife relief to support family formation and
Spouse Relief provide recognition to male and female taxpayers supporting their spouses or ex-
spouses.
Qualifying child relief They are reliefs given in recognition of families’ efforts in supporting their children
(QCR) / handicapped child and caring for handicapped children.
relief (HCR)
Working Mother’s Child WMCR is a relief introduced to serve the following objectives:
Relief (WMCR) • to reward families with children holding Singapore citizenship;
• to encourage parents to take up citizenship for their children; and
• to encourage married women to remain in the workforce after having children.
Handicapped Brother / It is a relief given to provide recognition for individuals supporting their physically or
Sister Relief mentally handicapped siblings or siblings-in-law who lives in Singapore.
Parent / Handicapped It is a relief to promote filial piety and provides recognition to individuals supporting
Parent Relief their parents / handicapped parents in Singapore.
Grandparent Caregiver GCR is a relief given to provide recognition for grandparents who play the role of a
Relief (GCR) caregiver, and to help working mothers take care of their children.
Life Insurance Relief It is a relief on annual insurance premiums paid on the taxpayer’s or his wife’s life
insurance policies.
Central Provident Fund “CPF / Provident fund relief” is a relief given to encourage individuals to save for
(CPF) / Provident Fund their retirement. Employees who are Singapore Citizens / Permanent Residents
Relief For Employees may claim CPF/ Provident Fund relief on compulsory employee CPF contributions or
contributions to an approved pension or provident fund.
39
CPF Relief for Self- It is compulsory for an individual who is self-employed, is a Singapore citizen or
Employed Persons Singapore permanent resident and earns a yearly net trade income of more than
S$6,000 to make Medisave contributions.
Tax Relief for Cash Top- Members who top up their or their loved ones’ Special/Retirement/MediSave
ups To Retirement And Account in cash will enjoy tax relief of up to S$8,000 for top ups to their own
Healthcare Savings Special/Retirement/MediSave Account, and an additional S$8,000 for top ups to
their loved ones’ Special/Retirement/MediSave Account.
Course Fees Relief It is given to encourage an individual to continuously upgrade himself, so as to
enhance his lifelong employability.
Foreign Domestic Worker It is a relief given to encourage married women to remain in the workforce and to
Levy Relief also encourage procreation. This relief is twice the amount of domestic worker levy
paid for one foreign domestic worker.
Supplementary SRS is a voluntary scheme introduced by the Government to encourage individuals
Retirement Scheme (SRS) to save more for retirement on top of the contributions made to the CPF.
Relief Investment returns are tax-free before withdrawal and only 50% of the withdrawals
from SRS are taxable at retirement.
Matched Retirement It was launched in 2021 to help senior Singapore Citizens who have not reached the
Savings Scheme (MRSS) current Basic Retirement Sum, to build their retirement savings. From 2021 to 2025,
the Government will match every dollar of cash top-up made to eligible members’
Retirement Accounts, up to an annual cap of $600.
Additional MediSave AMCS is a voluntary scheme for employers to contribute more to their employees'
Contribution Scheme MA to help build up their savings for employees' healthcare needs. Employers can
(AMCS) For Employees make contributions under AMCS of any amount up to $2,730 per employee per
year.
Parenthood Tax Rebate It is a rebate given to married Singapore resident individuals, to encourage them to
have more children. Rebates are given only if the child is a Singaporean. The rebate
can be used to offset the income tax payable of the parents, in any proportion
as agreed by the spouses. Any rebate unutilised can be carried forward to offset
against future tax payable of the parents.
40
Part I Chapter 17. Insurance Nomination, Wills And Trusts
PART I CHAPTER 17
INSURANCE NOMINATION, WILLS AND
TRUSTS
CHAPTER OUTLINE
1. Framework For The Nomination Of Beneficiaries (NOB)

2. Aims Of Nomination Framework
3. Scope Of Nomination Framework
4. Who Can Nominate?
5. Choices Available To Policy Owners
6. Types Of Nominations Allowed Under Various Types Of Policies
7. Application To Other Types Of Policies
8. Trust Nomination
9. Revocable Nomination
10. Differences Between Trust Nomination And Revocable Nomination
11. Nomination Forms
12. Priority Of Nominations
13. Wills
14. Trusts
15. Effects of Death on Life Insurance And Various Distribution Methods
LEARNING OUTCOMES

 understand the framework for the nomination of beneficiaries
 know the aims and scope of the nomination framework
 know who can nominate and the choices available to policy owners
 discuss the types of nominations allowed under various types of policies
 understand trust nomination and revocable nomination
 describe how to make a trust nomination and a revocable nomination
 differentiate between trust nomination and revocable nomination
 know the different nomination forms and understand their purposes
 understand the priority of nominations
 understand the definition and purpose of Wills
 understand the definition, types and benefits of trusts
 differentiate between Wills and trusts
 know the effects of death on life insurance
 understand the various distribution methods of assets upon death
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. FRAMEWORK FOR THE NOMINATION OF BENEFICIARIES (NOB) ........................... 4
A. Background – Before 1 September 2009 ................................................................ 4
B. After 1 September 2009 ........................................................................................... 5
C. The Current Statutory Positions On Life Insurance Nomination........................... 6
D. Leaving The Life Insurance Policy Un-Nominated ................................................ 6
2. AIMS OF NOMINATION FRAMEWORK ....................................................................... 7
3. SCOPE OF NOMINATION FRAMEWORK .................................................................... 8
A. Cash-Funded Policies .............................................................................................. 8
4. WHO CAN NOMINATE? ............................................................................................... 9
5. CHOICES AVAILABLE TO POLICY OWNERS .............................................................. 9
6. TYPES OF NOMINATIONS ALLOWED UNDER VARIOUS TYPES OF POLICIES ....... 9
A. Insurance Policies Under CPF Investment Scheme ............................................... 9
B. Others ..................................................................................................................... 10
C. When Considering What Type Of Nomination To Make ..................................... 10
7. APPLICATION TO OTHER TYPES OF POLICIES ........................................................ 11
A. Group Insurance .................................................................................................... 11
B. Existing Policies ..................................................................................................... 12
C. Income Insurance Limited Policies ....................................................................... 12
8. TRUST NOMINATION ................................................................................................ 12
A. Making A Trust Nomination .................................................................................. 13
B. Payment Of Proceeds ............................................................................................ 14
C. When A Nominee Dies Before The Policy Owner ................................................ 14
D. Revoking A Trust Nomination ............................................................................... 14
9. REVOCABLE NOMINATION ....................................................................................... 15
A. Making A Revocable Nomination ......................................................................... 15
B. Payment Of Proceeds ............................................................................................ 15
C. When A Nominee Dies Before The Policy Owner ................................................ 15
D. Changing A Revocable Nomination...................................................................... 16
E. Execute a Revocable Nomination ......................................................................... 16
10. DIFFERENCE BETWEEN TRUST NOMINATION & REVOCABLE NOMINATION.......19
11. NOMINATION FORMS ............................................................................................... 20
A. Different Nomination Forms ................................................................................. 20
B. List Of Nomination Forms ..................................................................................... 21
C. Checklist For Filling In A Nomination Form ......................................................... 21
D. Differences Between Trust Nomination Form And Revocable Nomination
Form………………………………………………………………………………………….... 21
12. PRIORITY OF NOMINATIONS .................................................................................... 23
A. Conflicts Between Wills And Nominations ........................................................... 23
13. WILLS .......................................................................................................................... 24
A. Purpose Of A Will................................................................................................... 24
B. Who Can Make A Will? .......................................................................................... 24
C. Grant Of Probate .................................................................................................... 24
D. Who Is An Executor? ............................................................................................. 25

14. TRUSTS ...................................................................................................................... 25
A. What Is A Trust? ..................................................................................................... 25
B. Types Of Trusts ...................................................................................................... 26
B1. Express Trust................................................................................................... 26
B2. Implied Or Resulting Trust ............................................................................. 26
B3. Constructive Trusts ......................................................................................... 26
C. Benefits Of Trusts .................................................................................................. 27
D. Trust Versus Will .................................................................................................... 28
15. EFFECTS OF DEATH ON LIFE INSURANCE AND VARIOUS DISTRIBUTION
METHODS ................................................................................................................... 28
A. Intestate Succession Act 1967 .............................................................................. 28
1. FRAMEWORK FOR THE NOMINATION OF BENEFICIARIES (NOB)
A. Background – Before 1 September 2009
1.1 Before 1 September 2009, there was no provision in the Insurance Act 1966 that
governed the nomination of beneficiaries 1 to the proceeds from insurance
policies. When a policy owner nominated his spouse and / or children as
beneficiaries to his life insurance policy, the nomination was governed by
Section 73 of the Conveyancing and Law of Property Act 1886 (“CLPA”) 2. Under
Section 73 of the CLPA, a statutory trust 3 is automatically created in favour of
these beneficiaries as mentioned.
1.2 The rationale which underlies Section 73 of the CLPA is to accord family
financial protection to the beneficiaries of the policy owner through the creation
of a statutory trust. The proceeds from his life insurance policy will generally4
be protected from his creditors and will remain the entitlement of his
beneficiaries.
1.3 However, the creation of a statutory trust also means that the policy owner is
not generally allowed to deal with the policy for his own benefit. Examples in
which the policy owner may deal with the policy include him taking up a policy
loan, converting the policy to a paid-up policy with a lower sum assured,
changing the named beneficiaries, and receiving maturity benefits.
1.4 The nomination framework under Section 73 of the CLPA has caused concern
to those who wish to alter their beneficiaries as a result of changed family
circumstances. They are generally unable to do so once a nomination has been
made under Section 73 of the CLPA, unless they obtain the consent of all the
beneficiaries. In other words, nominations made under Section 73 of the CLPA
were generally irrevocable.
1.5 The pitfalls of such trusts are obvious. Once a policy owner nominates his
spouse and / or children as beneficiaries of his policy, he cannot change the
beneficiaries, without the consent of all the nominees, and must at all times
deal with his policy for the benefit of the beneficiaries.
1.6 Many policy owners were unaware of the undesirable consequences of

establishing an irrevocable trust. They realised their predicament only when
they were caught up in a divorce, as their former spouses still had claims on
their plans.
1 The person for whom the trustees are holding in trust, is also regarded as an equitable owner.
2 Other countries, such as Canada and Malaysia, have provisions in their insurance legislation for
nomination of beneficiaries, including nominations similar to those made under Section 73 of the CLPA.
In the UK, nominations of spouse and / or children are governed by the Married Women’s Property Act.
3 Statutory trusts are trusts created by statute; they are automatically created when certain specified
conditions or requirements are met. They do not require any intention to create a trust. Even the
knowledge of the statutory provision is not required.
4 No protection would be offered in certain situations, e.g. in cases where it can be proven that the policy
owner has bought the insurance policy with the intention to defraud his creditors.
1.7 Policy owners were allowed to nominate people other than a spouse or children
as beneficiaries, such as parents and siblings, but these were not legally
binding. Many policy owners made such nominations without realising that
their nominees had no legal claim on their policies.
1.8 There was an exception for policies bought from NTUC Income Insurance Co-
operative Limited prior to 1 September 2022. It operates under a separate Act
that allowed co-operative members to nominate such people as spouses,
children, relatives and friends as beneficiaries. NTUC Income Insurance Co-
operative Limited underwent a corporatisation exercise. It now operates under
the corporate entity, Income Insurance Limited, with effect from 1 September
2022.
1.9 Income Insurance Limited will recognise valid nominations made in accordance
with the requirements of Section 45 of the Co-operative Societies Act (CSA) and
valid nominations made under the Insurance Act 1966, unless they have been
revoked, or a new nomination has been made (under the Insurance Act 1966)
prior to the effective date of its corportisation.
B. After 1 September 2009
1.10 As such, the MAS recognised that there was a need to accord greater flexibility
and clarity to policy owners in respect of how their insurance policy proceeds
are to be disbursed. A new nomination framework was then incorporated into
the Insurance Act.
1.11 The MAS first issued a consultation paper for the framework relating to the
nomination of beneficiaries in December 2005. The MAS response to the
feedback received was published in 2006. Thereafter, a second consultation
paper was issued together with the proposed Insurance (Amendment) Bill 2007.
After further feedback was received, the necessary amendments were made,
and the Bill was presented to Parliament as the Insurance (Amendment) Bill
2009. It was duly passed by Parliament on 19 January 2009 and assented by the
President on 11 February 2009. It came into operation partially on 1 March 2009.
The NOB provisions and its regulations came into effect on 1 September 2009.
1.12 Under the new framework, nominations were no longer allowed to be made
under Section 73 of the CLPA to avoid possible repetition or conflict. In addition,
Section 150 of the Insurance Act, governing the manner of insurance claims
payouts, was amended to reflect that proper claimants 5 would receive payouts
only in the event that the policy owner had not nominated a beneficiary under
the new framework. Section 150 of the Insurance Act will nonetheless continue
to govern the payment of claims from insurance policies, where no nominations
have been made.
5 A “proper claimant”, as defined in Section 150(12) of the Insurance Act 1966, is a person who claims to
be entitled to the sums in question as executor of the deceased, or who claims to be entitled to that sum
(whether for his own benefit or not) and is the widower, widow, parent, child, brother, sister, nephew
or niece of the deceased; and in deducing any relationship for the purposes of this subsection, an
illegitimate person shall be treated as the legitimate child of his actual parents.
1.13 Under the new regime, policy owners of life and accident and health insurance
policies with death benefits are allowed to make both revocable and trust
(irrevocable) nominations. Policy proceeds under trust nominations are
protected from creditors, as previously the case under Section 73 of the CLPA.
Unlike previously, revocable nominations of spouses and / or children, as well
as other entities, are allowed. It means that you can change your nomination at
any time without your nominee’s consent. However, do note that unlike trust
nominations, policy proceeds under revocable nominations are not protected
from creditors.
1.14 Making a nomination under the new regime is not compulsory. However, the
purpose of having the new legal provisions on nomination is to provide a policy
owner with an affordable legal means of distributing the policy benefits to his
nominees.
C. The Current Statutory Positions On Life Insurance Nomination
1.15 With effect from 1st September 2009, a policy owner has 3 options with regards
to nominating beneficiary on his insurance policy. Option one, a policy owner
can leave a policy un-nominated. Option two, he can choose to execute a
revocable nomination. Option three, he can choose to excute an irrevocable
trust nomination if the benefiaries satisfy certain relational condition. Before we
dive into the details of these three options, let us first understand some basic
rules. In order for a policy to be able to be nominated, the policy owner and the
life insured must be the same person. This means all 3rd party policies cannot
be nominated. This include juvenille policy where the owner tends to be the
parent and the life insured is the child; group policy where the owner tends to
be a corporate entity and the life insured is the member of that entity. With this
understanding, we can now examine the three options in detail, and we can
assume in the following narrative, the policy-owner and the life insured is the
same person.
1.16 If no nomination is made, the proceeds of the policy will be distributed

according to the policy owner’s Will, if any. If there is no such Will made, such
proceeds will be distributed according to the rules in the Intestate Succession
Act 1967.
D. Leaving The Life Insurance Policy Un-Nominated
1.17 This is the default option when one applies for a life insurance policy. Upon the
policy owner’s death, up to $150,000 of the death benefit can be advanced,
without provision of grant of probate or letter of administration, to the proper
claimant, which is defined under Section 150(12)(b) of the Insurance Act as the
deceased’s estate executor or legal personal representative, widow, widower,
parent, child, sibling, or children of the sibling. The remaining of the sum
assured will be held by the insurance company until the deceased’s estate
executor or administrator produce the grant of probate or letter of
administration. Only then the insurance company will release the remaining
death benefit payable to the “estate of the deceased”. The deceased estate
executor or administrator would then distribute the proceed according to the
valid will, Intestate Succession Act, or Administration of Muslim Law Act,

whichever is relevant to the deceased’s situation.
1.18 There are 3 points to watch out for in this option. First, the $150,000 is defined
in Regulation
1.19 7 of the Insurance (General Provisions) Regulations. It is an amonut which an

insurance company can advance to the proper claimant of the deceased policy
owner. It is calculated based on one life per insurance company. Therefore, if a
policy owner has multiple insurance policies from one insurance company,
totalling a sum assured of say $1M. Upon his death, $150,000 will be advanced
to proper claimant without grant of probate or letter of administration. The
remaining $850,000 will be paid to the estate of the deceased policyowner upon
provision of grant of probate or letter of administration. This can cause estate
liquidity problem.
1.20 Second, the $150,000 figure is not a given. The law has uses the phrase “may
make a payment to any proper claimant”, which means if the insurance
company has reason to think there are potential disputes amongst multiple
possible claimant or estate creditors, the insurance company has every legal
right not to pay any amount to anyone until a court order is being produced by
relevant claimant.
1.21 Third, the proper claimant receives the advanced policy proceeds not in a
capacity of a beneficiary, but as a trustee. This means, the proper claimant is
responsible to distribute the advanced policy proceeds to relevant beneficiary
according to the valid will, or, in the absence of a will, the relevant intestacy
laws. It is not uncommon to find proper claimant assume he or she is the
beneficiary of the adavcned insurance proceeds and spent it all, only to be held
accountable by the beneficiary subsequently, resulting in much anguish.
1.22 Despite the disadvantages highlighted above, leaving life insurance un-
nominated and distribute through a will or testamentary trust is a common
advise given by a estate planning professional who is not formally trained in
life insurance.
2. AIMS OF NOMINATION FRAMEWORK
2.1 The aims of the new nomination framework are:

(a) To provide policy owners with greater choice and flexibility in determining
the manner in which the proceeds from their insurance policies are to be
disbursed.
The new framework gives policy owners the choice of making nominations
revocable such that a statutory trust will not be created, even in instances,
where the spouse and / or children are named as beneficiaries. In this way,
policy owners will be able to retain full rights and control over their
insurance policies if they so wish.
(b) To accord adequate financial protection to the named beneficiaries.

The new framework seeks to preserve, as far as possible, the principle
behind Section 73 of the CLPA of conferring benefits for the purpose of
family financial protection. Thus, apart from revocable nominations, policy
owners will also be offered the option of making trust (irrevocable)
nominations, which in effect are similar to nominations made under the
previous Section 73 of the CLPA.
(c) To offer greater clarity and certainty in respect of nominations of

beneficiaries to insurance policy proceeds.
This would be achieved through requiring policy owners to deliberately
exercise the choice to make a revocable nomination or an irrevocable
nomination. In this way, policy owners would be encouraged to understand
the implications inherent in each option, before they make their choices.
3. SCOPE OF NOMINATION FRAMEWORK
A. Cash-Funded Policies
3.1 Under the new nomination framework, policy owners can only make
nominations to proceeds from non-indemnity insurance policies. These will be
life and personal accident insurance policies, which are designed primarily for
the financial protection of the policy owner’s beneficiaries.
3.2 Conversely, indemnity policies, such as those providing hospital and surgical
benefits, are excluded from the nomination framework, because such policies
compensate the policy owner for specific losses during his lifetime and are
solely for his benefit. Furthermore, the payouts from such policies are typically
commensurate with the actual losses incurred, such as hospitalisation fees.
After the policy proceeds are used to pay for such losses, there is usually little
or no residual value left to pass on to the beneficiaries. As such, the concept of
nomination is not relevant in these cases.
3.3 Finally, the nomination framework will apply to policies incepted before and
after the nomination framework came into force. However, new nominations
made to policies which were incepted before the framework came into force
would be recognised under the framework, only if the policies have no existing
encumbrances. Policies under Section 73 of the CLPA incepted before 1
September 2009 are not covered by the new law, which is not retrospective, but
if a policy owner has an existing policy with no trust nomination in place, he
can now nominate beneficiaries.
3.4 It is stated under the Insurance Act that the types of policies eligible for
nomination are any life policy or accident and health policy which:
 is issued by a licensed insurer;
 is governed by Singapore law;
 provides death benefits;
 is effected by the policy owner on his own life;
 is not the subject of any trust created under Section 73 of the Conveyancing
and Law of Property Act 1886; and
 is not an annuity purchased with the minimum sum under Section 15(6C)
of the Central Provident Fund Act 1953.
4. WHO CAN NOMINATE?
4.1 To make the nomination 6, you must be both the policy owner and the life
insured under the policy, and be at least 18 years old.
5. CHOICES AVAILABLE TO POLICY OWNERS
5.1 Under the new nomination framework, a policy owner can decide whether or
not to nominate beneficiaries to the proceeds from his insurance policies.
Should he decide to make a nomination, he will then have a further choice
between revocable nomination and trust (irrevocable) nomination. The decision
to nominate can be exercised at any time during the policy coverage period,
provided that it is legally possible to do so 7. Trust nomination and revocable
nomination are explained in detail in the later sections of this chapter.
6. TYPES OF NOMINATIONS ALLOWED UNDER VARIOUS TYPES OF POLICIES
A. Insurance Policies Under CPF Investment Scheme
6.1 Any insurance policy purchased in whole or in part with the Central Provident
Fund (CPF) moneys will be considered a Central Provident Fund Investment
Scheme (CPFIS) insurance policy. Policy owners are only allowed to make
revocable nominations for CPFIS insurance policies; irrevocable nominations
are not allowed.
6.2 As long as a policy owner is alive and does not qualify for withdrawal of his CPF
savings, proceeds from any insurance policy purchased under the CPFIS have
to be refunded to the policy owner’s CPF account to form part of his retirement
savings. However, proceeds from irrevocably nominated policies will belong to
the beneficiaries, and not the policy owner, due to the creation of a statutory
trust. This runs contrary to the purpose for which CPF moneys are intended –
the member’s retirement. As such, irrevocable nominations to CPFIS insurance
policies are not allowed under the nomination framework.
6.3 Under CPFIS, if the proceeds are paid out when the policy owner is not eligible
to make withdrawals, it will be returned to his CPF Account. However, the death
benefits under CPFIS will be paid to the beneficiaries.
6 Some of the sections on Insurance Nominations are adapted from LIA’s “Your Guide to the Nomination
of Insurance Nominees”, with LIA’s permission.
7 The policy in question must not already be subject to encumbrances which may render the nomination
unenforceable. For instance, once an irrevocable nomination is made on a policy, a revocable
nomination cannot be subsequently made on the same policy, without first revoking the irrevocable
nomination; this will require the consent of all the beneficiaries.
B. Others
(a) Supplementary Retirement Scheme

Similar to CPFIS policies, trust nominations are not allowed for policies
bought under the Supplementary Retirement Scheme (SRS). The use of
SRS savings is restricted to products that have the potential of growing
one's own pool of retirement savings. Policies with trust nomination do not
fulfil this criterion, as the policy owner will no longer have control over the
proceeds of such policies during his lifetime.
(b) Muslim Policy Owners

Muslim policy owners may make both trust and revocable nominations
over their life insurance policies, or accident and health insurance policies
with death benefits. However, they should be aware that revocable
nominations are subject to “Faraid” (Muslim law of inheritance), and they
should seek guidance from the Islamic Religious Council of Singapore
(MUIS) on how the different types of nominations interact with the
principles of Muslim law.
The above specified restriction on making trust nominations for CPF-funded

policies also applies to Muslim policy owners.
The Islamic Religious Council of Singapore (MUIS) issued a FATWA on 22

March 2012 to clarify that under Section 111 of the Administration of
Muslim Law Act 1966, Muslims can make revocable nominations on their
insurance policies.
C. When Considering What Type Of Nomination To Make
6.4 Knowing which policies are eligible for nomination will allow you to ensure that
the policy proceeds are paid out to the right person(s) at the right time and in
the right amount. Table 17.1 below shows the types of nomination that are
allowed to be made under the various types of policies.
Table 17.1: Types Of Nominations Allowed Under Various Types Of Policies
Types of Policies Is Trust Nomination Is Revocable

allowed? Nomination allowed?
Cash-funded Policies
Life Policy Yes Yes
Accident and Health Policy with Yes Yes
Death Benefits
Policies under CPF Schemes
CPFIS Policy No Yes
DPS Policy No Yes
Others
SRS Policy No Yes
Muslim Policy owner Yes Yes
(subject to Muslim
Law)
ElderShield Supplementary No Yes
Policy
Integrated Shield Plan No Yes*
Key:
A&H: Accident & Health DPS: Dependants’ Protection
Scheme
CPF: Central Provident Fund SRS: Supplementary Retirement
Scheme
CPFIS: CPF Investment Scheme
*Even though a Revocable Nomination (RN) is allowed for an Integrated Shield

Plan (IP) under the Insurance Act 1966, a RN may not be relevant, since such a
plan is mainly meant to cover any medical claim which will usually be paid
directly by the insurer to the healthcare provider, and the death benefit under
such IP is a waiver of any deductible and/or co-insurance.
7. APPLICATION TO OTHER TYPES OF POLICIES
A. Group Insurance
7.1 Group insurance covers a group of people under one master policy.
7.2 Typically, a group insurance policy is bought by an organisation such as an

employer for the benefit of its individual employees. The insurer issues the
master policy contract to the organisation. Thus, the organisation becomes the
policy owner.
7.3 The individual employee does not have a policy with the insurer, but the
benefits of the master policy will go to him as a form of employee benefit.
7.4 As the policy owner (the organisation) is also not the life insured in such a case,
insurance nomination is not allowed for any group insurance policy.
B. Existing Policies
7.5 If the policy owner has one or more life policies which he bought before the
operation of the new legal provisions on nomination, it is important that you
understand and highlight the following to your client:
(a) If your client has never made any nomination on his policy, he can now
make a trust or revocable nomination under the said provisions.
(b) If your client has named his spouse and / or children as nominees, his policy
will fall under Section 73 of the CLPA, and these nominees will continue to
be recognised. Note that Section 73 of the CLPA has not been repealed. The
new legal provisions have no impact, as it does not apply retrospectively.
If your client believes that there are special circumstances in his case, he
should seek legal advice on the legal effect of his nominations.
7.6 Policy owners are advised to seek legal advice if any of the following applies to
him:
(i) If the nominees whom the policy owner named previously are not his
spouse and / or children.
(ii) If the nominees whom the policy owner named previously are his spouse
and / or children and some other persons or relatives.
(iii) If the nominees whom the policy owner named previously are persons or
relatives other than his spouse and / or children and he subsequently
changed those nominees or added others.
C. Income Insurance Limited Policies
7.7 Before 1 September 2009, nomination of beneficiaries for policies bought from
NTUC Income Insurance Co-operative Limited was governed solely by Section
45 of the Co-operative Societies Act (CSA) 1979.
7.8 With effect from 1 September 2009, the law governing the nomination of
beneficiaries is consolidated under the Insurance Act 1966; and no nomination
is allowed under the CLPA and CSA.
7.9 For policies with nominations made prior to 1 September 2009 under Section
73 of the CLPA or Section 45 of the CSA, there will be no change in the status
of the existing nominations and no action is required. Policy owners in this
position who wish to change their nominations should contact Income
Insurance Limited for more information.
8. TRUST NOMINATION
8.1 When the policy owner makes a trust nomination at the time of buying a policy
or at any time after the policy is issued, he will lose all rights to the ownership
of the policy. This means that all proceeds (living benefits and death benefits)
from the policy now belong to the nominees whom he named. While he is still
obliged to pay the premiums for the policy, all the benefits of the policy belong
to the nominees.
8.2 The making of a trust nomination will have the same effect as nominating under
the previous Section 73 of the CLPA. The only difference is that under the new
framework, the policy owner will be required to make a deliberate and explicit
decision to make a trust nomination, and hence, cause a statutory trust to be
established over his policy.
8.3 Only a policy owner who is at least 18 years old can make a trust nomination.
8.4 Written consent is needed of all nominees (and for any nominee below the age
of 18 years, the written consent of the parent / legal guardian who is not the
policy owner), or of a trustee8 who is not the policy owner, before the policy
owner may:
 make any change to the policy;
 revoke the trust nomination;
 take a loan under the policy; or
 surrender the policy.
8.5 In the event of any bankruptcy, the policy proceeds are generally protected from
creditors.
8.6 Given the inflexibility of a trust nomination, the policy owner should only
consider making such a nomination if he is prepared to give away the insurance
policy proceeds completely to the nominees. He must also be aware that he will
not be able to unilaterally change his nomination(s) later on, even if his family
circumstances have undergone changes.
A. Making A Trust Nomination
8.7 Under Section 132(1) of the Insurance Act 1966, trust nominations cannot be
made to any policy which is:
 issued under the Dependants’ Protection Insurance Scheme established
and maintained by the CPF Board;
 any CPF-funded scheme under which the CPF member is obliged to repay
the benefits or proceeds back into the CPF fund;
8.8 To make a trust nomination over the policy, the policy owner has to complete a
prescribed Trust Nomination Form which can be obtained from his insurer.
8.9 The form must be completed in full with accurate information in the presence
of two adult witnesses who each must be at least 21 years old. The witnesses
must not be any of the policy owner’s nominees or the spouse of any of his
nominees. Only the policy owner’s spouse and / or children can be nominated.
8.10 Any trustee must be at least 18 years of age. The trustee can be changed at any
time, subject to the prevailing law. A nominee can also be a trustee. The policy
owner can name himself as the trustee, but he cannot receive the policy
proceeds, or give consent for revocation of the nomination on behalf of the
nominees. Only another trustee can do so.
8 The “trustee” is the legal owner of the trust.
8.11 The policy owner must specify the percentage share of the policy proceeds that
each nominee is to receive. The total of the percentages which he specifies for
all the nominees whom he has named must add up to 100 per cent of the policy
proceeds.
8.12 To ensure that the policy owner’s nominees receive the benefits from the policy,
he must notify his insurer and send his completed Trust Nomination Form to
the insurer.
8.13 All benefits from the policy, both living benefits (e.g. critical illness payout) and
death benefit, will be released to the policy owner’s nominees.
8.14 If the policy owner names a trustee other than himself, the proceeds can be paid
to this trustee. If he names himself as the only trustee, the proceeds will be paid
to the nominees who have each attained the age of 18 years and to parents /
legal guardians (who must not be the policy owner) of nominees below 18 years
of age.
8.15 When a nominee dies before the policy owner, his share of the policy proceeds
will go to the deceased nominee's estate.
D. Revoking A Trust Nomination
8.16 To revoke a trust nomination, the policy owner has to use a prescribed
Revocation of Trust Nomination Form to get the written consent of a trustee
who is not the policy owner, or of every nominee. He must notify his insurer
and send his completed Revocation of Trust Nomination Form to the insurer.
8.17 The policy owner can revoke a trust nomination if all his nominees who are
each at least 18 years old give written consent. If his nominee or one of his
nominees is below 18 years old, he must obtain the written consent of the
parent / legal guardian who is not the policy owner. Alternatively, he can get
the consent of a trustee who is not the policy owner.
8.18 If a nominee dies before the policy owner, that portion of the proceeds becomes
part of the nominee’s estate for distribution according to the deceased's Will,
or if he has not made a Will, according to the Intestate Succession Act 1967.
8.19 Once the trust nomination has been properly revoked, the policy owner can
then make a new trust nomination or revocable nomination over the policy.
9. REVOCABLE NOMINATION
9.1 When a policy owner makes a revocable nomination, he will continue to retain
full rights and ownership over the policy. This means that he can change or
revoke a nomination at any time, without needing the written consent of the
nominee or nominees.
9.2 Only death benefits from the policy will be payable to the nominees. All living
benefits will be paid to the policy owner.
9.3 Hence, revocable nominations offer the benefit of maximum flexibility to the
policy owner. The policy owner will be able to reserve the policy proceeds for
his own use should illness or disability befall him. By making a revocable
nomination, it would allow for faster payout of policy proceeds in the event of
the policy owner’s death, as compared to the policy owner not making any
nomination at all.
9.4 Only a policy owner who is at least 18 years old can make a revocable
nomination.
9.5 Note that companies (corporations) can also be made nominees. The term
“person” includes corporations. They are legal persons.
A. Making A Revocable Nomination
9.6 The prescribed Revocable Nomination Form is a legal document used as the
basis for distributing the money that the insurer pays from the policy owner’s
policy after his death.
9.7 Under Section 133 of the Insurance Act 1966, a revocable nomination cannot be
made on a policy if a trust nomination has already been made on that policy.
9.8 To ensure that the policy owner’s nominees receive the benefits from the policy,
he must notify his insurer and send his completed Revocable Nomination Form
to the insurer.
9.9 Living benefits such as the benefit to be paid to the policy owner if he comes
down with a critical illness will be made to him. On his death, the remaining
death proceeds, if any, will be paid directly to the nominees.
9.10 If any of the nominees is below 18 years old, the proceeds will be paid to the
parent or legal guardian who is not also the policy owner.
9.11 If there is only one nominee, a revocable nomination will automatically be

revoked on the death of the nominee. If there is more than one nominee, a
revocable nomination will automatically be revoked on the death of all
nominees.
9.12 If there is one surviving nominee, all the deceased nominees' shares will be
added to the surviving nominee's share of the death benefits. If there is more
than one surviving nominee, each deceased nominee's share will be added to
each surviving nominee's share in proportion to each surviving nominee's
initial share. This amount is calculated according to the formula as prescribed
by the new legal provisions on nomination in the Insurance Act.
D. Changing A Revocable Nomination
9.13 At some point after making a revocable nomination, the policy owner may wish
to change his nomination. This may be due to reasons, such as a divorce or the
birth of a new child.
9.14 Since the policy owner retains full rights and ownership over the policy, he may
revoke (undo) his existing nomination and make another new nomination at
any time.
9.15 To make the change, the policy owner can complete a prescribed Revocation of
Revocable Nomination Form in full with accurate information, in the presence
of two adult witnesses who must each be at least 21 years old. A witness must
not be a nominee or the spouse of a nominee.
9.16 The policy owner must notify his insurer and send his completed and signed
Revocation of Revocable Nomination Form, as well as complete and sign the
new Nomination Form to the insurer.
9.17 It is important that the policy owner understands the differences between trust
and revocable nominations, and is familiar with which form to use accordingly.
E. Execute a Revocable Nomination
9.18 Revocable nomination is one of the new outcome created under the nomination
framework. It is codified in Section 133 of the Insurance Act 1966. A policyowner
can nominate a person, or any legal entity, to receive his insurance death
benefit. There is complete freedom on who the policyowner wish to nominate
his policy to and the beneficiary need not have to be related to him. The
beneficary also need not prove that he or she justifies the sum assured
nominated. Each policy is not restricted to one beneficiary. Multiple
beneficiaries are allowed and is being indicated by percentage in the
nomination form. (All the insurance companies’ nomination forms are
standardised and can be downloaded via their web-site).
9.19 Assuming a policyowner has made a revocable nomination, and he dies. The
insurance company can pay out the entire death benefit to the nominated
beneficiary or beneficiaries without the provision of grant of probate or letter of
administration. In other words, a revocable nomination is an excellent source
of liquidity for the beneficiaries compared to un-nominated insurance policy.
9.20 There are a few points to watch out for in this option. First, the beneficiary will
have legal ownership of the insurance proceed he or she receives. For example,
if Peter nominated his elderly mother in his $1M life insurance policy under the
revocable nomination. When Peter dies, his elderly mother will receive the $1M
without grant of probate or letter of administration. Peter’s other family
members cannot challenge the elderly mother to stake a claim on the insurance
proceed.
9.21 Second, as the name suggest, this policy’s nomination can be revoke by the
policy-owner without consent from the beneficiary.
9.22 Third, if the beneficiary dies before the policyowner, his or her share will be
extinguished, and if the policyowner dies subsequently, the policy procceds will
be given to the surviving beneficiary completely. If there is no surviving
beneficiary, the insurance proceed will be treated as though there is no
nomination as written previously.
9.23 Fourth, though the policy proceeds can be paid without grant of probate or
letter of administration, the proceeds are not protected from the estate
creditors. The official assignee can go after the beneficiary to claim back the
money which can result in extreme embarrassment for the stakeholders.
9.24 Fifth, this nominaion only deals with the death benefit. All living benefits, such
as critical illness, endowment policy’s coupon pay-out, and retirement policy
income pay-out etc, are still payable to the policyowner.
9.25 Revocable nomination is an excellent tool to provide liquidity and direct the
capital to the targeted beneficiary. Some of the usages are as follows:
S/No. Usage of Life Policy Remarks
1. Mortgage Protection Provide immediate liquidity for the

Policy beneficiary to discharge the loan liability
from the estate or joint liability holder
2. Life policy for Family Provide immediate liquidity to surviving

Income family members while the estate is
undergoing estate settlement pocess.
3. Life insurance for Provide immediate liquidity to complete the

planned giving planned giving intention of the policyowner.
9.26 Revocable nomination can be executed on the following types of insurance

policies:
S/No. Types of Policies Remarks

1. Cash-funded Policies Under the Insurance Act 1966, the types of
policies eligible for nomination are any life
2. SRS-funded Policies policy or accident and health policy which:
3. CPF-Funded Policies a. Is issued by a licensed insurer;

b. Is governed by Singapore law;
4 Dependent c. provides death benefits;
Protection Scheme d. is effected by the policy owner on his own
(DPS) Policies life;
e. is not the subject of any trust created under
5. Personal Accident Section 73 of CLPA; if so, the trust needs to
Policies be revoked before a revocable nomination
can be done;
f. is not an annuity purchased with the
minimum sum under Section 15(6C) of the
CPF Act 1953.
9.27 For avoidance of doubt, indemnity policies like hospital and surgical policies
are excluded from the nomination framework. This is because such policies
compensate the policy owner for specific losses during his lifetime and are
solely for his benefit. Furthermore, the payouts from such policies typically
commensurate with the actual losses incurred, such as hospitalisation fees.
After the policy proceeds are used to pay for such losses, there is usually little
or no residual value left to pass on to the beneficiaries. As such, the concept of
nomination is not relevant in these cases.
10. DIFFERENCES BETWEEN TRUST NOMINATION AND REVOCABLE

NOMINATION
10.1 Table 17.2 shows the differences between trust (irrevocable) nomination and
revocable nomination.
Table 17.2: Differences Between Trust Nomination And Revocable Nomination
Considerations Trust (Irrevocable) Revocable Nomination

Of The Policy Nomination
Owner
Can the policy No Yes
owner retain
control over the
policy for as
long as he is
alive?
Who gets the Nominees get both Living benefits are paid to the
policy proceeds? types of benefits. policy owner. Nominees only get
- Living benefits the death benefits.
- Death benefits
owner change The nomination can
his nomination be revoked only if any
by himself at trustee who is not the
any time? policy owner gives
consent; or if all the
nominees give written
consent.
owner name one Only spouse and / or Any legal entity (i.e. individual,
or more children can be association or corporation),
nominees who nominated. including spouse and / or
are not his children, can be nominated.
spouse or However, nomination of an
children? animal is an invalid nomination.
Can the policy The Will has no impact The earlier revocable nomination
owner make a on the earlier trust is revoked by the Will, provided
Will after having nomination. that the Will contains the
made an earlier Once a trust information as prescribed in the
nomination? nomination is made, Insurance (Nomination of
the policy no longer Beneficiaries) Regulations 2009.
belongs to the policy
owner. As such, he Note: The insurer will pay
cannot give it away according to the latest properly
under his Will, as he executed instrument (be it a
can give away only revocable nomination or a Will)
property under the that is known to the insurer at the
Will which still time of the policy owner’s death.
belongs to him.
Considerations Trust (Irrevocable) Revocable Nomination

Of The Policy Nomination
Owner
What happens if Policy proceeds If only one nominee is named, the
the policy passes to the estate of nomination is revoked; in all
owner’s the deceased other cases, the surviving
nominee dies nominee. nominees share in the deceased’s
before the policy share in proportion.
owner?
Are the policy Yes No
proceeds
protected
against claims
from creditors in
the event of
bankruptcy?
11. NOMINATION FORMS
A. Different Nomination Forms
11.1 The use of separate forms for six mutually exclusive purposes means that the
policy owner will have to deliberately and consciously decide on the type of
nomination that he wishes to make. This will in turn encourage policy owners
to make more informed decisions when nominating beneficiaries.
11.2 The forms will allow policy owners to specify, within each type of nomination,
the percentage share of the policy proceeds for each named beneficiary. The
shares may differ between beneficiaries, but they must total to 100%. This is to
provide clarity and completeness in nomination, which will, in turn, lead to ease
of payout.
11.3 Policy owners can obtain the nomination forms from their insurers and exercise
their choices at any time during the policy coverage period. It is the
responsibility of policy owners to inform their insurers should they
subsequently wish to alter their nominations or execute other legal
instruments, such as Wills, which may override the nominations already made.
11.4 In addition, before a nomination is made, it is the responsibility of policy owners

and their lawyers to check on the existence of any previous nominations or legal
instruments which may impede the validity and execution of the nomination
forms. Thereafter, insurers are required to keep and maintain records of any
changes made to the nominations which are notified to them, and policy
owners are advised to do likewise.
11.5 Copies of the various Nomination Forms listed below can be obtained from the
insurers.
11.6 To be considered as valid, a nomination form must be completely filled up and

must be signed in the presence of two suitable witnesses. The information that
it contains must be true to the best of the policy owner’s belief at that point in
time. The forms are legally binding, so they should be carefully filled in and
properly signed. For the nomination to be effective, the policy owner needs to
notify his insurer, and enclose the Nomination Form that he has just filled up
and signed in accordance with the statutory requirements.
B. List Of Nomination Forms
Form 1 : Trust Nomination for the policy owner to make a trust

nomination.
Form 2 : Revocation of Trust Nomination for the policy owner to revoke a
trust nomination.
Form 3 : Appointment, Revocation of Appointment, of Trustee of Policy
Moneys for the policy owner to appoint or revoke the
appointment of one or more trustees of policy moneys.
Form 4 : Revocable Nomination for the policy owner to make a revocable
nomination
Form 5 : Revocation of Revocable Nomination for the policy owner to
revoke a revocable nomination
Form 6 : Notice of Revocation of Revocable Nomination for the policy
owner to give notice of the revocation of a revocable nomination
if:
to briefly describe the conditions of revocation in S133(7)(a); or
to briefly describe the conditions of revocation in S133(7)(b).
C. Checklist For Filling In A Nomination Form

 Decide who to name as the nominee or nominees.
 Use the right form; there is a prescribed Trust Nomination Form, prescribed
Revocable Nomination Form, etc.
 Specify the proportion of benefits that each nominee is to receive, ensuring
that they all add up to 100% of the policy proceeds.
 Ensure that all information on each nominee is accurate.
 Ensure that details of the policy are accurate.
 Ensure that the witnesses and trustees, if any, meet the requirements as set
out in the Nomination Form.
 Ensure that all the fields in the form are fully completed.
 Notify the insurer of the nomination and send a copy of the completed
Nomination Form to the insurer.
D. Differences Between Trust Nomination Form And Revocable Nomination Form
11.7 Table 17.3 below shows the differences between a trust nomination form and a
revocable nomination form and the respective requirements. It is important that
you are aware of all the requirements that need to be fulfilled, so that you can
advise your client appropriately.
Table 17.3: Differences Between Trust Nomination Form

And Revocable Nomination Form
Trust Nomination Form Revocable Nomination Form
(prescribed by the Insurance (prescribed by the Insurance
(Nomination of Beneficiaries) (Nomination of Beneficiaries)
Regulations 2009 Regulations 2009
Use a Trust Nomination Form to make Use a Revocable Nomination Form to
a trust nomination over the policy. make a revocable nomination over
the policy.
The policy owner must complete the form in full with accurate information in
the presence of two adult witnesses who must be at least 21 years old each.
They must not be any of the nominees or the spouse of any of the nominees.
The policy owner may nominate only The policy owner may nominate any
policy owner’s spouse and / or legal entity, be it individual,
children. association or corporation; or policy
owner’s spouse and / or children.
Nomination of an animal is an invalid
nomination.
The policy owner must name a trustee Trustee is not required.
or trustees who are at least 18 years of
age each. The trustee can be changed
at any time, subject to the prevailing
law. A nominee can also be a trustee.
The policy owner can name himself as
the trustee, but he cannot receive the
policy proceeds, or give written
consent for revocation of the
nomination on behalf of the
nominees. Only another trustee can
do so.
The policy owner must specify the percentage share of the policy proceeds
that each nominee is to receive. The total of the percentages as specified for
all nominees named must add up to 100% of the policy proceeds.
12. PRIORITY OF NOMINATIONS
12.1 There are various ways in which a policy owner may transfer the proceeds from
his insurance policy to another person. These include assigning his policy
proceeds, bequeathing them in a Will or using the prescribed nomination
forms.
12.2 The nomination framework will specify the priority of nominations vis-à-vis
alternative methods of transfer. Nonetheless, owing to the varied
circumstances faced by different policy owners, it is possible that conflicts may
arise with respect to how the policy owner’s assets are to be disposed of.
12.3 To illustrate, under the framework, revocable nomination forms will be deemed
testamentary instruments 9, meaning that they will be recognised as legal
instruments with which to disburse the assets of the policy owner. As such,
revocable nomination forms will have the same legal standing as Wills. Thus,
potential conflict can arise in a situation, where the beneficiary named in a
revocable nomination form and that named in a Will are different. However,
such a case is unlikely to be prevalent.
12.4 Trust nominations are not relevant in the above example, because policy
proceeds from an irrevocably nominated policy will not form part of the assets
governed by a Will.
A. Conflicts Between Wills And Nominations
12.5 Where conflicts do occur, the person named as the beneficiary of the relevant
insurance policy in the latest, validly executed instrument (be it a nomination
form, a Will or any other instrument) will be recognised as the rightful
beneficiary. This is because the latest, validly executed instrument would be
deemed to best reflect the policy owner’s most current wishes. This also
reinforces the aforementioned need to keep track of changes to the
nominations, as part of the due diligence process. Doing so would help to
minimise uncertainty regarding the validity of the different instruments
concerned, and would correspondingly reduce the possibility of legal conflict
between beneficiaries named in different instruments.
12.6 Where a policy owner wishes to use a Will to govern the disbursement of his
insurance policy proceeds, explicit details of the policy in question must be spelt
out in the Will. Examples of such details include the name of the insurer, the
policy number, and the amount of policy proceeds to be disbursed to the
respective beneficiaries.
12.7 For instance, if a policy owner makes a validly executed nomination on his
insurance policy and subsequently draws up a Will, the Will must contain
explicit details of his insurance policy as mentioned above in order for the Will
to override the nomination form. A Will which merely states that it
encompasses “all” the deceased’s property may not be deemed to include the
9 The nomination forms are designed and completed according to the rules on capacity, proper execution,
attestation and revocation laid out in the Wills Act 1838.
insurance policy in question. As such, the Will may not be considered legally
valid in respect of the insurance policy proceeds, and the latest validly executed
instrument, i.e. the nomination form, may be recognised instead.
12.8 If the policy owner has first made a Will, and then makes a nomination to his
insurance policy, the Will would typically not contain details of the insurance
policy. In this case, the nomination form, if validly executed, would be deemed
to override the Will in respect of the insurance policy proceeds, since it is the
latter of the two instruments.
13. WILLS
13.1 A Will is basically a legal document that is executed by an individual (called the
“testator”), which sets out how his estate should be managed and the assets
distributed when he should pass away. The Will takes effect only on the death of
the testator. He is free to change the Will as and when he likes, and as many times
as he wants, up until the point of death.
A. Purpose Of A Will
13.2 The purpose of a Will is to see that the distribution of the deceased’s property
is done in accordance to his wishes. This may be effected by the deceased
during his lifetime through a Will.
13.3 If there is no valid Will, then the distribution of the deceased’s property shall be
done in accordance with the provisions of the law, i.e. the Intestate Succession
Act 1967 or the Administration of Muslim Law Act 1966.
13.4 Any adult of sound mind can make his own Will. The Will should indicate who the
executor of the estate is and who the guardian of the minor children should be in
case neither parent survives. It is important that the Will must be witnessed by
two persons who are present together, and signed at the same time as the
testator.
B. Who Can Make A Will?
13.5 Any person who has attained the age of 21 years and with a sound mind can make
a Will. Notwithstanding this, any soldier (including a member of an air force) in
actual military service, or any mariner or seaman being at sea may do so, even
though he is under the age of 21 years. The right of Muslims to make a Will is
governed by the Administration of Muslim Law Act 1966.
C. Grant Of Probate
13.6 The mere existence of a Will is insufficient for an executor to proceed with the
administration of the deceased’s estate. A grant of probate must be obtained from
the Court to enable the executor to administer the deceased’s estate, according to
the directions as contained in his Will.
D. Who Is An Executor?
13.7 An executor is the person nominated to administer the deceased’s estate

according to the Will. If the executor is a female, she is called an executrix. The
executor can be a beneficiary under the Will or some disinterested party, e.g. a
solicitor, a banker or friends, etc.
14. TRUSTS
14.1 In this section, we will discuss the topic of trusts – what they are, the different
types of trusts and the benefits of trusts.
A. What Is A Trust?
14.2 A trust is in essence an agreement between a settlor, the person who settles
property into the trust, and the trustee, the person to whom the property is
transferred. The trust property would be held by trustees “in trust for” the
beneficiaries. The beneficiaries of the trust are, therefore, the people who will
receive the benefit of the income and / or capital of the trust fund.
Transfers Assets
Settlor Trustee
Agreement
For the benefit of
Beneficiaries
(Beneficial Owners)
14.3 The agreement between the settlor and the trustee may be oral or written, but for
ease of proof, the trust agreement should be a written document.
14.4 A trust arrangement, therefore, allows a duality of ownership: the trustee is the
legal owner of the property that has been transferred to him, and the law
recognises that in addition to the legal owner, there are beneficial owner(s). The
law holds that the interests of the beneficiaries are paramount. Therefore, in
exercising their powers, the trustees must take into account the interests of the
beneficiaries.
B. Types Of Trusts
B1. Express Trust
14.5 We are using the term “express trusts” in a wide sense to cover situations,
where there is an express intention to create a trust over a life policy (which
intention is not required for a statutory trust). In strict law, there would be three
certainties which are required, namely, certainty of words, certainty of subject
matter and certainty of objects. In simple English, the intention to create a trust
should be clear, and the beneficiaries should be ascertainable.
14.6 Where documents are used to create a trust, there is little problem. Unlike
creating trusts for tangible properties, such as landed properties, one would not
usually use a “deed” (i.e. a document under seal) to create a trust over a life
policy. A less formal agreement or a letter, or even words would suffice.
B2. Implied Or Resulting Trust
14.7 A trust may be implied or may “result” in certain situations with regard to life
policies.
14.8 Firstly, owing to the death of the beneficiary, or for some other reason, such as
the beneficiary being disqualified to receive the policy moneys, a trust may
result for the benefit of the person who has originally constituted the trust, or
of his estate.
14.9 Secondly, there may be cases where the policy would provide for the policy
moneys to be paid to some person other than the policy owner or his personal
representatives, and the payee is regarded as a trustee who is not to benefit
personally under the policy. In such a case, the payee will hold the policy
moneys on trust for the policy owner or the estate of the policy owner.
14.10 Thirdly, there may be cases where a creditor, such as a bank, takes out a policy
on the life of the debtor, and the debtor has agreed to be liable to pay the
premiums. The Court may well hold that the policy is deemed to be held in trust
for the debtor, subject to a charge in the creditor’s favour for the moneys due
to it.
B3. Constructive Trusts
14.11 A constructive trust is a trust that arises from the operation of a law where the
recipient of life insurance proceeds is to hold the proceeds as trustee and return
them to a rightful beneficiary. For example, a policy owner executed a revocable
nomination on his whole life policy – with a sum assured $100K - to his church
as part of a legacy strategy. At the policy owner’s death, the insurer paid the
sum assured to the church. It was then found that the deceased had incurred an
estate debt of $1M. The estate creditor subsequently sued the estate and won.
In this situation, the church will be deemed as a constructive trustee of the sum
assured of $100K and will need to return the proceeds to the rightful owner -
the estate creditors.
C. Benefits Of Trusts
C1. Distribution
14.12 The trust deed provides for the distribution of the assets held by the trustees in
accordance with the wishes of the settlor and at the time that he intends the
beneficiaries to benefit. The trust is useful, particularly in the case of minor
beneficiaries, as the trustees can safeguard the assets for the children till such
time as the settlor wishes, or till they are of age.
C2. Avoiding Probate
14.13 Another main benefit of having a trust is that it allows the settlor to plan for the
smooth transfer of assets to his next of kin, without going through costly probate
procedures, especially if the settlor has assets in various countries registered in
his name. This is because if assets, such as real estate and stocks and shares in
foreign jurisdictions, are registered in the name of the settlor (whether sole or
joint), such shares may be frozen if anything unforeseen happens to the settlor.
Grant of probate will have to be applied for. Such grant may have to be resealed
in the foreign jurisdiction, before the assets can be transferred to the next of kin
or in any way dealt with by them. Not only is this a tedious, time-consuming and
possibly expensive procedure, but the assets in those jurisdictions may be subject
to estate duty of those jurisdictions.
14.14 Because assets settled into the trust with a corporate trustee are no longer in the
name of the individual settlor, but in the name of the corporate trustee, which is
an ongoing entity, such assets are not frozen and may be dealt with by the trustees
readily. However, testamentary trusts would not give the testator this benefit.
C3. Confidentiality
14.15 Settling assets into a trust can also provide confidentiality and will not expose
your estate to the public scrutiny that probate procedures will.
C4. Succession
14.16 A trust can also be a good vehicle to plan for the succession to business assets. It
can segregate the control of business assets from the derivation of economic
benefit, thereby allowing control to be left in the hands of some, whereas others
enjoy the dividends.
C5. Estate Duty
14.17 Depending on how it is structured and the domicile of the settlor and beneficiaries,
a trust or company structure may also help to minimise estate duty liability
exposure in various jurisdictions.
14.18 In Singapore, estate duty was abolished on 15 February 2008.
C6. Asset Protection
14.19 Depending on how a trust is structured, it could protect the assets of the trust from
future creditors. At the very least, it can protect the assets from the creditors of
spendthrift children and / or the claims of their spouses.
D. Trust Versus Will
14.20 Having a Will is better than not having a Will. At least with a Will, the person would
have planned for the succession of his estate. The absence of a Will when he dies
can be very troublesome. This is because the distribution of his assets may then
depend on the laws of the country where he has assets.
14.21 However, a Will does not avoid the problems of probate. Probate is a legal process
that allows the next of kin of the deceased to inherit the assets of the deceased.
14.22 When a person dies, his assets are frozen, and the next of kin cannot deal with
those assets, unless the Court gives a grant of probate. Before the Court can do
so, the next of kin has to file in Court a lot of papers, including details of the
deceased’s assets. Only when the Court is satisfied that the papers are in order
and estate duty (if any) has been paid will the Court award the grant. If the
deceased has assets in many jurisdictions, then this process may have to be
repeated in all those jurisdictions. Details of his assets will be open to public
scrutiny.
14.23 One of the main benefits of having a trust is that it allows the settlor to plan for
the smooth transfer of assets to the next of kin, without having to go through the
time-consuming and possibly expensive probate procedures, especially if the
settlor has assets in various countries registered in his name.
15. EFFECTS OF DEATH ON LIFE INSURANCE AND VARIOUS DISTRIBUTION

METHODS
15.1 Effects of death on life insurance policy is an important planning consideration

that requires careful deliberation. As most of the time, life insurance proceed
forms a significant portion of the estate left behind by the deceased. This
section will focus on the effects of Intestate Succession Act.
A. Intestate Succession Act 1967
15.2 If a person should die without a Will, the law will decide to whom the property
of the deceased person should go to. For instance, should a person die without
a Will, his fiancée will be left with nothing from the deceased person’s estate,
since the fiancée does not have any legal right over the fiancé’s estate.
15.3 The Intestate Succession Act 1967 provides rules for the transfer of property.
This Act spells out the rules for distributing the deceased's property to the
spouse, children and relatives. The distribution rules under the Act are fixed. If
the deceased had wanted to vary the proportion of distribution to certain
relatives, or to leave his assets to charities or non-relatives, such wishes cannot

be honoured, unless it has been specifically drawn up in the Will. In Singapore,
the Intestate Succession Act governs the distribution of the deceased estate of
a non-Muslim. If a Muslim passes away without a valid will, his estate
distribution will be governed by the Administration of Muslim Law Act, the
details of which is beyond the scope of this book.
15.4 Intestacy can delay the distribution of the estate to the beneficiary or
beneficiaries. This delay can create great difficulty if the deceased's family
members need the money for immediate needs. The trauma of losing a loved
one can be made less painful if there is a Will detailing how the deceased's
wishes are to be carried out.
15.5 The Intestate Succession Act is a statute that makes provision for the
distribution of intestate estates. Under this act, the distribution will go
according to legitimate family relationships. Please refer to the table below on
the rules for distribution.
Rules for distribution

Rule Person passes away Distribution
leaving behind
Rule 1 Spouse only All to spouse
Rule 2 Spouse and children Half to spouse and the other half to be
divided equally among the children. If the
children of the intestate has passed away,
then the portion goes to the children’s
descendants in equal proportions
Rule 3 Children only All to be divided equally among the
children. If the children of the intestate
have passed away, then the portion goes
to the children’s descendants in equal
proportions
Rule 4 Spouse and parents Half to spouse and the other half to be
only divided equally between the parents
Rule 5 Parents only All to parents equally
Rule 6 Siblings and their All to be shared equally among siblings. If
children only any sibling has already passed away, then
the portion goes to the sibling’s
Rule 7 Grandparents only All to be shared equally between the
grandparents
Rule 8 Uncles and / or All to be shared equally among the uncles
aunties only and aunties
Rule 9 No spouse, children, All to the government
parents, siblings,
siblings’ children,
grandparents, uncles
or aunties
Table 1 Future Value Interest Factors For One Dollar

i= 0.5% 1% 1.5% 2% 2.5% 3% 3.5% 4% 4.5% 5%
n=1 1.0050 1.0100 1.0150 1.0200 1.0250 1.0300 1.0350 1.0400 1.0450 1.0500
2 1.0100 1.0201 1.0302 1.0404 1.0506 1.0609 1.0712 1.0816 1.0920 1.1025
3 1.0151 1.0303 1.0457 1.0612 1.0769 1.0927 1.1087 1.1249 1.1412 1.1576
4 1.0202 1.0406 1.0614 1.0824 1.1038 1.1255 1.1475 1.1699 1.1925 1.2155
5 1.0253 1.0510 1.0773 1.1041 1.1314 1.1593 1.1877 1.2167 1.2462 1.2763
6 1.0304 1.0615 1.0934 1.1262 1.1597 1.1941 1.2293 1.2653 1.3023 1.3401
7 1.0355 1.0721 1.1098 1.1487 1.1887 1.2299 1.2723 1.3159 1.3609 1.4071
8 1.0407 1.0829 1.1265 1.1717 1.2184 1.2668 1.3168 1.3686 1.4221 1.4775
9 1.0459 1.0937 1.1434 1.1951 1.2489 1.3048 1.3629 1.4233 1.4861 1.5513
10 1.0511 1.1046 1.1605 1.2190 1.2801 1.3439 1.4106 1.4802 1.5530 1.6289
11 1.0564 1.1157 1.1779 1.2434 1.3121 1.3842 1.4600 1.5395 1.6229 1.7103
12 1.0617 1.1268 1.1956 1.2682 1.3449 1.4258 1.5111 1.6010 1.6959 1.7959
13 1.0670 1.1381 1.2136 1.2936 1.3785 1.4685 1.5640 1.6651 1.7722 1.8856
14 1.0723 1.1495 1.2318 1.3195 1.4130 1.5126 1.6187 1.7317 1.8519 1.9799
15 1.0777 1.1610 1.2502 1.3459 1.4483 1.5580 1.6753 1.8009 1.9353 2.0789
16 1.0831 1.1726 1.2690 1.3728 1.4845 1.6047 1.7340 1.8730 2.0224 2.1829
17 1.0885 1.1843 1.2880 1.4002 1.5216 1.6528 1.7947 1.9479 2.1134 2.2920
18 1.0939 1.1961 1.3073 1.4282 1.5597 1.7024 1.8575 2.0258 2.2085 2.4066
19 1.0994 1.2081 1.3270 1.4568 1.5987 1.7535 1.9225 2.1068 2.3079 2.5270
20 1.1049 1.2202 1.3469 1.4859 1.6386 1.8061 1.9898 2.1911 2.4117 2.6533
21 1.1104 1.2324 1.3671 1.5157 1.6796 1.8603 2.0594 2.2788 2.5202 2.7860
22 1.1160 1.2447 1.3876 1.5460 1.7216 1.9161 2.1315 2.3699 2.6337 2.9253
23 1.1216 1.2572 1.4084 1.5769 1.7646 1.9736 2.2061 2.4647 2.7522 3.0715
24 1.1272 1.2697 1.4295 1.6084 1.8087 2.0328 2.2833 2.5633 2.8760 3.2251
25 1.1328 1.2824 1.4509 1.6406 1.8539 2.0938 2.3632 2.6658 3.0054 3.3864
26 1.1385 1.2953 1.4727 1.6734 1.9003 2.1566 2.4460 2.7725 3.1407 3.5557
27 1.1442 1.3082 1.4948 1.7069 1.9478 2.2213 2.5316 2.8834 3.2820 3.7335
28 1.1499 1.3213 1.5172 1.7410 1.9965 2.2879 2.6202 2.9987 3.4297 3.9201
29 1.1556 1.3345 1.5400 1.7758 2.0464 2.3566 2.7119 3.1187 3.5840 4.1161
30 1.1614 1.3478 1.5631 1.8114 2.0976 2.4273 2.8068 3.2434 3.7453 4.3219
35 1.1907 1.4166 1.6839 1.9999 2.3732 2.8139 3.3336 3.9461 4.6673 5.5160
40 1.2208 1.4889 1.8140 2.2080 2.6851 3.2620 3.9593 4.8010 5.8164 7.0400
45 1.2516 1.5648 1.9542 2.4379 3.0379 3.7816 4.7024 5.8412 7.2482 8.9850
50 1.2832 1.6446 2.1052 2.6916 3.4371 4.3839 5.5849 7.1067 9.0326 11.4674
i= 5.5% 6% 6.5% 7% 7.5% 8% 8.5% 9% 9.5% 10%
n=1 1.0550 1.0600 1.0650 1.0700 1.0750 1.0800 1.0850 1.0900 1.0950 1.1000
2 1.1130 1.1236 1.1342 1.1449 1.1556 1.1664 1.1772 1.1881 1.1990 1.2100
3 1.1742 1.1910 1.2079 1.2250 1.2423 1.2597 1.2773 1.2950 1.3129 1.3310
4 1.2388 1.2625 1.2865 1.3108 1.3355 1.3605 1.3859 1.4116 1.4377 1.4641
5 1.3070 1.3382 1.3701 1.4026 1.4356 1.4693 1.5037 1.5386 1.5742 1.6105
6 1.3788 1.4185 1.4591 1.5007 1.5433 1.5869 1.6315 1.6771 1.7238 1.7716
7 1.4547 1.5036 1.5540 1.6058 1.6590 1.7138 1.7701 1.8280 1.8876 1.9487
8 1.5347 1.5938 1.6550 1.7182 1.7835 1.8509 1.9206 1.9926 2.0669 2.1436
9 1.6191 1.6895 1.7626 1.8385 1.9172 1.9990 2.0839 2.1719 2.2632 2.3579
10 1.7081 1.7908 1.8771 1.9672 2.0610 2.1589 2.2610 2.3674 2.4782 2.5937
11 1.8021 1.8983 1.9992 2.1049 2.2156 2.3316 2.4532 2.5804 2.7137 2.8531
12 1.9012 2.0122 2.1291 2.2522 2.3818 2.5182 2.6617 2.8127 2.9715 3.1384
13 2.0058 2.1329 2.2675 2.4098 2.5604 2.7196 2.8879 3.0658 3.2537 3.4523
14 2.1161 2.2609 2.4149 2.5785 2.7524 2.9372 3.1334 3.3417 3.5629 3.7975
15 2.2325 2.3966 2.5718 2.7590 2.9589 3.1722 3.3997 3.6425 3.9013 4.1772
16 2.3553 2.5404 2.7390 2.9522 3.1808 3.4259 3.6887 3.9703 4.2719 4.5950
17 2.4848 2.6928 2.9170 3.1588 3.4194 3.7000 4.0023 4.3276 4.6778 5.0545
18 2.6215 2.8543 3.1067 3.3799 3.6758 3.9960 4.3425 4.7171 5.1222 5.5599
19 2.7656 3.0256 3.3086 3.6165 3.9515 4.3157 4.7116 5.1417 5.6088 6.1159
20 2.9178 3.2071 3.5236 3.8697 4.2479 4.6610 5.1120 5.6044 6.1416 6.7275
21 3.0782 3.3996 3.7527 4.1406 4.5664 5.0338 5.5466 6.1088 6.7251 7.4002
22 3.2475 3.6035 3.9966 4.4304 4.9089 5.4365 6.0180 6.6586 7.3639 8.1403
23 3.4262 3.8197 4.2564 4.7405 5.2771 5.8715 6.5296 7.2579 8.0635 8.9543
24 3.6146 4.0489 4.5331 5.0724 5.6729 6.3412 7.0846 7.9111 8.8296 9.8497
25 3.8134 4.2919 4.8277 5.4274 6.0983 6.8485 7.6868 8.6231 9.6684 10.8347
26 4.0231 4.5494 5.1415 5.8074 6.5557 7.3964 8.3401 9.3992 10.5869 11.9182
27 4.2444 4.8223 5.4757 6.2139 7.0474 7.9881 9.0490 10.2451 11.5926 13.1100
28 4.4778 5.1117 5.8316 6.6488 7.5759 8.6271 9.8182 11.1671 12.6939 14.4210
29 4.7241 5.4184 6.2107 7.1143 8.1441 9.3173 10.6528 12.1722 13.8998 15.8631
30 4.9840 5.7435 6.6144 7.6123 8.7550 10.0627 11.5583 13.2677 15.2203 17.4494
35 6.5138 7.6861 9.0623 10.6766 12.5689 14.7853 17.3796 20.4140 23.9604 28.1024
40 8.5133 10.2857 12.4161 14.9745 18.0442 21.7245 26.1330 31.4094 37.7194 45.2593
45 11.1266 13.7646 17.0111 21.0025 25.9048 31.9204 39.2951 48.3273 59.3793 72.8905
50 14.5420 18.4202 23.3067 29.4570 37.1897 46.9016 59.0863 74.3575 93.4773 117.391
i= 10.5% 11% 11.5% 12% 12.5% 13% 13.5% 14% 14.5% 15%
n=1 1.1050 1.1100 1.1150 1.1200 1.1250 1.1300 1.1350 1.1400 1.1450 1.1500
2 1.2210 1.2321 1.2432 1.2544 1.2656 1.2769 1.2882 1.2996 1.3110 1.3225
3 1.3492 1.3676 1.3862 1.4049 1.4238 1.4429 1.4621 1.4815 1.5011 1.5209
4 1.4909 1.5181 1.5456 1.5735 1.6018 1.6305 1.6595 1.6890 1.7188 1.7490
5 1.6474 1.6851 1.7234 1.7623 1.8020 1.8424 1.8836 1.9254 1.9680 2.0114
6 1.8204 1.8704 1.9215 1.9738 2.0273 2.0820 2.1378 2.1950 2.2534 2.3131
7 2.0116 2.0762 2.1425 2.2107 2.2807 2.3526 2.4264 2.5023 2.5801 2.6600
8 2.2228 2.3045 2.3889 2.4760 2.5658 2.6584 2.7540 2.8526 2.9542 3.0590
9 2.4562 2.5580 2.6636 2.7731 2.8865 3.0040 3.1258 3.2519 3.3826 3.5179
10 2.7141 2.8394 2.9699 3.1058 3.2473 3.3946 3.5478 3.7072 3.8731 4.0456
11 2.9991 3.1518 3.3115 3.4785 3.6532 3.8359 4.0267 4.2262 4.4347 4.6524
12 3.3140 3.4985 3.6923 3.8960 4.1099 4.3345 4.5704 4.8179 5.0777 5.3503
13 3.6619 3.8833 4.1169 4.3635 4.6236 4.8980 5.1874 5.4924 5.8140 6.1528
14 4.0464 4.3104 4.5904 4.8871 5.2016 5.5348 5.8877 6.2613 6.6570 7.0757
15 4.4713 4.7846 5.1183 5.4736 5.8518 6.2543 6.6825 7.1379 7.6222 8.1371
16 4.9408 5.3109 5.7069 6.1304 6.5833 7.0673 7.5846 8.1372 8.7275 9.3576
17 5.4596 5.8951 6.3632 6.8660 7.4062 7.9861 8.6085 9.2765 9.9929 10.7613
18 6.0328 6.5436 7.0949 7.6900 8.3319 9.0243 9.7707 10.5752 11.4419 12.3755
19 6.6663 7.2633 7.9108 8.6128 9.3734 10.1974 11.0897 12.0557 13.1010 14.2318
20 7.3662 8.0623 8.8206 9.6463 10.5451 11.5231 12.5869 13.7435 15.0006 16.3665
21 8.1397 8.9492 9.8350 10.8038 11.8632 13.0211 14.2861 15.6676 17.1757 18.8215
22 8.9944 9.9336 10.9660 12.1003 13.3461 14.7138 16.2147 17.8610 19.6662 21.6447
23 9.9388 11.0263 12.2271 13.5523 15.0144 16.6266 18.4037 20.3616 22.5178 24.8915
24 10.9823 12.2392 13.6332 15.1786 16.8912 18.7881 20.8882 23.2122 25.7829 28.6252
25 12.1355 13.5855 15.2010 17.0001 19.0026 21.2305 23.7081 26.4619 29.5214 32.9190
26 13.4097 15.0799 16.9491 19.0401 21.3779 23.9905 26.9087 30.1666 33.8020 37.8568
27 14.8177 16.7386 18.8982 21.3249 24.0502 27.1093 30.5414 34.3899 38.7033 43.5353
28 16.3736 18.5799 21.0715 23.8839 27.0564 30.6335 34.6644 39.2045 44.3153 50.0656
29 18.0928 20.6237 23.4948 26.7499 30.4385 34.6158 39.3441 44.6931 50.7410 57.5755
30 19.9926 22.8923 26.1967 29.9599 34.2433 39.1159 44.6556 50.9502 58.0985 66.2118
35 32.9367 38.5749 45.1461 52.7996 61.7075 72.0685 84.1115 98.1002 114.338 133.176
40 54.2614 65.0009 77.8027 93.0510 111.199 132.782 158.429 188.884 225.019 267.864
45 89.3928 109.530 134.082 163.988 200.384 244.641 298.410 363.679 442.840 538.769
50 147.270 184.565 231.070 289.002 361.099 450.736 562.073 700.233 871.514 1083.66
CHAPTER
17
INSURANCE NOMINATION, WILLS AND TRUSTS

Aims Of Nomination • To provide policy owners with greater choice and flexibility in determining the
Framework manner in which the proceeds from their insurance policies are to be disbursed.
• To accord adequate financial protection to the named beneficiaries.
• To offer greater clarity and certainty in respect of nominations of beneficiaries
to insurance policy proceeds.
Types Of Nominations Is Trust Nomination Is Revocable
Allowed Under Various Types of Policies
allowed? Nomination allowed?
Types Of Policies
Cash-funded Policies
Life Policy Yes Yes
Accident and Health Policy Yes Yes
with Death Benefits
Policies under CPF Schemes
CPFIS Policy No Yes
DPS Policy No Yes
Others
SRS Policy No Yes
Muslim Policy owner Yes Yes
(subject to Muslim Law)
ElderShield Supplementary No Yes
Policy
Integrated Shield Plan No Yes*
Group Insurance Group insurance covers a group of people under one master policy. Typically, a
group insurance policy is bought by an organisation such as an employer for the
benefit of its individual employees. The insurer issues the master policy contract to
the organisation. Thus, the organisation becomes the policy owner.
The individual employee does not have a policy with the insurer, but the benefits of
the master policy will go to him as a form of employee benefit. As the policy owner
(the organisation) is also not the life insured in such a case, insurance nomination
is not allowed for any group insurance policy.
Trust Nomination When the policy owner makes a trust nomination at the time of buying a policy or
at any time after the policy is issued, he will lose all rights to the ownership of the
policy. This means that all proceeds (living benefits and death benefits) from the
policy now belong to the nominees whom he named. While he is still obliged to pay
the premiums for the policy, all the benefits of the policy belong to the nominees.
Only a policy owner who is at least 18 years old can make a trust nomination.
Revocable Nomination When a policy owner makes a revocable nomination, he will continue to retain full
rights and ownership over the policy. This means that he can change or revoke
a nomination at any time, without needing the written consent of the nominee or
nominees. Only death benefits from the policy will be payable to the nominees. All
living benefits will be paid to the policy owner. Hence, revocable nominations offer
the benefit of maximum flexibility to the policy owner.
41
Difference Between Trust
Nomination and Revocable Considerations Of Trust (Irrevocable)
Nomination Revocable Nomination
The Policy Owner Nomination
Can the policy owner No Yes
retain control over
the policy for as long
as he is alive?
Who gets the policy Nominees get both Living benefits are paid to
proceeds? types of benefits. the policy owner. Nominees
- Living benefits only get the death benefits.
- Death benefits
owner change his The nomination can
nomination by be revoked only if any
himself at any time? trustee who is not the
policy owner gives
consent; or if all the
nominees give written
consent.
Can the policy owner No Yes
name one or more Only spouse and / Any legal entity (i.e.
nominees who are or children can be individual, association or
not his spouse or nominated. corporation), including
children spouse and / or children,
can be nominated. However,
nomination of an animal is
an invalid nomination.
Can the policy owner The Will has no impact The earlier revocable
make a Will after on the earlier trust nomination is revoked
having made an nomination. by the Will, provided
earlier nomination? Once a trust that the Will contains the
nomination is made, information as prescribed in
the policy no longer the Insurance (Nomination
belongs to the policy of Beneficiaries) Regulations
owner. As such, he 2009.
cannot give it away
Note: The insurer will
under his Will, as he
pay according to the
can give away only
latest properly executed
property under the
instrument (be it a
Will which still belongs
revocable nomination or a
to him.
Will) that is known to the
insurer at the time of the
policy owner’s death.
42
Difference Between Trust
Nomination and Revocable Considerations Of Trust (Irrevocable)
Nomination Revocable Nomination
The Policy Owner Nomination
What happens if Policy proceeds If only one nominee is
the policy owner’s passes to the estate named, the nomination is
nominee dies before of the deceased revoked; in all other cases,
the policy owner? nominee. the surviving nominees
share in the deceased’s
share in proportion.
Are the policy Yes No
proceeds protected
against claims from
creditors in the event
of bankruptcy?
List of Nomination Forms • Form 1: Trust Nomination for the policy owner to make a trust nomination.
• Form 2: Revocation of Trust Nomination for the policy owner to revoke a trust
nomination.
• Form 3: Appointment, Revocation of Appointment, of Trustee of Policy
Moneys for the policy owner to appoint or revoke the appointment of one or
more trustees of policy moneys.
• Form 4: Revocable Nomination for the policy owner to make a revocable
nomination
• Form 5: Revocation of Revocable Nomination for the policy owner to revoke a
revocable nomination
• Form 6: Notice of Revocation of Revocable Nomination for the policy owner
to give notice of the revocation of a revocable nomination if:
» to briefly describe the conditions of revocation in S133(7)(a); or
» to briefly describe the conditions of revocation in S133(7)(b).
Wills A Will is basically a legal document that is executed by an individual (called the
“testator”), which sets out how his estate should be managed and the assets
distributed when he should pass away. The Will takes effect only on the death of the
testator. He is free to change the Will as and when he likes, and as many times as he
wants, up until the point of death.
Grant Of Probate A grant of probate must be obtained from the Court to enable the executor to
administer the deceased’s estate, according to the directions as contained in his
Will.
Executor An executor is the person nominated to administer the deceased’s estate according
to the Will. If the executor is a female, she is called an executrix. The executor can
be a beneficiary under the Will or some disinterested party, e.g. a solicitor, a banker
or friends, etc.
Trust A trust is in essence an agreement between a settlor, the person who settles
property into the trust, and the trustee, the person to whom the property is
transferred. The trust property would be held by trustees “in trust for” the
beneficiaries. The beneficiaries of the trust are, therefore, the people who will
receive the benefit of the income and / or capital of the trust fund.
Express Trust We are using the term “express trusts” in a wide sense to cover situations, where
there is an express intention to create a trust over a life policy (which intention is
not required for a statutory trust). In strict law, there would be three certainties
which are required, namely, certainty of words, certainty of subject matter and
certainty of objects. In simple English, the intention to create a trust should be clear,
and the beneficiaries should be ascertainable.
Implied Or Resulting Trust A trust may be implied or may “result” in certain situations with regard to life
policies.
43
Constructive Trusts A constructive trust is a trust that arises from the operation of a law where the
recipient of life insurance proceeds is to hold the proceeds as trustee and return
them to a rightful beneficiary. For example, a policy owner executed a revocable
nomination on his whole life policy – with a sum assured $100K - to his church
as part of a legacy strategy. At the policy owner’s death, the insurer paid the sum
assured to the church. It was then found that the deceased had incurred an estate
debt of $1M. The estate creditor subsequently sued the estate and won. In this
situation, the church will be deemed as a constructive trustee of the sum assured
of $100K and will need to return the proceeds to the rightful owner - the estate
creditors.
Benefits of Trusts • Distribution: The trust deed provides the distribution of the assets held by the
trustees in accordance with the wishes of the settlor and at the time that he
intends the beneficiaries to benefit.
• Avoiding probate: The settlor can plan for the smooth transfer of assets to his
next of kin, without going through costly probate procedures, especially if the
settlor has assets in various countries registered in his name.
• Confidentiality: A trust will not expose your estate to the public scrutiny that
probate procedures will.
• Succession: A trust can also be a good vehicle to plan for the succession to
business assets
• Estate duty: A trust may also help to minimise estate duty liability exposure in
various jurisdictions.
• Asset protection: Depending on how a trust is structured, it could protect the
assets of the trust from future creditors.
Intestate Succession Act The Intestate Succession Act 1967 provides rules for the transfer of property. This
1967 Act spells out the rules for distributing the deceased's property to the spouse,
children and relatives. The distribution rules under the Act are fixed.
Rules of Distribution of
Intestate Assets Person passes away
Rule Distribution
leaving behind
Rule 1 Spouse only All to spouse
Rule 2 Spouse and children Half to spouse and the other half to be
divided equally among the children. If the
children of the intestate has passed away,
then the portion goes to the children’s
Rule 3 Children only All to be divided equally among the children.
If the children of the intestate have passed
away, then the portion goes to the children’s
Rule 4 Spouse and parents Half to spouse and the other half to be
only divided equally between the parents
Rule 5 Parents only All to parents equally
Rule 6 Siblings and their All to be shared equally among siblings. If
children only any sibling has already passed away, then
the portion goes to the sibling’s descendants
in equal proportions
Rule 7 Grandparents only All to be shared equally between the
grandparents
Rule 8 Uncles and / or All to be shared equally among the uncles
aunties only and aunties
Rule 9 No spouse, children, All to the government
parents, siblings,
siblings’ children,
grandparents, uncles
or aunties
44
Part II Chapter 18. Introduction To Structured Products
PART II CHAPTER 18
INTRODUCTION TO STRUCTURED PRODUCTS
CHAPTER OUTLINE
1. What Is A Structured Product?

2. Components Of A Structured Product
3. Types Of Structured Products
4. Similarities And Differences Of Structured Products
5. Suitability
LEARNING OUTCOMES

 describe what structured products are
 identify the components of structured products
 explain the types of structured products
 understand the similarities and differences of structured products
 advise clients on the suitability of structured products
NOTE:
Throughout this Study Text, the words:
▪ “capital” and “principal”; and
▪ “investment fund” and “collective investment scheme (CIS)”
are used interchangeably.
CONTENTS
CHAPTER OUTLINE ………………………………………………..………………………1
1. WHAT IS A STRUCTURED PRODUCT? ....................................................................... 3
A. How Does A Structured Product Work? .................................................................. 3
B. What Is A Wrapper? ................................................................................................. 5
C. Why Invest In Structured Products? ........................................................................ 7
D. Challenges Facing Structured Products .................................................................. 7
2. COMPONENTS OF A STRUCTURED PRODUCT ......................................................... 8
A. Principal Risk Versus Return Risk ............................................................................ 8
B. Trade-off Between Risk And Return ...................................................................... 10
3. TYPES OF STRUCTURED PRODUCTS....................................................................... 11
A. Products Designed To Protect Capital ................................................................... 13
B. Yield Enhancement Products ................................................................................. 14
B1. Reverse Convertible Bonds ............................................................... ………….15
B2. Discount Certificates ......................................................................................... 15
C. Participation Products ............................................................................................ 16
C1. Tracker Certificate ............................................................................................. 17
C2. Bonus Certificate............................................................................................... 17
C3. Airbag Certificate .............................................................................................. 18
4. SIMILARITIES AND DIFFERENCES OF STRUCTURED PRODUCTS ......................... 19
A. Similarities In Features .......................................................................................... 19
B. Differences In Features........................................................................................... 20
C. Differences In Rights .............................................................................................. 20
D. Similarities And Differences In Governance ......................................................... 21
D1. Listed Products ................................................................................................. 21
D2. Collective Investment Scheme (CIS) ............................................................... 22
D3. ILPs .................................................................................................................... 22
5. SUITABILITY ............................................................................................................... 23
A. Know Your Clients.................................................................................................. 24
A1. Investment Objectives ...................................................................................... 24
A2. Investment Time Horizon ................................................................................. 24
A3. Investment Knowledge And Experience ......................................................... 24
B. Know Your Products............................................................................................... 25
B1. Understanding The Products ........................................................................... 25
B2. Explaining To Clients ........................................................................................ 25
1. WHAT IS A STRUCTURED PRODUCT?
1.1 Structured products are among the fastest growing investment classes in global
finance. As the sub-prime mortgage crisis has reminded us, structured products
bear multifaceted complex risks.
1.2 The name “structured products” comes from the fact that such products are
created by combining traditional assets such as a bond with financial derivatives
(usually an option). Such “structuring” allows the resulting products to achieve
specific risk-return profiles to match the investors’ needs and expectations that
cannot be met by traditional investments.
1.3 Structured products are unsecured debt securities of the issuer 1 . They are
commonly backed only by the issuer’s promise to make good on the intended
payouts. They are not equity securities, and holders of structured products are
not entitled to share the issuer’s profits. The fact that the intended payouts from
structured products may be based on equity price movements does not make
them equity securities. Structured products are also referred to as pre-packaged
products, because it is possible to mirror equity-like (or other asset classes)
returns using a fixed income structure.
1.4 Investors need sufficient knowledge to evaluate structured products in the light
of the more complex nature of such products.
A. How Does A Structured Product Work?
1.5 A bond provides regular interest payments and repayment of the par value of
the bond at maturity. Aside from the bond-issuer’s credit risk, the bond-holder
has certainty of the return from his bond investment. On the other hand,
investment in stock has a higher return potential compared to investment-grade
bonds, but share prices are volatile and dividends are not guaranteed. It is
desirable from the investors’ perspective if a product can combine the
characteristics of bonds and equities, to offer the potential upside performance
of stocks with the downside protection of bonds.
1.6 Where there is demand, there is supply. An equity-linked note designed to

return at least the principal 2 is the response to the demand, by combining a zero-
coupon bond with an option on an underlying equity asset. The underlying can
be a single stock, or a basket of stocks, or an index, depending on the investment
objective.
1
Examples of exception to this are structured funds, which are discussed in greater detail in later chapters.
2
The use of the term capital / principal protected and any other derivative of the term is disallowed in
Singapore as from September 2009.
Illustration
Consider a 5-year note linked to ABC Company’s stock whose current

Scan the QR market price is S$100. Out of every S$100 invested, S$80 is used to buy a
code to zero-coupon bond, with S$100 par value maturing in five years. The
watch a remaining S$20 is used to buy a call option on ABC shares, with a strike
short video
explanation.
price of S$120.
Upon maturity five years later, the zero-coupon bond pays out S$100,
returning the capital portion of the note. If the ABC share price doubles in
value (that is, becomes S$200), the option pays off S$80 (S$200 – S$120).
The total payout to the investor is thus S$180. By contrast, if the S$100
were to be invested directly in ABC shares, the payout would have been
S$200 upon sales of ABC shares, ignoring dividends .
If the ABC shares price stays flat in value, the option expires out-of-the-
money. Hence, the total payout to the investor is only the S$100 from the
zero-coupon bond. Had the S$100 been invested directly in ABC shares,
the payout would have been S$100 as well.
In the worst-case scenario, the ABC shares decline to S$50, rendering the
option worthless. The payout to investors is only the capital of S$100. By
contrast, if the S$100 were invested directly in ABC shares, the investor
would have lost half of his capital.
In other words, this structured product enables the investor to participate

in the price performance of ABC shares without concern of losing a portion
of his capital if the shares perform poorly. However, the downside
protection is counterbalanced by the possible loss of some of the upside
potential.
Furthermore, if the zero-coupon bond issuer defaults, the investor may not
be able to recoup his original capital investment.
1.7 A zero-coupon bond is used in the structuring because it tends to be issued

below its par value, leaving more money to be invested in options for the upside
participation. Alternatively, a coupon-bearing bond can be used instead, to
provide more stability in returns, with lower participation on the upside.
1.8 Both bonds and options have fixed maturity dates. Consequently, structured
products have expiry or maturity dates 3, and are often issued in rolling tranches
or series. Although product features may be identical, each series is likely to be
priced differently, based on market conditions at the time of issue.
3
There are a few structured products that do not have maturity dates. One such example, the tracker
certificate, is discussed in this chapter.
B. What Is A Wrapper?
1.9 Structured products can be created and marketed in different formats, called
“wrappers”. The equity-linked note illustrated above is one possible wrapper in
the form of unsecured debenture, i.e. a note. There are others. The choice of
wrapper depends on a number of factors, including:
 regulatory restriction on issuers (e.g. only banks can take deposits, and only
insurance companies can issue insurance policies);
 the desired investment freedom (e.g. there are investment restrictions
applicable to collective investment schemes);
 desired level of transparency (e.g. structured fund allows independent
valuation with the Net Asset Value (NAV) published on a regular basis);
 the targeted level of returns (e.g. some format is costlier than others); and
 tax consideration in a particular jurisdiction.
1.10 The most common wrappers are:

(a) Structured Deposits: Only banks can take deposits. Despite the name, it is
important to note that structured deposits are considered investment
products, and are excluded from the Deposit Insurance Scheme in
Singapore.
(b) Structured Notes: These are unsecured debenture of issuers. By purchasing
the structured notes, the note-holders are lending money to the issuer.
(c) Structured Funds: These are Collective Investment Schemes (CIS), also
known as investment funds. In Singapore, most Singapore-domiciled
investment funds are structured as trusts, while foreign-domiciled funds are
typically structured as corporations. In the case of a fund structured as a
trust, there is an independent trustee making sure that the fund manager’s
operation of the fund is in accordance with the trust document and
investment mandate. A similar role exists for the board of directors and / or
the depositary bank for funds structured as corporations.
(d) Structured Investment-linked Life Insurance Policies (ILPs): These are life
insurance policies. As such, only life insurers can issue structured ILPs. They
operate like a term insurance plus a structured fund, where the term
insurance provides insurance coverage, and the structured fund provides
the investment return.
1.11 Different wrappers have their distinct advantages and disadvantages from
investment and distribution points of view, as outlined in Table 1.1.
1.12 It should be kept in mind that advantages and disadvantages are relative. For
example, the lower return from structured deposits is a disadvantage for
investment purposes, but it provides the advantage of security of capital. By the
same token, while the lower administrative cost associated with structured
deposits may make such products advantageous in terms of investment returns,
it is limited in terms of product sophistication and flexibility.
Table 1.1: Advantages & Disadvantages Of Different Wrappers
Wrapper Advantages Disadvantages

Structured  Lower administrative cost  Returns are lower (in
Deposits as the bank structuring the general) owing to the
product also performs the cost of providing return
distribution. of capital.
 The bank usually  Investors are unsecured
guarantees payout of creditors of the issuer in
capital. the event of liquidation.
Structured Notes  Full flexibility in product  Investors are unsecured
design. creditors of the issuer in
the event of liquidation.
 Prospectus is required,
resulting in higher
issuing cost.
Structured  A wide and ready  Administrative cost is
Funds distribution network higher due to operating
through existing fund cost of the fund.
distribution channels.  Prospectus is required,
 In a trust structure, there is resulting in higher
greater transparency of issuing cost.
charges and investment  Product design may be
performance. The trustee affected by investment
also acts in the investors’ restrictions due to
best interest. regulatory
 In a trust structure, assets requirements.
are held in trust for the
benefit of the investors.
Structured ILPs  A wide and ready  Insurers typically
distribution network outsource the
through existing insurance structuring, which adds
distribution channels. an additional layer of
 Insurance coverage being cost.
provided, albeit typically  Similar to funds,
very small. investment restrictions
may apply.
C. Why Invest In Structured Products?
1.13 Structured products can be used as an alternative to a direct investment in

traditional asset classes, especially in markets where direct access is restricted.
For example, when a market is closed or restrictive to foreign investors,
structured products may be the only way to replicate the performance of that
market, without directly investing in securities of that market.
1.14 Structured products can offer access to exotic asset classes typically out of reach
for individual investors. They are extremely versatile, and can be tailor-made to
deliver specific risk / return profile to suit the investor’s needs, such as leveraged
returns, guaranteed return of capital, or conditional capital protection.
1.15 Structured products can be used as part of the asset allocation process to reduce
risk exposure of a portfolio.
1.16 Investment banks typically can issue structured products quickly, enabling
investors to swiftly respond to market trends.
1.17 While structured products may suit investors’ particular investment needs, there
are associated risks which may not be immediately apparent to investors. These
risk factors are discussed in Chapter 19.
D. Challenges Facing Structured Products
1.18 Owing to increasing product complexity, correct pricing and efficient risk
management are two challenges facing financial institutions.
1.19 The difficulty with pricing is that markets for instruments used to construct
structured products may not be liquid enough to achieve meaningful mark-to-
market values. The lack of transparency on the hedging and transaction costs
implicit in the structure also contributes to the difficulty in getting the price right.
Moreover, pricing is done by pricing software. Depending on the sophistication
of the model and the accuracy of input parameters, the outcome of the pricing
software is only as reliable as the built-in modelling techniques and
assumptions adopted.
1.20 Pricing and risk management go hand-in-hand. If financial institutions find it

difficult to price the products correctly, then it is understandable that they find
it difficult to quantify and monitor the associated risks. Similar to pricing
models, the mathematical models used in risk management may not be able to
fully capture the underlying volatility, risks and cost structure of complex
products. The likelihood of hidden risks not being detected early enough is
increasing with the growing complexity of structured products.
2. COMPONENTS OF A STRUCTURED PRODUCT
2.1 There are two components in every investment transaction, namely the
principal invested, and the investment return generated. The purpose of
investment is to maximise return, while safeguarding principal. An aggressive
investor may be willing to do so at the risk of losing all or a portion of his
principal. A more conservative investor may be willing to accept a lower return
in order to protect his principal.
Figure 1.1: Components Of A Structured Product
Upside Investment
Potential Return
Option
Principal
Return of
Principal
Fixed
Income
At Issue At Maturity
2.2 Structured products are no exception; they consist of the same two components
of principal and return. As illustrated in Figure 1.1, the return of principal is
achieved through a fixed income instrument, which provides periodic interest
payments (if a coupon-bearing instrument is used) and the return of principal
on maturity. The investment return is delivered through a derivative instrument,
which provides additional return based on the price performance of the
underlying assets, namely equities, fixed income, currencies, commodities or
digital asset (e.g. cryptocurrencies) . The underlying assets can be a single
security, or a mixture of securities, depending on the investment target.
A. Principal Risk Versus Return Risk
2.3 Since different financial instruments are used for the principal and the return
components, they are subject to different primary risk factors.
2.4 The risk to principal is the credit risk to the fixed income instrument used, which
are usually senior, unsecured debts. Should the issuer default, the investor is
one of many general creditors of the issuer. Consequently, the credit worthiness
of the issuer of the fixed income instrument, which may be different from the
issuer of the structured product itself, is the primary risk to the principal
component of structured products. To mitigate this risk, the issuer of the

structured products may provide a guarantee, either by itself or by a third party,
enhancing the credit security of the products. However, investors should note
that the cost of risk mitigation can affect the potential returns.
2.5 The primary risk to the return component is market volatility. All derivative
contracts have specified expiry dates. It is the contractual value of the
underlying assets on the expiry date that determines the amount of return, if the
rights under the contract have not been exercised before expiry. A sudden fall
in the value of underlying assets on expiry date may wipe out the entire
cumulative gain throughout the life of the contract. As the contract expires after
expiry date, the investor has no chance to ride out the sudden downturn. This is
unlike a direct investment in stocks, where the investors may choose to hold on
to the stocks in hope of price recovery at a later date.
2.6 For example, a product promised to deliver a return equals to 50% of the STI
performance measured from the Inception Date to the Maturity Date. Despite
the bull market during the whole investment period, if STI registers a negative
performance on the Maturity Date, the product is not able to deliver any
performance. This is the case, even if the STI enjoys a miraculous recovery on
the day after the Maturity Date. Having said that, there are some equity linked
notes that deploy different structures such as the use of an averaging formula
to smooth out returns on the equity-linked portion of the structured products.
2.7 The return component is also subject to the credit risk of the counterparty to the
derivative contract. That is, the counterparty may not be able to deliver the
contractual value when due.
2.8 There is a trade-off between safety of principal and participation in an upside

performance. The degree of safety can be reduced in exchange for a greater
participation in performance. For example, a product may be designed to
provide for return of 75% of principal, by reducing the investment in fixed
income instrument by 25%, permitting a larger investment in derivatives, and
thus a greater upside potential. This product still provides a downside
protection, although not 100% of principal.
Figure 1.2: Trade-off Between Safety Of Principal

And Participation In Performance
Upside
Retur
Potential
Optio
Option
75% Principal
Principal
Principal
Fixed Protection
Income Fixed
Income
B. Trade-off Between Risk And Return
2.9 In the realm of finance, risk refers to uncertainty. When it is said that an
investment is of high risk, it means that the probability of the anticipated return
which may not be realised is higher as compared to other investments. It also
means that all or part of the principal may be lost. Naturally, investors demand
to be properly compensated for the risk that they take on. This is the reason why
investors expect higher returns from risky investments, i.e. compensate for the
higher probability that the returns may not materialise.
2.10 However, this does not mean that all risky investments have the potential of
high returns. There are bad investments that offer low pay-off for high risk taken.
By the same token, it is conceivable, though rare, that there are opportunities
offering high return at low risk. The art of investment is to correctly assess the
risk-return profile of each opportunity and decide whether the trade-off between
risk and return is acceptable.
2.11 Figure 1.3 illustrates the relationship between risk and return. The northeast
quadrant represents investments that offer high return at high risk. These are
for ambitious investors who can afford to take the maximum loss under the
worst-case scenario. By contrast, the southwest quadrant represents
investments that offer low return for low risk. These are for investors who are
willing to accept a lower expected return in exchange for higher assurance of
the return of their principals.
2.12 Typically, investment returns commensurate with risk. For an investor to take
higher risk, he would want to be compensated with a higher return. However, a
conservative investor who initially executes a safe investment may
subsequently reap a much higher return than what was originally conceived. In
that case, his safe investment has become a rare gem. On the same token, an
investor who made a bold investment may end up with unworthy investment
when the actual return of his investments turns out much lower than what was
originally expected.
Figure 1.3: Risk And Return Trade-off
Too good to be true: Low

risk with high potential
Return
Bold The principal may

Rare Gems Investments be at risk; the
potential return is
high, but not
certain.
Safe Unworthy
Investments Investments
Risk
The principal is relatively safe; the

return is low, but is relatively
3. TYPES OF STRUCTURED PRODUCTS
3.1 Structured products are by nature not homogeneous - as a large number of

derivatives and underlying can be used. However, the more popular ones can
be classified into the categories as described below.
 Interest rate-linked: Structured product designed to be linked to interest rates
such as Libor or Euribor.
 Equity-linked: It refers to an investment instrument that combines the
characteristics of a zero, or low coupon bond or note with a return
component, based on the performance of a single equity security, a basket of
equity securities, or an equity index.
 FX (Foreign Exchange) and Commodity-linked: This involves an investment
instrument linked to the performance of a specific commodity, a basket of
commodities, some foreign exchange rate, or a basket of foreign exchange

rates.
 Hybrid-linked: It is a structured note, sometimes called "hybrid debt". It is an
intermediate term debt security, whose interest payments are determined by
some type of formula tied to the movement of an interest rate, stock, stock
index, commodity, or currency.
 Credit-linked: A form of funded credit derivative. It is structured as a security
with an embedded credit default swap allowing the issuer to transfer a
specific credit risk to credit investors. The issuer is not obligated to repay the
debt if a specified event occurs. This eliminates a third-party insurance
provider.
 Market-linked: A structured product that is linked to a certain or a basket of
market indices.
3.2 Structured products are versatile in the sense that they can be linked to single
or multiple securities, in any or a combination of asset classes, of short or long
durations, denominated in any currencies, providing full or no return of capital.
Thus, it is easy to understand why there is a wide range of structured products,
both traded on the exchange and off the exchange.
According to a survey of European distributors of structured products 4, 70% of

structured products were linked to equities, 22% fixed income, 3% foreign
currency and 2% commodities. While the global figures may differ from the
European experience, it is safe to say that structured products are
predominantly based on equities as the underlying assets. Research done on
global structured products in 2010 - 2014 also pointed to equities as the
predominant underlying assets. In US market, Bloomberg reported in Jul 2022
that structured products made up nearly US$11 trillion of US public and private
bond market debt.
3.3 There is no universal way of classifying financial products. Traditional

investments such as CIS and ILPs can be classified in a number of ways: by
geographical focus; by asset class; by maturity; etc. Likewise, structured
products can be classified in different ways, e.g. by underlying asset classes; by
risk-return profiles; or by investment objectives. We have discussed about
structured products based on their underlying asset classes. Now, we will
discuss structured products based on their investment objectives, which
correspond to their risk levels:
(a) products designed to protect capital;
(b) yield enhancement products; and
(c) performance participation products.
3.4 For example, there are structured deposits based on equities or currencies
designed to preserve capital; structured notes linked to equities or bonds
designed to preserve capital; and structured funds or ILPs aimed at preserving
capital. Similarly, yield enhancement and performance participation products
4
“Structured products: Double your guess for retail market’s size”, Euromoney, September 2008.
can also use different underlying asset classes for different investment
objectives.
Figure 1.4: Risk-Return Profile Of Structured Products
Expected
Returns
Performance
Participation
Yield
Enhancement
Designed to
Protect
Risk
3.5 The risk-return profile is different for these three types of structured products.
Products designed to preserve capital carries the lowest degree risk, and
correspondingly lower expected return, because part of the investments goes to
protecting the downside. The yield enhancement products are riskier with
higher return potential relative to products aimed to preserve capital, because a
greater portion of investments goes to delivering upside potential. Participation
products are the riskiest of the three, as they often provide no downside
protection at all; the entire investments are put to pursuing performance.
3.6 Investors are often attracted by high potential payout products. However, a
structured product delivers return to investors only when the:
(a) anticipated market view is correct;
(b) strategy or structure to capture the market view is appropriate; and
(c) pricing on the structure is reasonable.
A. Products Designed To Protect Capital
3.7 These products are designed using a fixed income instrument to preserve all or
majority of the principal component at maturity, so that the investors are protected
to a certain degree if the return component of the products does not perform well
under adverse market conditions.
3.8 These products are structured by combining a bond or a note with a call option on
the underlying assets. A zero-coupon bond is typically used for the principal
component. The underlying is most commonly a single stock, a basket of stocks,
an index or digital assets.
3.9 Some examples of this type of products include:

 Structured deposits;
 Equity or credit-linked notes, to the extent that the fixed income component
of the product is structured to provide the return of capital; and
 Capital guaranteed funds.
3.10 However, downside protection is only as good as the credit worthiness of the
party providing the protection. The credit standing of the protection-giver is a
major consideration in the risk-return analysis, especially for long duration
products, where the financial position is more prone to change.
3.11 The protection in a structured product is provided by the underlying fixed income
instrument. Therefore, the protection-giver is the issuer of the bond used in the
structuring. If the bond-issuer defaults, the issuer of the structured product is not
obligated to step in to make good, unless the product-issuer has given its
guarantee to the investors. For this reason, investors need to consider the credit
worthiness of the bond-issuer, rather than the product-issuer in assessing the
strength of the downside protection. In situation where the product issuer such as
a bank has offered to underwrite the default risk, it is pertinent to note that the
capital guarantees feature of structured products is only as strong as the credit
worthiness of the guarantee provider.
3.12 Even if the bond-issuer does not default, the principal may still be at risk, despite
the best intention of the product design. This is because the return of principal is
only applicable at maturity. Similar to the plight of a depositor breaking a fixed
deposit, an investor wishing to cash-in his structured investments before maturity
date often suffers losses of amount dependent on the mark-to-market
adjustments. Therefore, investors should take into account their investment time
horizon when choosing a product to avoid timing mismatches. For longer-term
products, the possibility of early cash-in resulting from unforeseen circumstances
is higher. Thus, the early redemption risk and market volatility risk are
correspondingly higher.
B. Yield Enhancement Products
3.13 Some investors have higher risk tolerance, and seek returns higher than those
from traditional fixed income instruments, at slightly higher risk. This is not
possible to achieve with traditional investment vehicles, without taking on
excessive credit risk. In response to such demand, yield enhancing structured
products have been engineered to achieve just that.
3.14 The most common of such products are reverse convertible bonds and discount
certificates.
B1. Reverse Convertible Bonds
3.15 Like all other structured products, a reverse convertible bond is an unsecured debt
instrument5. It is issued as a note that is linked to a single stock. It has features of
a fixed income instrument under normal circumstances: periodic interest
payments (if the note so provides), and payment of the par value of the note upon
maturity. However, if the price of the underlying stock falls below a pre-determined
level, called the "kick-in" level, the investor receives a pre-determined number of
shares of the underlying stock in lieu of the par value of the note at maturity. The
kick-in level is usually 20% to 30% below the price of the underlying stock on issue
date. The lower the kick-in level, the lower will be the coupon payment of the fixed
income instrument.
3.16 In terms of structure, a reverse convertible bond consists of:

 a bond, providing the periodic interest payments (if any) and par value at
maturity; and
 a written put option (i.e. the investor is selling a put option), providing the
shares in lieu of par value at maturity if the kick-in level is breached.
3.17 The upside return to investors is capped at the yield on the note, while there is
no protection on the downside as the value of the stock falls. To compensate for
the capped upside, the yield is higher than that for traditional bonds.
3.18 While most reverse convertible bonds are linked to single stocks, they can also be
linked to other classes of assets or baskets of assets.
B2. Discount Certificates
3.19 A discount certificate has the same risk-return profile as a reverse convertible,
except it is structured differently.
3.20 A discount certificate allows the investors to participate in the performance of the
underlying stock up to a pre-determined maximum level, called the “cap-strike”
or simply “cap”. The product is sold at a discount to compensate for the capped
upside. The lower the cap, the higher will be the discount. At maturity, the investor
receives either a cash settlement or the underlying shares, depending on the
underlying share price such as:
 Scenario 1: The price of the underlying stock is above the cap-strike – The
investor receives a cash settlement equal to the cap-strike and realises the
maximum possible profit; or
 Scenario 2: The price of the underlying stock is at or below the cap-strike –
The investor receives the underlying stock.
3.21 Both reverse convertible bonds and discount certificates offer capped upside
potential without a downside protection. They share the same risk-return
5
Examples of exception to this are structured funds, which are discussed in greater detail in later chapters
of this Study Text.
profiles, although they are structured very differently. Discount certificates are
structured by combining two different types of options. (Transaction cost may
reduce the actual return from the product.)
Scan the QR
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Figure 1.5: Payoff Of A Yield Enhancement Structured Product
short video
explanation.
Profit Price of
Underlying
Stock
Payoff to Investors
Kick-in Level
or Cap-Strike
Payout to Investors
Loss Price of
Underlying Assets
Something To Keep In Mind

Yield enhancement products do not provide downside protection. The
investor’s risk exposure follows exactly that of the underlying stock when
the stock price falls below the kick-in level. Investors considering these
products should consider and be comfortable with the downside risk of
the underlying stock.
3.22 Financial advisers and sales representatives should clearly explain the risks to
investors. They should never suggest that a yield enhancement product could be
a substitute for conventional bond, because the risk-return profiles are
fundamentally different, as the figure above illustrates.
C. Participation Products
3.23 “Participation” refers to participation in the price performance of the underlying

assets. These products typically offer full upside potential with no downside
protection. There are variations where there are capped upside potential, and /
or limited or conditional downside protection, depending on investors’ desired
risk-return profile. Compared to the previous two types of structured products,
participation products generally carry higher degrees of risk, with
corresponding higher levels of potential return, because of their more
aggressive pursuit of upside potentials.
3.24 Participation products are legally unsecured debentures. They are commonly
marketed under the name of “certificates” or “notes”. They are not to be
confused with “certificate of deposits”6.
3.25 Without any downside protection element in participation products, there is

typically no need to involve fixed income instruments for the principal component
of these products. Instead, derivatives contracts are used for both principal and
return components to achieve the desired risk-return pattern.
3.26 There are many examples of products in this category. Three are discussed below,
as an illustration of the versatility of product design of participation products,
namely tracker certificate, bonus certificate and airbag certificate.
C1. Tracker Certificate
3.27 A tracker certificate tracks the performance of an underlying asset. It has neither
upside cap nor downside protection. Its risk profile is identical to the underlying
asset that it tracks. The reason for its creation is to give investors access to
investments otherwise not possible or not economically feasible, such as a
tailored-made index.
3.28 A tracker certificate is one of the few structured products that may have no
maturity date and typically launched as an open-ended instrument.
Figure 1.6: Payoff Of A Tracker Certificate
Scan the QR
code to Profit
watch a
short video
explanation.
Payout to Investors
Price of
Loss
Underlying Assets
C2. Bonus Certificate
3.29 Bonus certificates are tracker certificates with the conditional downside protection
which hinges on a pre-determined barrier. They are designed to give the downside
Scan the QR code to
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protection only to the level of the barrier. So long as the price of the underlying
explanation.
6
Certificate of Deposits (CDs) are bank deposits covered by the Deposit Insurance Scheme in Singapore.
asset does not drop below the barrier, the payoff to the investor at maturity is no
lower than an agreed amount (the “bonus”). However, if the barrier is crossed
during any point during the life of the certificate, the protection is off, and the
investor is paid the value of the underlying asset at maturity.
3.30 The feature where the protection no longer applies is called “knock-out”. The
knock-out feature is inherent from the barrier options (down and out options)
used in their structures. (See Chapter 20 for a discussion on exotic options.)
3.31 Depending on the product design, a bonus certificate may be knocked-out

anytime during its life, or may be knocked-out only at maturity. In the first case,
once the knock-out is triggered, the protection is gone for the remainder life of
the certificate, even if the stock price subsequently recovers above the barrier
level before the expiry date.
3.32 Figure below illustrates the payoff pattern of a bonus certificate. As can be seen,
there is a discontinuity, representing a sudden drop in the payoff, at the barrier
level where the knock-out takes place. At or above the barrier level, the investor
gets paid at least the bonus amount. Below the barrier level, the investor bears
the full downside of the underlying asset.
Figure 1.7: Payoff Of A Bonus Certificate
Profit
Barrier level:
Knock-out
takes place.
Payout to Investors
Price of
Loss Underlying Assets
C3. Airbag Certificate
3.33 With a bonus certificate, a “disaster” occurs at the barrier level, when the
protection against price decline is knocked-out. Like a motorist in a car accident,
an investor may want to have some protection against such disastrous
situations. An airbag certificate was created to reduce the impact of knock-out,
extending the downside protection up to a pre-determined airbag level.
3.34 The downside protection is still knocked-out at the airbag level. However, investors
have downside protection to the specified airbag level, and there is no sudden
drop in payoff at that level. Below the airbag level, the payoff remains above the
price of the underlying asset until it loses all value.
3.35 One advantage of an airbag certificate over a bonus certificate is that it gives the
underlying stock a chance to rebound during the life of the certificate.
3.36 Airbag certificates can be designed to have different airbag level to suit an
investor’s particular risk tolerance. Naturally, higher the level of protection, lower
the return potential.
Figure 1.8: Payoff Of An Airbag Certificate

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code to
watch a Profit
short video
Airbag
explanation. Level: e.g.
35% of Spot
Payout to Investors
Price of
Underlying Assets
Loss
4. SIMILARITIES AND DIFFERENCES OF STRUCTURED PRODUCTS
A. Similarities In Features
4.1 One commonality among structured products is the use of financial derivatives
to either amplify gains, or hedge away risks, or both. While the types of
derivatives instruments used vary widely depending on investment objectives,
structured products that aim to preserve capital typically use bonds as the
underlying structure to provide return of all or part of capital at maturity.
4.2 There are different ways to achieve the same risk-return profiles, using different
financial instruments. Examples which we have seen earlier are the reverse
convertible bonds and discount certificates of this chapter: reverse convertible
is constructed by using a bond and a put option; discount certificate is
constructed by using a call option and a down-and-out option.
4.3 Why do issuers adopt different structures? The most common answer is tax.
Dividend income and capital gains have different tax treatments in most
countries. Different structures may achieve the same investment objectives, but
returns to investors may be different, depending on the investor’s tax domicile.
B. Differences In Features
4.4 Structured products with the same structure and wrapper may have different
features. One notable example is the call feature. A debt security with an “issuer
callable” feature may be redeemed (or “called”) before its maturity date, at the
issuer’s discretion. The debt security usually specifies a minimum period before
the debt can be called, and the call price is typically higher than the par value
on a sliding scale, depending on how early the debt is called.
4.5 The issuer is likely to exercise his right to “call” when the interest rate has
declined, so that he can re-finance his debt at a lower rate. When the interest
rate is low, the price of debt securities is high. The lender (i.e. investor) may be
unable to replace his investment at the same rate of return. Consequently,
callable securities expose investors to interest rate risk and reinvestment risk.
4.6 The performance of structured products using callable securities in their

structures is affected when the callable securities are called. Does it mean that
callable securities are undesirable and should be avoided at all times? Not
necessarily so, there are certain benefits to callable securities to compensate for
the additional risks.
4.7 Callable securities are cheaper than straight, non-callable securities, and pay
higher coupons. This is comparable to selling (writing) an option; the option
writer gets a premium upfront, but has a downside risk if the option is exercised.
In fact, the price of a callable bond is the price of straight bond, less the price of
a call option on the bond. A decision to invest in a callable bond is an investment
decision, after weighing the associated benefits and risks.
4.8 Debt securities are not the only ones that may be called. There are callable (also
known as “redeemable”) preference shares as well.
C. Differences In Rights
4.9 Not all bondholders are created equal. Depending on the type of bonds that they
hold, they have different rights even though they are creditors of the same
issuer.
4.10 There are two types of bonds, namely senior bonds and subordinated bonds. In
case of liquidation, holders of senior bonds have priority over shares and
subordinated bonds. Repayment for subordinated bonds, on the other hand,
takes place after all other creditors with higher priority have been paid. As a
result, subordinated bonds usually have a lower credit rating than senior bonds,
and may pay a higher interest rate to compensate the higher risk.
4.11 Subordinated bonds may be issued in tranches. The holders of senior tranches
are paid back first, the subordinated tranches later. Issuers may have rating
agencies to rate the tranches separately. It is important to remember that a

senior tranche of a subordinated bond still ranks lower than other senior bonds.
That is, a AAA rated tranche of a junk bond is still a junk bond.
D. Similarities And Differences In Governance
4.12 The governance of structured products depends on the wrapper used. Some
products may be listed on a stock exchange, in which case, they are governed
by additional requirements as imposed by the listing exchange.
D1. Listed Products
4.13 Structured notes and structured funds can be listed. There are a number of
structured notes listed on the Singapore Exchange (SGX), under the categories
of Exchange-Traded Notes (ETNs) and Daily Leveraged Certificates.
4.14 Listed structured funds come under the generic umbrella of Exchange-Traded
Funds (ETFs). Keep in mind that not all ETFs are structured funds. Although
majority of ETFs are tracker funds, some ETFs make direct investments, while
others use derivatives, to replicate the underlying index. Only those ETFs that
use derivatives are structured funds. They are also known as “synthetic ETFs”.
4.15 Listed products in Singapore are subject to the oversight of SGX. In evaluating
a structured product’s eligibility to list, SGX considers the reputation of the
financial institutions issuing the securities, its financial strength, and the
liquidity of the proposed listed securities.
4.16 To ensure liquidity, SGX requires for ETFs, the fund size must be at least S$20
million, and at least 25% of the fund's total number of issued shares, excluding
treasury shares is held by at least 500 public shareholders (100 in the case of a
venture capital fund). For ETNs, the issuer whose equity securities are listed on
SGX is required to issue a principal amount of at least S$750,000. However, if
the ETN issuer whose equity securities are not listed on SGX7, then the issue of
its ETN must have a principal amount of at least S$750,000 and at least 80% of
the issue must be subscribed by specified investors. Both ETN and ETF issuer
must ensure that there is at least one approved Designated-Market Maker 8
providing quotation.
4.17 Liquidity is the main advantage of listed structured products over other
structured products. Nonetheless, a listing does not guarantee liquidity, as the
trading can be thin due to the lack of market demand. Even with a Designated
7
Other alternative conditions to fulfil listing requirements for ETN issuers whose equity securities are
not listed on SGX are available on Chapter 3 of SGX Rulebooks.
8
A market maker’s duty is to make sure that investors can readily buy and sell their investments. When
an investor wants to sell (buy) his investments, but there is no one willing to buy (sell) from him, the
market-maker steps in and completes the trade. In doing so, the market-makers literally "make a market.”
Market-Maker, there is no guarantee that the investor will be able to dispose of

his investment at a price which he considers reasonable9.
D2. Collective Investment Scheme (CIS)
4.18 A CIS is a pooled investment vehicle, where individual investors invest in a

common fund, and a professional investment manager directs the investments
and daily operation of the fund. A structured fund is a CIS and must follow the
regulatory requirements for CIS, in particular, the Code on CIS (the “Code”)
issued by the MAS.
4.19 A CIS offered in Singapore to the public must be either authorised or recognised
by the MAS.
4.20 The legal form of a CIS is typically either a trust or a corporation. In Singapore,
most authorised CIS take the trust structure, known as unit trusts. Investors, as
unit-holders, are beneficiary owners of the trust. A trustee is appointed to
safeguard the beneficiary owners’ interests. In contrast, most recognised CIS in
Singapore take the structure of a corporation.
4.21 The assets of a CIS are held by a third-party custodian such as the trustee. Thus,
investors in structured funds need not be concerned about the credit risk of the
product-issuer, although they are still subject to credit risk of the CIS’
investments. By contrast, investors in structured deposits and structured notes
are general creditors of the financial institutions issuing the products in case of
bankruptcy.
D3. ILPs
4.22 An ILP is a life insurance policy, regulated under the Insurance Act 1966. The
regulatory framework for ILPs is therefore, different from that for CIS which is
governed by the Securities and Futures Act 2001, although both Acts are
administered by the MAS. Only life insurers licensed under the Insurance Act
1966 may issue ILPs. Similarly, only fund managers licensed under the
Securities and Futures Act 2001 may manage authorised CIS.
4.23 All life insurance products, aside from Term Insurance, Personal Accident and
Health Insurance policies, contain a protection element and an investment
element. An ILP is the only type of life insurance product that allows the policy
owner to choose the investment options for the investment portion of his policy,
from a list of funds.
8
There is a market-maker pricing practice known as “stub quotes”, where market-makers submit bid and
offer prices at extremely high or low levels which are not expected to be taken. For example, the stub
quotes can be a bid of a penny to buy (from investors) or an offer of a thousand dollars to sell (to
investors). Since 6 December 2010, the US Securities & Exchange Commission has banned the practice
of stub quotes, and required market-makers to quote within 8% of the national best bid or offer. In
Singapore, the maximum bid-offer spread is individually agreed upon between the Designated Market-
maker and SGX for each listed structured product.
4.24 The available funds may be linked to an external CIS, or may be internal funds
managed by the insurer. Each internal ILP fund must be kept separate from any
of the insurer’s other businesses. Such in-house ILP funds are “insurance
funds”. Insurance funds are not trusts, but they have quasi trust status, because
the Insurance Act 1966 provides policy owners priority claim on insurance fund
assets over general creditors in case of bankruptcy.
4.25 The investment portion of a structured ILP is a CIS by nature, although not by
legal structure. To ensure consistent regulatory treatment of ILPs and CIS,
Notice No. MAS 307 issued under the Insurance Act 1966 specifies that the
investment guidelines under the Code on CIS apply to ILP funds as well.
4.26 For further details on the rules and regulations, refer to the CMFAS Module 5:
Rules and Regulations for Financial Advisory Services study text published by
the Singapore College of Insurance.
5. SUITABILITY
5.1 There is a great variety of structured products with full spectrum of risk-return
profiles. It should be apparent to readers by now that they are not categorically
more risky, or offer higher returns compared to traditional investments.
However, their structures are without doubt more complex. With the exception
of a few basic products, many structured products may be too complicated for
the average investors to fully grasp how the products perform relative to direct
investments in the underlying assets.
5.2 MAS Guidelines on Fair Dealing, issued in April 2009, have outlined five desired
outcomes of fair dealing with clients. Outcome 2 requires financial institutions
to offer products and services that are suitable for their target customer
segments. Apart from regulatory requirements, professional ethics also dictate
that financial advisers and representatives of financial institutions (collectively
known as “Advisers”) take into account suitability of products in their
recommendations. Given the complexity of structured products, the challenge
is how to determine suitability.
5.3 Determination of suitability begins with knowing your client - his investment
objectives, risk appetite, time horizon, financial position, investment knowledge
and experience. The second step is for the Adviser to know the products under
consideration, so that the product features and risk factors can be explained to
the client in a way that he can understand. While it is not necessary (nor possible
sometimes) for the client to understand the technical details of a structured
product, he must know, at the very least, the payoffs under different
circumstances (including the worst case scenario) and the risk factors affecting
the payoffs, so that he has the right expectation of product performance, when
market condition changes.
A. Know Your Clients
A1. Investment Objectives
5.4 Investors have three basic investment objectives, namely safety of principal,
stability of investment income, and potential for capital appreciation. In
addition, the investor wants to be able to convert his investments into cash at a
reasonable price, when the need arises. Although liquidity does not directly
relate to investment return, it is nonetheless an important consideration, and
reasonable expectation.
5.5 These four objectives (safety, income, growth and liquidity) are not mutually
exclusive. For example, it is not uncommon for a client to wish to protect his
capital, and seek capital gain opportunity in investments that can be easily
converted to cash, when needed. However, there are trade-offs among these
objectives. To pursue capital gain, the client must sacrifice some degree of
safety. To achieve the desired degree of liquidity, certain potentially high-
yielding, but illiquid asset classes are precluded.
5.6 Most investment strategies are guided by one pre-eminent objective, with other
objectives being less significant in the overall scheme.
5.7 Advisers should help clients to determine their investment objectives based on
their personal circumstances and risk appetites 10 . The pool of structured
products is wide enough to suit most combinations of safety, income and
growth objectives. However, most structured products are not liquid, and the
market “fair” value is difficult to determine. They are suited for clients with low
liquidity requirements, intending to hold the products to maturity.
A2. Investment Time Horizon
5.8 With a few exceptions, structured products have fixed maturity dates. Cashing-
in before maturity date may not be allowed and, if allowed, often comes with
substantial mark-to-market adjustments. Hence, it is important to choose a
product that fits the investor’s investment time horizon.
5.9 Some structured funds which are open-ended in nature improve the liquidity.
Nonetheless, the unit redemption is often restricted under severe market
conditions.
A3. Investment Knowledge And Experience
5.10 Structured products are highly complex. The extent to which the clients are able
to understand the products depends on their investment experience and level
of financial literacy. It is difficult for the clients, without prior experience with
derivatives, for example, to grasp the workings of structured products. In
advising the clients with little investment experience or financial knowledge,
10
It is outside the scope of this module to discuss the steps involving financial planning and needs analysis.
Advisers should take extra steps in assessing the clients’ understanding of the
recommended products before implementing the recommendation. Financial
institutions should have internal policies and procedures in place to guide their
Advisers on the steps to take when dealing with inexperienced clients.
B. Know Your Products
B1. Understanding The Products
5.11 Financial institutions are required to train their Advisers on the features and risk-
return profile of any investment products that they recommend. Although the
financial institutions have the duty to provide the training, the responsibility of
product knowledge resides with the Advisers.
5.12 All financial products have trade-offs between risk and return. Advisers should
present products in a balanced way, highlighting the benefits as well as the
risks. Each product has been designed to meet a particular combination of
investment objectives (safety, income and growth). Advisers should understand
the targeted client segment of each product and know how each product
responds to different market conditions.
B2. Explaining To Clients
5.13 The financial institution should provide every customer with all relevant
information, such as prospectus, pricing statement, Product Highlights Sheet,
fact-sheet and marketing materials, before the customer makes a financial
decision. It should be noted that the quality of information provided is more
important than the quantity. More information is not necessarily better. On the
contrary, the customers might become inundated and confused by voluminous
amount of information given.
5.14 Clarity of information contributes greatly to the client’s understanding of a

financial product. The Fair Dealing Guidelines require disclosures to customers
to be in plain language, avoiding technical and misleading terms, and presented
in a format that is simple to read and easy to understand.
5.15 The client’s financial experience and literacy affect what is deemed “clear”. For
example, an investor who is not familiar with the financial derivatives contracts
may not understand the significance of the expiry date.
5.16 It is not easy to explain a complex product in simple language. One way to meet
the Fair Dealing Outcome is to explain the product features by presenting a
range of possible outcomes for the product. For example, two scenarios should
be highlighted for yield enhancement type of structured products as follows:
 the best-case scenario, where the underlying outperforms, and the return to
the customer is capped at the cap-strike level; and
 the worst-case scenario, where the underlying underperforms, and the
customer loses a portion or all of his principal sum.
5.17 This is especially important when customers are opting for such products as an
alternative to traditional fixed income investments. The worst-case scenario
should sufficiently demonstrate to customers that yield-enhancing structured
products are fundamentally different from traditional bonds and notes.
CHAPTER
18
INTRODUCTION TO STRUCTURED PRODUCTS

Structured products The name “structured products” comes from the fact that such products
are created by combining traditional assets such as a bond with financial
derivatives (usually an option).
What Is A Wrapper? • “Wrappers” are different formats of structured products being created
and marketed under.
• Examples of wrappers are:
 Structured Deposits.
 Structured Notes.
 Structured Funds.
 Structured Investment-linked Life Insurance Policies (ILPs).
Structured Deposits Only banks can take deposits. Despite the name, it is important to note
that structured deposits are considered investment products, and are
excluded from the Deposit Insurance Scheme in Singapore.
Structured Notes These are unsecured debenture of issuers. By purchasing the structured
notes, the note-holders are lending money to the issuer.
Structured Funds These are Collective Investment Schemes (CIS), also known as investment
funds.
Structured Investment-linked Life These are life insurance policies. As such, only life insurers can issue
Insurance Policies (ILPs) structured ILPs. They operate like a term insurance plus a structured fund,
where the term insurance provides insurance coverage, and the structured
fund provides the investment return.
ADVANTAGES & DISADVANTAGES OF DIFFERENT WRAPPERS

WRAPPER ADVANTAGES DISADVANTAGES
Structured Deposits • Lower administrative cost as the bank • Returns are lower (in general)
structuring the product also performs the owing to the cost of providing
distribution. return of capital.
• The bank usually guarantees payout of • Investors are unsecured creditors
capital. of the issuer in the event of
liquidation.
Structured Notes • Full flexibility in product design. • Investors are unsecured creditors
of the issuer in the event of
liquidation.
• Prospectus is required, resulting in
higher issuing cost.
Structured Funds • A wide and ready distribution network • Administrative cost is higher due
through existing fund distribution to operating cost of the fund.
channels. • Prospectus is required, resulting in
• In a trust structure, there is greater higher issuing cost.
transparency of charges and investment • Product design may be affected
performance. The trustee also acts in the by investment restrictions due to
investors’ best interest. regulatory requirements.
• In a trust structure, assets are held in
trust for the benefit of the investors.
Structured ILPs • A wide and ready distribution network • Insurers typically outsource
through existing insurance distribution the structuring, which adds an
channels. additional layer of cost.
• Insurance coverage being provided, albeit • Similar to funds, investment
typically very small. restrictions may apply.
1
Why Invest In Structured • Alternative to a direct investment in traditional asset classes, especially
Products? in markets where direct access is restricted.
• Offer access to exotic asset classes typically out of reach for individual
investors.
• Used as part of the asset allocation process to reduce risk exposure of
a portfolio.
Challenges Facing Structured • The difficulty with pricing is that markets for instruments used to
Products construct structured products may not be liquid enough to achieve
meaningful mark-to-market values.
• If financial institutions find it difficult to price the products correctly,
then it is understandable that they find it difficult to quantify and
monitor the associated risks.
COMP ONENTS OF A STRUCTURED PRODUCT
Investment
Return
Upside
Potential
Option
Principal
Fixed
Income Return of
Principal
Principal Risk The risk to principal is the credit risk to the fixed income instrument used,
which are usually senior, unsecured debts.
Return Risk The primary risk to the return component is market volatility.
TRADE-OFF BETWEEN SAFETY OF PRINCIPAL AND

PARTICIPATION IN PERFORMANCE
Return
Upside
Potential
Option
Option
Principal
Fixed
75% Principal
Income
Fixed Principal
Income Protection
2
Interest rate-linked structured Structured product designed to be linked to interest rates such as Libor or
product Euribor.
Equity-linked structured product It refers to an investment instrument that combines the characteristics of
a zero, or low coupon bond or note with a return component, based on
the performance of a single equity security, a basket of equity securities,
or an equity index.
FX (Foreign Exchange) and This involves an investment instrument linked to the performance of a
Commodity-linked structured specific commodity, a basket of commodities, some foreign exchange rate,
product or a basket of foreign exchange rates.
Hybrid-linked structured product It is a structured note, sometimes called “hybrid debt”. It is an intermediate
term debt security, whose interest payments are determined by some type
of formula tied to the movement of an interest rate, stock, stock index,
commodity, or currency.
Credit-linked structured product A form of funded credit derivative. It is structured as a security with an
embedded credit default swap allowing the issuer to transfer a specific
credit risk to credit investors. The issuer is not obligated to repay the debt
if a specified event occurs. This eliminates a third-party insurance provider.
Market-linked structured product A structured product that is linked to a certain or a basket of market
indices.
Products designed to protect These products are designed using a fixed income instrument to preserve
capital all or majority of the principal component at maturity, so that the investors
are protected to a certain degree if the return component of the products
does not perform well under adverse market conditions.
Examples of products designed to • Structured deposits.
protect capital • Equity or credit-linked notes, to the extent that the fixed income
component of the product is structured to provide the return of
capital.
• Capital guaranteed funds.
Yield Enhancement Products 1. Some investors have higher risk tolerance, and seek returns higher
than those from traditional fixed income instruments, at slightly higher
risk.
2. Yield enhancement products do not provide downside protection. The
investor’s risk exposure follows exactly that of the underlying stock
when the stock price falls below the kick-in level. Investors considering
these products should consider and be comfortable with the downside
risk of the underlying stock(s).
Examples of yield enhancement • Reverse convertible bonds.
products • Discount certificates.
Reverse convertible bonds • It has features of a fixed income instrument under normal
circumstances: periodic interest payments (if the note so provides),
and payment of the par value of the note upon maturity.
• In terms of structure, a reverse convertible bond consists of:
 a bond, providing the periodic interest payments (if any) and par
value at maturity; and
 a written put option (i.e. the investor is selling a put option),
providing the shares in lieu of par value at maturity if the kick-in
level is breached.
Discount certificates • A discount certificate has the same risk-return profile as a reverse
convertible, except it is structured differently.
• A discount certificate allows the investors to participate in the
performance of the underlying stock up to a pre-determined
maximum level, called the “cap-strike” or simply “cap”. The product is
sold at a discount to compensate for the capped upside. At maturity,
the investor receives either a cash settlement or the underlying shares,
depending on the underlying share price such as:
 Scenario 1: The price of the underlying stock is above the cap-
strike – The investor receives a cash settlement equal to the cap-
strike and realises the maximum possible profit; or
 Scenario 2: The price of the underlying stock is at or below the cap-
strike – The investor receives the underlying stock.
3
Participation Products • “Participation” refers to participation in the price performance of the
underlying assets. These products typically offer full upside potential
with no downside protection.
• Participation products are legally unsecured debentures. They are
commonly marketed under the name of “certificates” or “notes”. They
are not to be confused with “certificate of deposit”.
Examples of participation • Tracker certificate.
products • Bonus certificate.
• Airbag certificate.
Tracker certificate • A tracker certificate tracks the performance of an underlying asset. It
has neither upside cap nor downside protection. Its risk profile is
identical to the underlying asset that it tracks.
• Has no maturity date, typically launched as an open-ended instrument.
Bonus certificate • Bonus certificates are tracker certificates with the conditional
downside protection which hinges on a pre-determined barrier.
• Depending on the product design, a bonus certificate may be knocked-
out anytime during its life, or may be knocked-out only at maturity.
In the first case, once the knock-out is triggered, the protection is
gone for the remainder life of the certificate, even if the stock price
subsequently recovers above the barrier level before the expiry date.
Airbag certificate • An airbag certificate was created to reduce the impact of knock-out,
extending the downside protection up to a pre-determined airbag
level.
• The downside protection is still knocked-out at the airbag level.
However, investors have downside protection to the specified airbag
level, and there is no sudden drop in payoff at that level. Below the
airbag level, the payoff remains above the price of the underlying asset
until it loses all value.
Similarities in features of Use of financial derivatives to either amplify gains, or hedge away risks, or
structured products both.
Differences in features of Call feature.
structured products
Differences in rights of structured Not all bondholders are created equal. Depending on the type of bonds
products that they hold, they have different rights even though they are creditors of
the same issuer.
Senior bonds In case of liquidation, holders of senior bonds have priority over shares
and subordinated bonds.
Subordinated bonds • Repayment for subordinated bonds, on the other hand, takes place
after all other creditors with higher priority have been paid.
• As a result, subordinated bonds usually have a lower credit rating than
senior bonds, and may pay a higher interest rate to compensate the
higher risk.
Similarities And Differences In Governance of structured products depends on the wrapper used.
Governance • Listed Products – Oversight of SGX.
• Collective Investment Scheme (CIS) – Code on CIS (the “Code”) issued
by the MAS.
• Investment-linked Policy - Insurance Act 1966.
Suitability of structured products • knowing your client - his investment objectives, risk appetite, time
horizon, financial position, investment knowledge and experience.
• know the products under consideration, so that the product features
and risk factors can be explained to the client in a way that he can
understand.
Investment objectives • Safety.
• Income.
• Growth.
• Liquidity.
Investment time horizon • With a few exceptions, structured products have fixed maturity dates.
• Important to choose a product that fits the investor’s investment time
horizon.
4
Understanding the products • Present products in a balanced way, highlighting the benefits as well as
the risks.
• Understand the targeted client segment of each product, and know
how each product responds to different market conditions.
Explaining to clients • Provide every customer with all relevant information, such as
prospectus, pricing statement, Product Highlights Sheet, fact-sheet and
marketing materials.
• Clarity of information.
• Best case scenario, where the underlying outperforms, and the return
to the customer is capped at the cap-strike level.
• Worst case scenario, where the underlying underperforms, and the
customer loses a portion or all of his principal sum.
5
Part II Chapter 19. Risk Considerations Of Structured Products
PART II CHAPTER 19
RISK CONSIDERATIONS OF STRUCTURED
PRODUCTS
CHAPTER OUTLINE
1. Market Risk
2. Issuer Or Swap Counterparty Credit Risk
3. Liquidity Risk
4. Foreign Exchange (FX) Risk
5. Structural Risk
6. Other Risks
LEARNING OUTCOMES

 understand the key risk factors of a structured product
 identify and explain the various risks of structured products
CONTENTS
CHAPTER OUTLINE.............................................................................................................. 1
1. MARKET RISK ............................................................................................................... 3
A. General Market Risk ................................................................................................. 3
B. Issuer-specific Risk ................................................................................................... 3
2. ISSUER OR SWAP COUNTERPARTY CREDIT RISK .................................................... 4
3. LIQUIDITY RISK ............................................................................................................ 5
4. FOREIGN EXCHANGE (FX) RISK ................................................................................. 6
5. STRUCTURAL RISK ...................................................................................................... 7
A. Safety Of Principal.................................................................................................... 7
B. Leverage ................................................................................................................... 7
C. Investment In Derivatives ........................................................................................ 8
D. Investment Concentration ....................................................................................... 8
E. Collateral ................................................................................................................... 9
6. OTHER RISKS ............................................................................................................... 9
A. Legal And Regulatory............................................................................................... 9
B. Correlation .............................................................................................................. 10
C. Modelling ................................................................................................................ 10
D. Early Redemption ................................................................................................... 11
E. Examples Of Redemption Amount ........................................................................ 11
1. MARKET RISK
1.1 Market risk refers to the price volatility that comes from the fluctuation in market
prices of the underlying assets.
1.2 Market price of a security is the current price at which the security can be bought
or sold. In theory, market price is the present value of the issuer’s future cash
flows. Factors affecting the cash flows– present and future – affect the current
market price. In practice, market price is determined by supply and demand, to a
large extent.
1.3 Many factors can cause price fluctuation. Two key factors are described below.
A. General Market Risk
1.4 Financial investments do not exist outside of the economy. They are affected by
the general economic conditions and market outlook. Given the global
connectivity that exists today, market prices are affected not only by domestic
conditions, but also global environment.
1.5 Factors such as interest rates, inflation, exchange rate, commodity prices, and
others can cause prices to fluctuate, as they directly affect business profitability
and company’s cash flows. For example, consider the stock price of a company.
When interest rate goes up, the cost of borrowing goes up, and the profit comes
down. When local currency appreciates, the cost of imported materials is cheaper
after conversion, and the profit goes up if the goods are sold locally at the same
price. However, for an export-oriented company, the profit may come down, as
the revenue is in foreign currency which is now lower after converting back to local
currency. Consequentially, a company’s cash flows would be impacted.
1.6 These factors are correlated, and their combined impact on prices is sometimes
difficult to anticipate.
B. Issuer-specific Risk
1.7 While general market risks affect the prices of all securities, there are risk factors
that only affect the price of a particular issuer’s security. An obvious example is a
downgrade in credit rating of a company, which creates downward pressure on
the prices of its shares and bonds. This in turn causes certain derivative contracts
based on that company’s shares or bonds to lose value.
1.8 Other examples of issuer-specific risks include operational risk, business risk,
litigation and regulatory action.
1.9 Issuer-specific risks can affect an entire industry sector. For example, a large court
award for liability lawsuits against one tobacco company may affect tobacco
manufacturers as a whole, leading to price fluctuation for securities and
derivatives based on tobacco companies.
1.10 For a particular structured product, it is important to identify the risk drivers that
influence its market price. As mentioned in the previous chapter, there are two
components in any structured product. The main risk drivers for the fixed income
component are interest rate and credit standing of the issuer.
1.11 The risk drivers for the derivatives component are linked to the underlying assets
of the derivatives contracts, as the price movement of the derivatives contracts
follows the price movement of the underlying assets, be it an equity index, a
specific commodity, a basket of stocks, currencies or digital assets. The price of
the derivatives is also influenced by the credit worthiness of the counterparty. The
price of the derivative contract goes down when the counterparty’s ability to fulfil
his contractual obligation is in doubt.
1.12 Foreign exchange rate is another risk driver, to the extent that foreign currencies
are involved in either component.
2. ISSUER OR SWAP COUNTERPARTY CREDIT RISK
2.1 Counterparty is a party with whom a transaction is done. Using a crude oil forward
contract as an example, A agrees to buy crude oil from B at an agreed price on a
future date. A and B are counterparties to each other. The counterparty risk to A is
that B will not deliver the amount and the grade of crude oil as promised. The
counterparty risk to B is that A will not pay the amount as agreed.
2.2 The counterparty’s inability to meet contractual obligation is called “default”. The
word “default” encompasses a range of failure to meet obligations such as, paying
interest when due, making futures delivery, repayment of loan, etc. It does not
necessarily mean a full-blown legal bankruptcy of the counterparty. There are
many possible causes of defaults, ranging from short-term liquidity crunch due to
temporary business or operational tribulation, to more permanent changes in
financial position leading to loss of funding facilities. Regulatory action or
prohibition may also prevent a counterparty from meeting his commitments.
2.3 As investment return from structured products is mainly supported by derivative

contracts, failure of the counterparties to deliver their commitments results in
losses to investors in the structured products. There are two ways to mitigate the
counterparty risk.
2.4 One mitigation method is to use publicly traded derivatives products. The
counterparty risk is minimised when the transaction takes place on an exchange,
because the exchange provides the guarantee that contractual obligations are
fulfilled through the concept of central clearing party. Note that there is still a risk
that the exchange itself may default, although the risk may be low.
2.5 For non-publicly traded, i.e. over the counter (OTC) derivatives products, it is
increasingly common to require counterparty to put up collaterals to back the
promises. The International Swaps and Derivatives Association (ISDA), the trade
association representing participants in the OTC derivatives industry, has
developed a standardised legal document which regulates collaterals for

derivative transactions. It is available for consideration in negotiating collaterals
for OTC derivatives contracts.
2.6 Since the financial crisis started in 2007, the use of collateralisation has gained
popularity. Based on the latest ISDA survey results released in April 2010, 78% of
all OTC derivatives transactions by large dealers in 2009 were supported by
collaterals. The figure is 97% for credit derivatives specifically. The total amount
of collateral in circulation was US$4 trillion in 2008 (the most recent figure
available at time of writing), nearly doubled from US$2.1 trillion in 2007, and
tripled from US$1.3 trillion in 2006. Recent ISDA survey indicated that more
rigorous collateral management through margin compliance aim to drive
efficiencies on the collateral process and manage risk.
2.7 Payment netting, also known as settlement netting, is also commonly used to
reduce counterparty risk for both OTC and exchange-traded products. Payment
netting minimises the need for funds and securities to change hands, whereby
maximises the likelihood that, at the end of the day, every party receives what
it should get.
3. LIQUIDITY RISK
3.1 Liquidity from an institution’s perspective refers to insufficient cash to meet its
cash flow requirements. This can be a temporary problem and does not indicate a
systemic issue. For example, market losses can result in margin calls on futures
contracts, causing the institution a temporary cash crunch. A financially strong
institution is able to borrow money or sell assets to meet a temporary surge in
demand for cash payment or collateral.
3.2 Liquidity shortfall can also be the result of a fundamental change in the
institution’s financial position. For example, a negative change in its credit rating
leads to its inability to borrow money, or results in an increase in collaterals
required by lenders. If poorly managed, liquidity risk can lead to bankruptcy.
3.3 When an institution is exposed to liquidity risk, its financial position and resulting
credit standing are inevitably affected, leading to a possible downgrade in its
securities and loss of values to their investors.
3.4 Liquidity from investor’s perspective refers to the ease of converting his
investments into cash. Publicly traded products tend to have greater liquidity over
products traded OTC, because there is a ready market. However, just because a
product is listed on an exchange, it does not guarantee liquidity, as the investor
may be unable to sell his investments for a reasonable price due to lack of demand.
There are examples of illiquid shares listed on the exchange, where the trading
volume is very thin each day.
3.5 Products invested in illiquid assets often have lock-up periods, during which the
investors cannot liquidate or cash-out their investment holdings. For example,
hedge funds may have lock-up periods of one to three years. To soften it, some
hedge fund enables an investor to redeem his capital by paying a redemption

penalty. Some investment funds do not have lock-up periods per se, but the asset
valuation is only done monthly or quarterly. In effect, investors cannot exit these
funds in between valuation dates.
3.6 Some products depend on market-makers to provide liquidity. A market maker’s

duty is to make sure that investors can readily buy and sell their investments.
When an investor wants to sell his investments, but there is no one in the market
willing to buy from him, the market-maker is obligated to step in and be the
counterparty. In doing so, the market-maker literally "makes a market".
4. FOREIGN EXCHANGE (FX) RISK
4.1 Investors in structured products are exposed to FX risk in two ways.
4.2 First, if his investments are denominated in a foreign currency, he may suffer a
loss on principal when he converts the maturity payment (made in foreign
currency) back into local currency.
4.3 For example, US$1 was worth S$1.5336 in 2006, but is only worth S$1.3536 in
20221. A US$1,000 investment made in 2006 cost S$1,533.6. When it matured in
2022, the principal repayment of US$1,000 was only worth S$1,353.6 when
converted back to S$. Even though the product had delivered protection of
principal in US$, the investor nonetheless suffered a loss of part of his principal in
S$ terms, due to the FX risk. The total return on the investment will need to be at
least 13.30% for this particular investment to compensate the FX loss.
4.4 The second source of FX risk relates to investment performance. If the underlying
assets are denominated in foreign currency, the investment return is dependent
on the FX rate as applied to the performance measurement. Consider an
investment denominated in Singapore dollars, but invested in USD-denominated
assets. The performance of this investment differs depending on whether it is
Scan the QR
code to measured in S$ or US$.
watch a
short video Table 2.1: Effect Of FX On Investment Performance
explanation.
FX:
S$ US$
US$1 = S$
At Issue 1,000 1.50 666.67
Investment Income 56 1.40 40.00
Rate of Return in Each Currency 5.6% 6.0%
4.5 In evaluating the return potential of a financial product, be mindful of how the
returns are measured for foreign currency denominated assets.
1
Exchange Rate, Monetary Authority of Singapore, December 2022.
4.6 In practice, for performance measurement, the actual currency of investment

income tends to be used in calculating return of its foreign currency denominated
assets. However, for investment reporting purpose, the chosen currency could
differ when an investor may have investments in multiple currencies and would
like to have a common (also known as base) currency e.g. a Singapore dollar for
performance reporting.
5. STRUCTURAL RISK
A. Safety Of Principal
5.1 Given the trade-offs in risk and return, products are structured to provide different
degrees of principal protection versus capital appreciation. Each product is
structured to provide full, partial or no return of principal upon maturity. Investors
should understand the design of the product to evaluate their tolerance for
possible loss of principal.
5.2 However, there is no guarantee that the intended protection will materialise. As
discussed above, the credit risk of the protection-provider affects the reliability of
the protection given. Another reminder is that structured deposits are considered
investment products and NOT subject to the protection of Deposit Insurance
Scheme in Singapore.
B. Leverage
5.3 “Leverage” (also called “gearing”) refers to techniques used to increase the
potential rate of return. Such techniques include trading on margin, use of
derivatives to trade on price differentials, and borrowing money to trade. Keep in
mind that it works both ways. While “leverage” multiplies gains, it also magnifies
losses.
5.4 Most derivative contracts are leveraged, or geared, by design. (See illustration
below.) Consequently, a structured product is leveraged if it uses leveraged
derivatives. The price volatility of leveraged products can be significantly greater
than direct investments. Some leveraged transactions may result in losses in
excess of the amount invested, as is the case in futures contracts.
5.5 Futures contracts are traded on margin, i.e. investors need to put up only a fraction
of the value of the contract to enjoy the full price appreciation, or sustain the full
decline in price. Trading on margin is akin to securities financing, where the
investor is essentially borrowing from the broker. Interest is charged on margin
accounts, which affects the total investment returns. (See Chapter 20 for further
explanation of how margin accounts work.)
Illustration Of The Effect Of Leverage
Consider an option to buy ABC Company’s shares. The intrinsic value of the
option is the difference between the spot price and the exercise price.
If the shares are currently trading at S$15, an option to buy it at S$10 has an
intrinsic value of S$5. Let’s examine what happens in the three scenarios as
illustrated in the Table below.
Table 2.2: Effect Of Leveraging
Spot Exercise Intrinsic % Change

Scenario Price Price Value From Base
(S$) (S$) (S$) Case
Base Case: At Issue 15 10 5 --
Scenario 1: Stock Price

18 10 8 +60
rises 20%
12 10 2 -60
falls 20%
falls below Exercise 9 10 0 -100
Price
A 20% fluctuation in the underlying share price results in 60% change in the
intrinsic value of the option. This is the leveraging (or gearing) effect of a
derivative product.
When the share price falls below the exercise price (out-of-the-money), the
option has no value, even though the shares still have value. This is why
derivatives are riskier than direct investments.
NOTE: The actual price of the option is the intrinsic value plus time value. Time
value is ignored for illustrative purposes here.
C. Investment In Derivatives
5.6 Besides leverage, there are other features in derivatives contracts that investors
should consider. For example, the kick-in and knock-out features as discussed in
Chapter 18 expose the investors to potentially unlimited downside risks.
D. Investment Concentration
5.7 To put it simply, this is the risk of putting all eggs in one basket. The solution to
concentration risk is diversification.
5.8 Unfortunately, diversification is not easy for an individual investor on his own. It
takes substantial resources to research and screen the universe of stocks to
diversify one’s equity portfolio, for example. For this reason, the typical advice is
for individual investors to invest in diversified unit trusts.
5.9 Diversification is not just within an asset class, but across asset classes via asset
allocation, namely a mix of cash, equities, fixed income, and risk-tolerance
permitting, alternative investments such as derivatives, commodities, structured
products and digital assets (e.g. Cryptocurrencies).
5.10 Too much of a good thing may not be good in the long run. If all risks are
diversified away, leaving no risk in the portfolio, the potential return is probably
also completely depleted. The art of investment is not in taking no risk (which gives
no return or achieves the risk-free rate at best), but to manage the risk to within an
acceptable level.
E. Collateral
5.11 Requiring collateral is a common method in managing counterparty risk. Note

that having collaterals does not fully eliminate the risk. While collaterals reduce
counterparty risk, they introduce another risk factor – the collateral risk.
5.12 Collateral risk refers to the risk that the value of collateral may not be sufficient
when collateral is exercised to cover the loss. This could happen for two
reasons. Firstly, the exposure may not have been fully collateralised in the first
place. Secondly, the value of collateral could have deteriorated since it was
pledged. Either way, having collaterals does not fully eliminate the risk
exposure.
5.13 The way to manage collateral risk is to set adequate level of collateral required,
and to require additional collateral when its value has depreciated. Since most
structured products are OTC non-standard contracts, the level of collateral 2 is
subject to private negotiations.
6. OTHER RISKS
A. Legal And Regulatory
6.1 Legal risk refers to the potential loss arising from the uncertainty of legal
proceedings, such as bankruptcy, and potential legal proceedings. One close to
home example is the Lehman Brothers Minibonds, where investors were exposed
to uncertainties resulting from Lehman’s bankruptcy.
2
ISDA survey 2014 shows the use of cash and government securities account for about 90% of OTC derivatives
collateral
6.2 Another source of legal risk is the regulatory risk, i.e. that legislation or regulations
may change during the life of the financial contract. The regulatory regime for
selling structured products is an example.
B. Correlation
6.3 Correlation is a statistical measurement of how the prices of two securities move
in relation to each other. Correlation is represented by a correlation coefficient,
which ranges from –1 to +1. A coefficient of +1 indicates that the two securities are
perfectly correlated. That is, when the price of one security moves up or down, the
price of the other security moves in the same direction, by the same percentage.
6.4 A coefficient of –1 indicates that the two securities are perfectly negatively
correlated. When the price of one security moves up or down, the price of the other
security moves in the opposite direction, by the same percentage.
6.5 If the correlation is 0, the movements of the securities have no correlation; they
are completely random.
6.6 In real life, perfectly correlated securities are rare. Even within the same industry,
prices of individual securities are correlated in some degree, as they are subject to
similar business risk factors, but they do not move up and down in perfect
harmony.
6.7 Negatively correlated securities may enhance portfolio diversification, as the price
movements go to the opposite directions, offsetting the downside risk with the
upside price movements.
C. Modelling
6.8 Advent of technology has led to the emergence of automated trading, also known
as algorithmic trading, or algo trading. It is the use of pre-programmed algorithm
to decide on the timing, price, or quantity of the trade orders. In many cases, the
computer initiates the order without human intervention.
6.9 The same technology has enabled fund managers to implement their quantitative
strategies through computer-aided analysis in identifying profit opportunities
arising from subtle anomalies, affecting the prices of various securities. These
fund managers use computer models (either built in-house or bought from third
parties) to optimise their investment portfolios, based on system-identified profit
opportunities, risk factors, and associated transaction costs.
6.10 While the computer modelling approach to quantitative strategy greatly improves
the speed and efficiency of portfolio management, it is not without perils. The
automated programmed trading was one of the factors causing the Flash Crash3
3
On 6 May 2010, the Dow Jones Industrial Averaged plunged 900 points within a few minutes. US regulators
SEC and CFTC issued a joint investigative report on the incidence in September 2010. The joint report detailed
in the US on 6 May 2010. There is also the risk that the models may not be robust
enough to cater to evolving market conditions. Technology does not fully displace
the need for fund managers to conduct research, analyse market trends and
exercise judgement calls on their own. Fund managers who use modelling need
to have the skills to construct the “right” models.
D. Early Redemption
6.11 Most structured products have fixed maturity dates. However, redemption before
maturity is possible under certain circumstances.
6.12 Early redemption may be initiated by investors who wish to cash out early to meet
unplanned financial needs. Investor-initiated early redemption may not be allowed
according to the contract terms. Or, if allowed, it is subject to the market value
adjustment. Depending on the market conditions, investors may suffer substantial
losses upon early redemption.
6.13 Early redemption may also be triggered by the issuer or due to the design of the
underlying assets. For example, some structured products are invested in
securities that contain early termination features, such as callable bonds, or kick-
in, knock-out options. Such products may be redeemed when the bonds are called,
or when the kick-in / knock-out levels are breached. Either that, or some structured
products contain covenants that allow for early termination should the size of the
structured products becomes too small. Upon early termination of the underlying
assets, the structured product may suffer losses.
E. Examples Of Redemption Amount
6.14 Redemption amounts may be adversely affected when certain key risks are
triggered, as illustrated by Table 2.3. Do keep in mind that the table is not an
exhaustive list of risks, and that there may be transaction or unwinding costs
associated with early or mandatory redemption, which may further exacerbate
the adversely impact the redemption amount. In the examples in Table 2.3, the
underlying funds are structured notes.
how a large mutual fund firm selling an unusually large number of E-Mini S&P 500 contracts first exhausted
available buyers, and then how high-frequency traders started aggressively selling, accelerating the effect of
the mutual fund's selling, and contributing to the sharp price declines that day.
Table 2.3: Examples Of Key Risk That Affect Redemption Amount
Key Risk What This means What Redemption Amount

Happens
Credit risk of the The issuer’s inability This triggers The investor may lose all
issuer to meet a payment an early (or or a substantial part of his
due will constitute an mandatory) original investment
event of default. redemption of amount.
the notes.
Derivative Derivative This triggers The investor may lose all
counterparty counterparty becomes an early (or or a substantial part of his
defaulting unable to make mandatory) original investment
payments due under redemption of amount.
the derivative the notes.
transaction (which
may be a swap or an
option), e.g. if it is
insolvent or becomes
bankrupt.
If the derivative
counterparty defaults,
the issuer will not
receive any payments
under the derivative
transaction and may
not be able to meet its
payment obligations
under the notes.
Certain events The assets This triggers The investor may lose all
adversely constituting the an early (or or a substantial part of his
affecting the collateral may suffer a mandatory) original investment
value or loss in market value, redemption of amount.
performance of thereby leading to a the notes.
the collateral loss in the market
value of the collateral
as a whole.
The issuer of the

collateral (e.g. bonds)
becomes insolvent or
defaults on any of its
payment obligations.
CHAPTER
19
RISK CONSIDERATIONS
OF STRUCTURED PRODUCTS

Market risk Market risk refers to the price volatility that comes from the fluctuation in
market prices of the underlying assets.
General market risk Affected by the general economic conditions and market outlook (e.g.
interest rates, inflation, exchange rate, commodity prices).
Issuer-specific risk Risk factors that only affect the price of a particular issuer’s security (e.g.
downgrade in credit rating of a company).
Issuer or swap counterparty credit The counterparty’s inability to meet contractual obligation is called
risk “default”. The word “default” encompasses a range of failure to meet
obligations such as, paying interest when due, making futures delivery,
repayment of loan, etc.
Liquidity risk (Institution) • Liquidity from an institution’s perspective refers to insufficient cash to
meet its cash flow requirements.
• Risk = Financial position and resulting credit standing are inevitably
affected, leading to a possible downgrade in its securities and loss of
values to their investors.
Liquidity risk (Investor) • Liquidity from investor’s perspective refers to the ease of converting
his investments into cash.
• Risk = Investor may be unable to sell his investments for a reasonable
price.
Foreign exchange (FX) risk • Investments are denominated in a foreign currency; investor may
suffer a loss on principal when he converts the maturity payment
(made in foreign currency) back into local currency.
• If the underlying assets are denominated in foreign currency, the
investment return is dependent on the FX rate as applied to the
performance measurement.
Structural risk • Safety of principal.
• Leverage.
• Investment in derivatives.
• Investment concentration.
• Collateral.
Safety of principal • Different degrees of principal protection versus capital appreciation.
• Each product is structured to provide full, partial or no return of
principal upon maturity.
Leverage • “Leverage” (also called “gearing”) refers to techniques used to increase
the potential rate of return.
• Such techniques include trading on margin, use of derivatives to trade
on price differentials, and borrowing money to trade.
Investment in derivatives Other features in derivatives contracts that investors should consider. For
example, the kick-in and knock-out features.
Investment concentration Risk of putting all eggs in one basket.
Collateral Collateral risk refers to the risk that the value of collateral may not be
sufficient when collateral is exercised to cover the loss.
Legal risk Legal risk refers to the potential loss arising from the uncertainty of legal
proceedings, such as bankruptcy, and potential legal proceedings.
Regulatory risk Legislation or regulations may change during the life of the financial
contract.
6
Correlation Correlation is a statistical measurement of how the prices of two securities
move in relation to each other and is represented by a correlation
coefficient.
• +1 indicates that the two securities are perfectly correlated. That is,
when the price of one security moves up or down, the price of the
other security moves in the same direction, by the same percentage.
• -1 indicates that the two securities are perfectly negatively correlated.
When the price of one security moves up or down, the price of
the other security moves in the opposite direction, by the same
percentage.
• 0 indicates movements of the securities have no correlation; they are
completely random.
Modelling Emergence of automated trading, also known as algorithmic trading, or
algo trading. It is the use of pre-programmed algorithm to decide on the
timing, price, or quantity of the trade orders. In many cases, the computer
initiates the order without human intervention.
Early redemption Subject to the market value adjustment or structure of the products;
depending on the market conditions, investors may suffer substantial
losses upon early redemption.
EXAMPLES OF KEY RISK THAT

AFFECT REDEMPTION AMOUNT
KEY RISK WHAT THIS MEANS WHAT HAPPENS REDEMPTION AMOUNT

Credit risk of the The issuer’s inability to meet a This triggers an early (or The investor may lose all
issuer payment due will constitute an mandatory) redemption of or a substantial part of
event of default. the notes. his original investment
amount.
Derivative Derivative counterparty This triggers an early (or The investor may lose all
counterparty becomes unable to make mandatory) redemption of or a substantial part of
defaulting payments due under the the notes. his original investment
derivative transaction (which amount.
may be a swap or an option),
e.g. if it is insolvent or becomes
bankrupt.
If the derivative counterparty

defaults, the issuer will not
receive any payments under the
derivative transaction and may
not be able to meet its payment
obligations under the notes.
Certain events The assets constituting the This triggers an early (or The investor may lose all
adversely affecting collateral may suffer a loss in mandatory) redemption of or a substantial part of
the value or market value, thereby leading to the notes. his original investment
performance of the a loss in the market value of the amount.
collateral collateral as a whole.
The issuer of the collateral (e.g.

bonds) becomes insolvent or
defaults on any of its payment
obligations.
7
Part II Chapter 20. Understanding Derivatives
PART II CHAPTER 20
UNDERSTANDING DERIVATIVES
CHAPTER OUTLINE
1. What Are Derivatives?

2. Futures And Forwards
3. Options And Warrants
4. Swaps
5. Contract For Differences (CFD)
LEARNING OUTCOMES

 know what derivatives are
 understand and explain the following derivatives:
- futures and forwards
- options and warrants
- swaps
- Contract For Differences (CFD)
CONTENTS
CHAPTER OUTLINE.............................................................................................................. 1
1. WHAT ARE DERIVATIVES? .......................................................................................... 3
A. Practical Example Of Derivative .............................................................................. 4
2. FUTURES AND FORWARDS ........................................................................................ 5
A. Pricing Of Forward Contracts .................................................................................. 6
B. Practical Examples Of Forward Contracts ............................................................... 7
B1.Energy ................................................................................................................. 7
B2.Commodities ....................................................................................................... 7
C. Summary Of Forward Contracts .............................................................................. 7
D. History Of Futures Contracts ................................................................................... 8
E. Pricing Of Futures Contracts .................................................................................... 9
F. Margin (Futures Contracts)..................................................................................... 10
G. Market Participants ................................................................................................ 10
G1.Hedgers ............................................................................................................. 11
G2.Speculators ....................................................................................................... 12
H. Futures Trading Strategies .................................................................................... 12
H1.Speculating With Futures ................................................................................. 12
H2.Short Hedging With Futures ............................................................................ 13
H3.Long Hedging With Stock Index Futures ......................................................... 14
3. OPTIONS AND WARRANTS ...................................................................................... 15
A. Risk Profile Of Option / Warrant ............................................................................ 16
B. Plain Vanilla Versus Exotic Option ........................................................................ 17
C. Basic Option Trading Strategies ............................................................................ 19
D. Bullish Option Strategies ....................................................................................... 19
D1.Long Calls ......................................................................................................... 19
D2.Covered Calls .................................................................................................... 20
D3.Protective Puts .................................................................................................. 21
D4.Selling Naked Puts............................................................................................ 23
E. Bearish Option Strategies ...................................................................................... 23
E1.Long Puts........................................................................................................... 23
E2.Naked Calls ........................................................................................................ 24
F. Neutral Option Strategies ....................................................................................... 25
F1.Straddles............................................................................................................ 25
G. Summary Of Options ............................................................................................. 27
4. SWAPS ........................................................................................................................ 28
A. Interest Rate Swaps ............................................................................................... 28
B. Currency Swaps...................................................................................................... 30
B1.Contrast With Futures And Forwards .............................................................. 30
B2.Contrast With Currency Exchange ................................................................... 30
C. Credit Default Swap (CDS) ..................................................................................... 30
D. Equity Swaps .......................................................................................................... 31
E. Commodity Swaps ................................................................................................. 32
5. CONTRACT FOR DIFFERENCES (CFD) ...................................................................... 32
1. WHAT ARE DERIVATIVES?
1.1 A derivative contract is a delayed delivery agreement in which its value is

dependent upon or derived from other underlying assets. The holder of a
derivative contract does not own the underlying assets. Using home purchase as
an analogy, an option to buy a flat is a derivative contract. You pay a fraction of
the price of the flat for the right to buy that flat. However, you do not own the flat
until years later when you pay the balance of the purchase price.
1.2 The underlying assets (simply called “underlying” sometimes) of a derivative

contract can be anything:
 weather (such as the number of days in a month that temperature is above or
below a certain level);
 farm and agricultural outputs (such as soy bean, corn, pork belly);
 metals (such as gold, aluminium, palladium);
 energy (such as oil and gas);
 financials - both physical (such as equity, bond, currency) and intangible (such
as equity index, bond index, interest rates); and
 digital – Cryptocurrencies, Non-fungible Tokens (NFT) and Central Bank Digital
Currencies (CBDCs)
1.3 Derivatives are useful hedging tools for commodities producers and consumers.
For example, oil producers and airlines (aircraft consumes jet fuel) may use futures
and forward contracts to ensure stability of their revenue and expenses,
respectively.
1.4 For speculators, derivative contracts are often used as directional bets of the price
movement of the underlying. For example, if an investor anticipates the price of a
particular stock to go up within a certain time frame, instead of direct investment
in that stock, he can purchase an option on that stock, hence reducing his capital
outlay. Since the price of the option is just a fraction of the cost of the stock, the
potential gain from the option is multiple times than that from the direct
investment, if his “bet” is proven right.
1.5 Derivatives can be used as risk management tools. For example, a corporation that
is planning to issue bonds can use interest rate futures to control its exposure to
the interest rate risk, before the bonds are issued.
1.6 Similarly, a pension fund with a diversified holding in the stock market faces
considerable risk from general fluctuation of the stock prices. The fund manager
can use options on a stock index to reduce or virtually eliminate the risk exposure.
1.7 Derivative contracts are integral parts of structured products. An understanding of

derivatives – different types, how they work and the associated risks – will be an
important foundation to understanding structured products.
A. Practical Example Of Derivative
1.8 Stocks and bonds are financial assets. When you invest in a financial asset, such
as a stock in XYZ Company that is currently priced at S$10, you receive a certificate
stating that you have a legal claim on the earnings (in the form of dividends) and
assets (upon liquidation) of XYZ, the issuer. If the company does well, and its share
price rises to S$15, you can sell your share in the open market for a capital gain of
S$5.
1.9 In contrast, a financial derivative asset (or just derivative) is a financial asset in that
you receive a contract stating a legal claim, except that the value of the derivative
is based on the performance of an underlying financial asset that you do not own
yet.
Example
Imagine that you dream to own a share of Warren Buffet’s Berkshire
Hathaway Inc priced at US$460,000. If you are fortunate enough to have this
large amount of money, you can pay up right away and own a share. Suppose
you do not have this amount of money, and your roommate is willing to sell
you the right to buy the share at US$400,000. For this right, your roommate
charges you a fee of US$75,000, and this right lasts three months. In effect,
your roommate has sold you a derivative contract in the form of an option.
If you buy the option, the value of your investment now depends on the
underlying asset – the share price of Berkshire Hathaway, even though you
do not own any Berkshire Hathaway shares. If the price of Berkshire
Hathaway goes up, so does the value your option. The reverse is true as well.
If the price of Berkshire Hathaway goes down, your option falls in value as
well.
At the end of three months, if the Berkshire share price falls below
US$400,000, you are unlikely to exercise your right to buy it from your
roommate, because you can buy it cheaper in the market. In this case, your
loss is the US$75,000 which you have paid for the option, a 100% loss.
However, suppose that the Berkshire share price has risen to US$520,000 at
the end of three months, you will be wise to exercise your option. Your
roommate will be obligated to sell the share to you at US$400,000, regardless
of the prevailing market price. If he does not own a Berkshire share, he must
buy it from the open market and then sell it to you at the agreed price. The
total price that you pay to own the Berkshire share is US$475,000 (US$75,000
option fee plus US$400,000 exercise price) for the share that is worth
US$520,000.
If you exercise the option and then sell the share, you make a profit of
US$45,000 (before transaction cost) on the US$75,000 investment that you
made, a 60% return. In contrast, your profit would have been US$60,000 had
you invested US$460,000 directly in the Berkshire share, a 13.04% return. The
reason for the higher rate of return by taking up the option from your
roommate is due to the leverage effect typically inherent in derivative
instruments.
1.10 This simple arrangement between you and your roommate is just one of the many
ways that derivatives can be constructed. There are two particularly important
types of derivatives, options and futures. Many other types exist, but they can
usually be created from these two basic building blocks, possibly by combining
them with all sorts of other investment assets including stocks and bonds, stock
indices, gold and commodities such as wheat and corn, and digital assets.
1.11 In this chapter, we will discuss four types of derivatives contracts, namely;
 Futures and Forwards;
 Options and Warrants;
 Swaps; and
 Contract for Differences.
2. FUTURES AND FORWARDS
2.1 Futures and forwards are contracts giving the obligation to buy (a “call” contract)
or sell (a “put“ contract) the underlying assets:
 in specified quantity;
 at a specified price (the “delivery price” or “future price”); and
 on a specified future date (the “delivery date” or “settlement date”).
2.2 The contract specifies one or both of two ways to fulfil the contractual obligations.
If both delivery options are provided in the contract, the buyer gives the final
instructions on the desired delivery option immediately before the delivery date:
(a) Physical delivery – The underlying assets are delivered by the seller to the
specified delivery location as specified in the contract.
(b) Cash settlement – Cash is exchanged to settle the profits and losses related to
the contract. This is the only settlement method available when the underlying
is intangible, such as interest rate or stock index, where physical delivery is
not possible.
2.3 Only 2% to 5% of the contracts are settled through physical delivery. Most
contracts are settled either in cash, or by entering into offsetting contracts.
2.4 Futures and forwards operate in the same way, but have main differences as
shown in Table 3.1.
Table 3.1: Main Differences Between Futures And Forwards
Futures Forwards
 Standardised contracts  Non-standardised contracts traded over the
traded on exchanges. counter (OTC) between two parties.
 Subject to margin  Not subject to margin requirements.
requirements (See
section below).  Settlement of gains / losses only occurs on
 There are partial delivery date.
settlements of emerging
However, since forward contracts are non-
gains / losses through
standard, features such as mark-to-market and
daily mark-to-market1
daily margining may be negotiated into specific
process.
contracts. Recent ISDA survey indicated
stepping up of margin compliance for OTC
contracts
A. Pricing Of Forward Contracts
2.5 In principle, the forward price for a contract is determined by taking the spot or
cash price at the time of the transaction and adding to it a “cost of carry”.
2.6 Depending on the underlying asset, the cost of carry takes into account payments
and receipts for matters such as storage, insurance, transport costs, interest
payments, dividend receipts, etc.
2.7 forward price = spot or cash price + cost of carry
2.8 The difference between the spot and the forward price is often referred to as the
premium or discount. That is, the cost of carry is referred to as a premium when it
is positive; is referred to as a discount when it is negative.
Scan the
Example
QR code to
watch a
short video Suppose John owns a house that is valued at S$100,000, and that Mary enters
explanation. into a forward contract to buy the house one year from today. However, since
John knows that he can get the S$100,000 only in a years’ time, he wants to
be compensated for the delayed sale. Suppose that the risk-free rate of return
R (the bank rate) for one year is 2%. So, if John sells the house now for
S$100,000 and puts the money in the bank, he will get S$102,000. So, John
will want at least S$102,000 one year from now for the contract to be
worthwhile for him. However, Mary knows that the house will fetch S$6,000 a
year if it is rented out, and that John has currently rented the property out.
Hence, Mary wants to be compensated for the rental income, and she is
1
Mark–to–market is the daily process of revaluing outstanding positions to the daily settlement price at the end
of each trading day. The resulting amount of profit and loss will be added to or subtracted from the margin
account.
willing to pay S$102,000 - S$6,000 = S$96,000. This will be the forward price
for the house today.
B. Practical Examples Of Forward Contracts
2.9 We look at two practical examples of forward transactions in the energy and
commodity markets.
B1. Energy
2.10 In the energy markets, forward markets have developed around benchmark crude
oils, such as North Sea Brent Blend 2(15-day Brent) and West Texas Intermediate
(WTI). In many of these forward contracts, cash settlement is preferred rather than
physical delivery.
2.11 The Brent 15-day market is the largest and most important crude oil forward
market in the world. Brent crude is part of the oil price benchmark of almost two
thirds of the world’s oil. The Brent forward contract gives 15 days’ notice to the
buyer to take delivery of a cargo at Sullom Voe during a notional three-day loading
period. The terms are either accepted or passed to another buyer who can repeat
the process forming a “chain”. This whole process is known as a book-out.
2.12 The majority of trades use a book-out process which means that the contracts are
cleared by the buyers and sellers in a series of trades to cancel mutual contracts
by cash settlement.
B2. Commodities
2.13 Forward contracts for commodities, such as wheat, corn and soybeans are similar
in principle with energy and metals, although the details may differ. Commodity
terms usually include terms CIF and FOB. These terms indicate the types of
delivery for different contracts.
2.14 The term CIF means Cost-Insurance-Freight. A CIF contract means that the total
cost of the contract including delivery is known. FOB means Free-On-Board, where
the buyer has to arrange and pay for transportation costs which must, therefore,
be added to the quote price.
C. Summary Of Forward Contracts
2.15 The major advantage of a forward contract is that it fixes prices for a future date.
The major disadvantage of a forward contract is that if spot prices move one way
or the other at the settlement date, then there is no way out of the agreement for
the counterparties. Both sides are subject to the potential of gains or losses which
are binding.
2
Apart from Brent, the other grades in North Sea crude oil are Forties, produced by BP Plc, Norsk Hydro ASA’s
Oseberg blend and Conoco Phillips’s Ekofisk
D. History Of Futures Contracts
2.16 Futures contracts address one of the key disadvantages of forward contracts. With
a futures contract, it is possible for market players to both fix the forward price of
an asset and combine it with the opportunity to take advantage of any future price
volatility.
2.17 The disadvantages posed by early forward contracts led to the introduction of
futures contracts in the mid-1860s. In 1865, the Chicago Board of Trade (CBOT) laid
the foundation to all modern futures contracts by introducing grain agreements
which standardised the following:
 the quality of the grain;
 the quantity of grain for the contract; and
 the date and the location for the delivery of the grain.
2.18 In effect the only condition left for the contract was the price. This was open to
negotiation by both sides, but was carried out on the floor of the exchange using
open outcry. This meant that the prices agreed were available and transparent to
all traders.
2.19 Originally, futures were traded only on commodities, in a market dominated by

the Chicago Mercantile Exchange (CME). Today, New York Mercantile Exchange
(NYMEX) is the largest physical commodity futures exchange in the world. After
the introduction of commodities futures in the 1970s, contracts on financial
instruments became hugely successful and quickly overtook commodities futures
in terms of trading volume and global accessibility to the markets. This led to the
introduction of many new futures exchanges across the world, such as ICE Futures
Europe, EUREX, TIFFE and Binance.
2.20 There are two basic types of assets for which futures contracts exist (see Table
3.2). These are:
 commodity futures contracts; and
 financial futures contracts.
Table 3.2: Examples Of Commodity And Financial Futures
Commodity Futures Financial Futures

Metals – base, precious Interest rates
Grains and oilseeds – grain, livestock,
Bond prices
oilseeds, fibres
Softs – coffee, cocoa, sugar Currency exchange rates
Energy – crude oil, gas, oil products Equity stock indices
Cryptocurrencies
E. Pricing Of Futures Contracts
2.21 For most commodities, the futures price is usually higher than the current spot
price. This is because there are costs associated with storage, freight and
insurance, which will have to be covered for the futures delivery. When the futures
price is higher than the spot price, the situation is known as contango.
2.22 If a chart is drawn of spot and futures prices, then, as the futures expiry date
approaches, the plots will converge. This is because the costs diminish over time
and become zero at the delivery date. Figure 3.1 shows a contango chart for a
three-month futures contract.
Figure 3.1: The Convergence Of Futures And Spot Price
Futures
Scan the price
QR code to
watch a
short video
explanation. Spot
price
One Two Three

month months months
2.23 When the futures price is lower than the spot price, the market is said to be in
backwardation. Backwardation occurs in times of temporary shortage caused by
strikes and under-capacity.
2.24 Another frequently used terminology in trading futures contracts is basis. Basis is
the difference between the spot price and the future price.
Example
Suppose the July futures price for corn is US$2.60 per bushel, and the cash
price in Farmerville USA is US$2.20. The basis is -US$0.40 (i.e. US$2.20 -
US$2.60). In market lingo, the basis is “40 cents under July”. If the basis has
been a positive 40 cents, then it is said to be “40 cents over July”.
2.25 Traders perform historical analysis on Basis to arrive at their expected Basis. If the
cash price of a commodity is close to its Futures price, it is a phenomenon known
as narrow basis. For instance, if the current basis of a corn Futures is – US$0.40
when – US$0.60 is expected, the market is said to be offering a narrow/strong
basis. On the contrary, if the market is offering a Basis of – US$0.80 when –
US$0.60 is expected, then the market is providing a wide/weak basis, that is the
cash (spot) price of the commodity is relatively far from its Futures price.
F. Margin (Futures Contracts)
2.26 Futures are traded on margin. The initial cash outlay (called “initial margin”) is a
fraction of the full value of the contract. The level of initial margin is set by the
exchange on which the contracts are traded, based on the anticipated price
volatility. The broker may add additional margin requirement for specific clients,
products or markets based on risk analysis. The ability to trade at a fraction of the
value of the contract creates the leverage effect of futures trading.
2.27 A futures contract is marked to market on a daily basis. The broker issues a
“margin call” when the initial margin is eroded by losses. The additional amount
required to restore the account to the initial margin is called “variation margin”.
2.28 To reduce the frequency of margin calls, brokers make margin calls only when the
account is below a “maintenance margin” level. Nonetheless, the variation margin
is always the amount required to restore the margin account to the initial margin
level.
2.29 If the margin calls are not met, the broker has the right to liquidate positions to
raise the necessary amount.
Example: Gold Futures
Scan the Initial margin: S$2,500

QR code to
watch a Maintenance margin: S$2,000
short video
explanation. An investor buying a gold contract will need to deposit S$2,500 as initial
margin with the broker.
If the value of the contract drops by S$1,000, the loss is offset against the
margin account, bringing it down to S$1,500 which is below the
maintenance margin.
The broker will issue a margin call, requesting a S$1,000 top-up to restore
the account balance to the initial margin level of S$2,500.
If the value of the contract drops by another S$300, the margin account is
reduced to S$2,200. Since this is above the maintenance margin level, no
margin call is made, even though it is below the initial margin.
G. Market Participants
2.30 There are two main types of market participants – hedgers and speculators. We
look briefly at what they do and why. Table 3.3 below summarises our discussion.
Table 3.3: Main Market Participants
Who Reason For Buying Reason For Selling

Hedgers To lock in a price and obtain To lock in a price and obtain
protection from rising prices. protection from falling prices.
Speculators To profit from rising prices. To profit from falling prices.
G1. Hedgers
2.31 Hedgers are typically producers and consumers of the commodity. Examples are:
rubber plantations and tire companies that use rubber to make tires; jet fuel
refineries and airlines that use jet fuel; sugar cane growers and cane sugar
manufacturers.
2.32 The hedger buys or sells in the futures market today, to establish a known price
for something that they intend to buy or sell later in the cash market. Buyers are
thus able to protect themselves against higher prices, and sellers are able to hedge
against lower prices. Whatever the hedging strategy, hedgers are willing to give
up the opportunity to benefit from favourable price changes, in order to achieve
protection against unfavourable price changes.
2.33 Consider this example. A tyre manufacturer will need to buy additional rubber
from its supplier in six months, to produce tyres that it is already offering in its
catalogues at a known price today. An increase in the cost of rubber can reduce or
wipe out any profit margin. To minimise this risk, the manufacturer buys futures
contracts for the delivery of rubber in six months at S$500 a tonne.
2.34 If, six months later, the cash market price of rubber has risen to S$550. The
manufacturer now has two choices. It may choose to settle its rubber contract for
a S$50 a tonne profit, and use that to offset the S$550 that it has to pay to its
supplier to acquire rubber. Alternatively, it may choose to take physical delivery of
rubber at S$500 a tonne. In reality, most commodities futures are settled in cash,
although physical delivery is almost always an option under the contract.
2.35 The hedge, in effect, provided protection against an increase in the cost of rubber.
It locked in a cost of S$500, regardless of what happens in the cash market price.
Had the price of rubber declined, the hedger would have incurred a loss on the
futures position, but this would have been offset by the lower cost of acquiring
rubber in the cash market.
2.36 The number and variety of hedging possibilities is practically limitless. A corporate
treasurer who will need to borrow money at some future date can hedge against
the possibility of rising interest rates. An investor can use stock index futures to
hedge against an overall increase in stock prices, if he anticipates buying stocks at
some future time. A coffee grower can hedge against lower coffee prices, and a
coffee retail store (like Starbucks or Coffee Bean) can hedge against higher coffee
prices.
G2. Speculators
2.37 Speculators are investors who buy to profit from a price increase or sell to profit
from a price decrease. Speculators put their money at risk in the hope of profiting
from an anticipated price change.
2.38 Speculators serve an important role of providing market liquidity. Hedgers’

interest is to maintain price stability, while speculators seek to benefit from price
volatility and trade constantly to aim to buy-low and sell-high. Without
speculators, the market liquidity tends to be low. A vibrant trading market requires
the participation from both hedgers and speculators.
H. Futures Trading Strategies
2.39 Futures contracts can be used for hedging or for speculation. In this section, focus
is on financial futures.
H1. Speculating With Futures
2.40 In March, you expect the Taiwan stock market to rise strongly over the next three
months. You buy an MSCI Taiwan June futures contract at 520 index points. Now
suppose that your belief turns out to be correct and, at contract maturity, the index
has risen to 542. Based on a multiplier of US$100 per index point, your payoff is
US$2,200:
Scan the
QR code to
watch a Initial cash outlay = 520 x US$100 per point
short video = US$52,000
explanation. MSCI Taiwan Stock Index close = 542
MSCI Taiwan futures price = 520
Index points difference = 22 points
Payoff = 22 x US$100 per point
= US$2,200
Now if you got things wrong and the market went down instead to 500, your loss
would be US$2,000 3:
MSCI Taiwan Stock Index close = 500

MSCI Taiwan futures price = 520
Index points difference = -20 points
Payoff = -20 x US$100 per point
= -US$2,000
2.41 Speculating in futures can bring huge rewards, as well as losses. While your
upside is unlimited, neither is your downside. If the stock index in our above
example has dipped to 450, 400 or even 300, the losses can be huge.
3
Recall that with stock index options, your loss is limited to the call premium and no more, but not with futures.
A long position in futures has very high downside risk, while a long call’s downside is limited to the call
premium paid.
H2. Short Hedging With Futures
2.42 A short hedge means to go into a short position to protect an existing portfolio of
stocks. Consider a fund manager who manages and owns a small diversified
portfolio of Singapore stocks that closely tracks the Straits Times Index (STI). He
expects a near-term market decline, but does not wish to liquidate his position. He
can hedge his portfolio by selling STI futures. In case the market falls, any losses
Scan the
QR code to on his portfolio holdings will be partially offset by the gains from the short futures
watch a position. If the market rises, he loses from the futures position, but gains from the
short video rise in the portfolio’s value. The gains and losses hopefully will cancel out, and the
explanation.
fund manager‘s position will not be adversely affected.
2.43 A fundamental problem exists in that there is no futures contract that exactly
matches his or any particular stock portfolio. By using a futures contract to protect
his portfolio, he is cross-hedging - the underlying stock index is related, but not
identical to his stock position.
2.44 One other consideration is that the volatility of the portfolio may not perfectly
match that of the market index. This is a fundamental problem because no market
index can exactly match any stock portfolio. For example, the market may fall 10
percent, but his portfolio may fall by 15 percent or something else. The sensitivity
of a portfolio’s price movement to the market’s price movement can be summed
up in a number called the portfolio beta. For example, a portfolio beta of 1.2 means
that that every 1 percent rise in the STI brought about a 1.2 percent increase in his
portfolio holdings. The reverse is also true if the STI goes down.
Example
Suppose the fund manager’s Singapore portfolio is currently worth

S$1,000,000, and it has a portfolio beta of 1.2 to the STI. It is now January
and he is concerned about a market decline over the next two months. The
STI is currently at 3,150 and the March STI futures contract is priced at 3,100.
With a multiplier of S$10 per point, the price coverage per contract (this
represents the value of portfolio that may be covered / compensated under
each contract of the future contract) of one March contract is:
Price coverage per contract= 3,100 x S$10

= S$31,000
To protect the portfolio against a market decline, the manager calculates the
hedge ratio, which is the number of futures contracts to sell:
value of portfolio
Hedge ratio= x portfolio beta
price coverage per contract
S$1,000,000
= x 1.2
S$31,000
= 38.7 or 39 contracts
Contracts are not divisible, so our fund manager rounds up and sells 39 STI
futures contracts.
2.45 By hedging, the fund manager has greatly reduced, or may even have eliminated
the possibility of a loss from a decline in the price of his Singapore portfolio.
However, he has also eliminated the possibility of a gain from a price increase.
This is an important point. If the STI rises, he will have a loss on his short futures
position, offsetting the gain on his Singapore portfolio. Or if the STI falls, he will
have a gain on his short futures position, offsetting the loss on his Singapore
portfolio.
H3. Long Hedging With Stock Index Futures
2.46 Imagine another fund manager who is starting up a new Singapore fund. The fund
does not own any stocks yet, but he will need to acquire them in the future. He is
bullish about the market and expects the stocks to increase in value very soon. The
problem is that he does not have the cash to buy into the market right away. With
stock index futures, he can buy futures contracts at a much lower cash outlay (due
to leverage, which we discussed in Chapter 19), and lock in today’s prices to take
advantage of the rise in prices if it does occur.
3. OPTIONS AND WARRANTS 4
3.1 Options and warrants are similar. Both give the right to buy (“call” contract) or sell
(“put” contract) the underlying security:
 in specified quantity;
 at a specified price (called the “exercise price”, or “strike price”); and
 on or before a specified date (called the “expiry date”).
3.2 Options and warrants grant the right, but not the obligation, to buy or sell the
underlying. The holder of the warrant or option may choose whether or not he
exercises the contractual rights. Indeed, many investors choose not to exercise the
rights when contracts are out-of-the-money, and simply let the contracts expire.
On the other hand, the holder of a futures / forward contract must fulfil the contract
terms on the settlement date.
3.3 A European style option / warrant is a contract that may only be exercised on
expiration. An American style option / warrant is a contract that may be exercised
on any trading day on or before the expiry date.
3.4 Both warrants and options may be traded on an exchange or a traded OTC.
Options are typically settled through physical delivery, except when the
underlying asset is intangible, such as an index. Exchange-traded warrants are
settled in cash.
3.5 Options and warrants have no value after the expiry date, because the right to buy
/ sell ceases after expiry date.
3.6 An option or warrant is said to be in-the-money, at-the-money, or out-of-the-

money, depending on the spot price of the underlying asset relative to the strike
price. A call option / warrant is in-the-money, when the strike price is below the
4
There are two types of warrants: structured warrants and company warrants. Only structured warrants are
used in structured products and, therefore, the discussion here confines to structured warrants. For reader’s
background information, company warrants are issued by a company in conjunction with bond, rights issue,
or loan stocks. Warrants issued in this way act as a sweetener to make the bond, rights issue or loan stocks
more attractive. Structured warrants (sometimes called covered warrants) are issued by a third-party, usually
an investment bank, unrelated to the issuer of the underlying securities.
market price of the underlying. That is, the call option / warrant still has intrinsic
value as illustrated in the following:
Call Put
Intrinsic Value
(Right to Buy) (Right to Sell)
Strike price is less Strike price is more
“in-the- money” Positive value
than market price. than market price.
Strike price is
Strike price is equal
“at-the money” equal to market No value
to market price.
price.
Strike price is
“out-of-the Strike price is less
more than market No value
money” than market price.
price.
A. Risk Profile Of Option / Warrant
3.7 The shape of the risk-return profile of structured products comes from the hockey-
stick shape of the risk profiles of options and warrants.
3.8 A holder of a call option or warrant has a bullish view of the market. If the market
turns bearish instead, the value of the call option / warrant starts to decline. When
the option / warrant is at-the-money or out-of-the-money (i.e. at or below the strike
price for the call), the option / warrant has no value, and the investor loses the
entire premium paid to the option.
Scan the
QR code to
watch a Figure 3.2: Risk Profile Of A Call Option / Warrant
short video
explanation.
Profit
Strike Price
Price of Underlying
Asset
Maximum
loss
Loss
3.9 A put option / warrant works the other way. As the price of the underlying asset
rises contrary to the investor’s bearish outlook, the value of the put option or
warrant starts to decline and reaches the maximum loss level at the strike price.
Figure 3.3: Risk Profile Of A Put Option / Warrant
Profit
Strike Price
Scan the
QR code to
watch a Price of Underlying
short video
explanation. Asset
Maximum Loss
Loss
B. Plain Vanilla Versus Exotic Option
3.10 “Plain vanilla option” refers to option with predetermined underlying assets, a
stated strike price, a known expiry date, without special conditions on any of the
option parameters. The value of option is based on a number of factors as follows:
 current spot price of the underlying asset;
 exercise price;
 time until expiry;
 interest rate;
 volatility of the underlying; and
 dividend rate on the underlying.
3.11 The value of option is determined by complex pricing models. However, the
market price of the option is influenced by the forces of market supply and
demand. The market price of option may deviate from its intrinsic value from time
to time.
3.12 “Exotic option”, by contrast, has conditions on any of its parameters. For example,
the payoff under an Asian option is based on the average price of the underlying
assets over a preset period. Needless to say, the exotic options have an additional
layer of complexity to their pricing.
3.13 Below is a list of more common exotic options.

 Asian option (or average price option): The payoff is determined by the average
price of the underlying assets over a preset period of time. This is in contrast to
the usual European option or American option, where the payoff of the option
depends on the price of the underlying asset at maturity.
 Forward-start option: The option only comes into effect at a future date. It is
essentially a forward on an option, except that the premium is paid today. It is
often used in executive compensation.
 Compound option: This is an option on an option. As settlement is at expiry,

the option-holder receives another option.
 Chooser option: Under this option, the investor chooses whether the option will
become a call or a put by a specified choice date.
 Barrier option: This is the option used in the barrier certificates. Under this
option, the option to exercise depends on the underlying assets crossing or
reaching a given barrier level. There are four combinations of this type of
options as follows:
– Up-and-out: Spot price starts below the barrier level and has to move up and
reaches the barrier level for the option to be knocked-out (i.e. becomes null
and void);
– Down-and-out: Spot price starts above the barrier level and has to move
down and reaches the barrier level for the option to be knocked-out;
– Up-and-in: Spot price starts below the barrier level and has to move up and
reaches the barrier level for the option to become activated; and
– Down-and-in: Spot price starts above the barrier level and has to move down
and reaches the barrier level for the option to become activated.
 Binary option: This option pays off either nothing or a predetermined amount.
The cash-or-nothing binary option pays some fixed amount of cash if the option
expires in-the-money, while the asset-or-nothing pays the value of the
underlying asset.
 Rainbow option: There are two or more risky underlying assets associated with
this type of options. The name comes from the analogy that the risky assets are
like the colours in the rainbow. The payoff of rainbow options depends on the
best or the worst of the risky assets. For example, best of x number of risky
assets, or the worst of, or the maximum of, or the minimum of.
 Swaption: This is an option giving the right to enter into an underlying swap
agreement. The term "swaption" typically refers to options on interest rate
swaps, although any type of swaps can be used.
 Bermuda options: Holder of Bermuda options can exercise its options at pre-
set dates including of course the expiration date. It is a hybrid between
European options and American options.
 Lookback options: Holders of lookback options do not have an exercise price at
the time of purchasing the option. Instead, he can choose the most favourable
price of the underlying assets over the duration of the option contract.
 Extendible options: This option enables either the buyer or seller of the options
to extend the maturity date of the option by a specified period of time, at their
discretion. Hence, it may come in the form of holder-extendible option in which
case the holder has the right to extend the maturity date, or a writer-extendible
option in which case the seller possesses the right to extend the maturity date
of the option.
 Shout options: The holder has the right to lock in a certain amount of profit
when the option is in-the-money before it expires. Having done that, the holder
can continue to participate in the upside potential in the remaining duration to

maturity.
C. Basic Option Trading Strategies
3.14 Options are appealing because they can be combined to offer investors a wide
variety of investment strategies. In fact, there is essentially no limit to the number
of different investment strategies available using options. Fortunately, only a small
number of basic option positions are available and more complicated strategies
are all built from these.
3.15 In this section, we learn how options work by looking at how to profit and lose
from them. To keep things simple, we assume each contract is European style and
lasts three months. We start by looking at basic call and put positions followed by
combining puts, calls, cash and shares of stock.
3.16 Strategies can be categorised as bullish, bearish or neutral. We can determine

whether a strategy is bullish or bearish just by asking: “Is money made on the rise
or fall of the stock price?” If money is made when stock price rises, then it is a
bullish position. If money is made when stock price falls, it is a bearish position. If
money is made when stock prices rises, as well as when it falls, it is probably a
neutral strategy.
D. Bullish Option Strategies
3.17 We now discuss four basic bullish strategies as follows:

 Long calls;
 Covered calls;
 Protective puts; and
 Selling naked puts.
D1. Long Calls
3.18 Buying calls appeals to aggressive investors because of leverage. Suppose

Michael has a strong feeling that a particular stock, currently trading at S$10 is
about to move higher. If he purchases the stock, his cash outlay is S$1,000 for 100
shares, and his maximum loss possible is S$1,000. If he buys a call, he pays S$100
(100 shares X S$1 per right), and his risk is limited to S$100. Here we see leverage
Scan the working - the call is only 10% of the S$1,000 needed to purchase the stock directly.
QR code to
watch a
short video Cash Gain when Gain when
explanation.
Outlay price=S$6 price=S$14
(S$) (S$) (%) (S$) (%)
Long Stock -1,000 -400 -40 +400 +40
Long Call -100 -100 -100 +300 +300
3.19 If the stock price falls to S$6, the long stock position loses S$400 as compared to
S$100 for the buy call. Leverage is magnified when the stock price goes up. At
S$14, the long stock’s S$400 gain is 40% of the cash outlay of S$1,000 as compared
to the long call’s profit of 300%. (Refer to Figure 3.2 for the profit / risk profile.)
3.20 When one considers the combination of leverage, limited downside and unlimited
upside potential, it is easy to see that buying call options is an attractive strategy
for bullish investors.
D2. Covered Calls
3.21 A covered call is a conservative strategy where one writes (i.e. sells) call options
on stock already owned (note that we are not newly buying stock). Suppose
Michael already owns 100 stocks of XYZ purchased at S$10 per share. He
subsequently sells a call option for S$1 with an exercise price of S$10. What is the
effect of these two transactions?
Cash Gain when Gain when

Scan the
(S$) (S$) (%) (S$) (%)
QR code to
watch a
Long Stock -1,000 -400 -40 +400 +40
short video Short Call +100 +100 +100 -300 -300
explanation.
Covered Call -900 -300 -33 +100 +11
3.22 If XYZ falls to S$6, the option will expire worthless, and Michael pockets the S$100
premium received. The S$100 helps to offset the S$400 loss from his long position.
Without selling the call option, his loss is S$400 as compared to S$300 from the
covered call position.
3.23 If the stock rises to S$14, the option will be exercised against Michael, and he has
to deliver the stock in exchange for S$10. Since he already owns the stock, he is
said to be “covered.” The net effect of the strategy is to give up the possibility of
higher profits in exchange for the certain option premium of S$100. This decreases
the uncertainty surrounding returns and, therefore, decreases risk.
3.24 Under Figure 3.4, notice that the resulting profit pattern from a long stock and sell
call is a sell put. For instance, if the stock price runs up to S$30 the loss from the
sell call will always be offset by the long stock position. The net result is a constant
expected profit of S$100.
Figure 3.4: Profit / Risk Profile Of A Covered Call
Profit
Long Stock
Covered Call
0
Stock Price
Short Call
3.25 Why write a covered call when a covered call cancels out unlimited upside
potential and exposes the investor to unlimited downside risk? Investors write
covered calls because they are bullish on the stock that they own and would like
to keep the stock for returns in the long term, but they feel that the potential of the
stock going up is not promising in the near term. Thus, they use options to
generate some additional income at very little risk in the short term. There is also
the added advantage that the breakeven price is lowered, in our case to S$9.
A covered call position can lower breakeven point:
Profit when stock price is (S$):
6 7 8 9 10 11 12 13 14
Long Stock at
-4 -3 -2 -1 0 1 2 3 4
S$10
Short Call 1 1 1 1 1 0 -1 -2 -3
Covered Call -3 -2 -1 0 1 1 1 1 1
D3. Protective Puts
3.26 A protective put strategy calls for buying a put on stock that one has already
owned. Suppose Michael already owns 100 stocks of XYZ purchased at S$10 per
share. He buys a put option for S$1 with an exercise price of S$10. What is the
effect of this transaction?
Scan the
QR code to Cash Gain when price=S$6 Gain when
watch a Outlay price=S$14
short video
explanation. (S$) (S$) (%) (S$) (%)
Long Stock -1,000 -400 -40 +400 +40
Buy Put -100 +300 +300 -100 -100
Protective Put -1,100 -100 -9 +300 +27
3.27 If XYZ falls to S$6, Michael will exercise the put option and receive a profit of S$300
(= -100 + 400). This S$300 offsets the S$400 loss from his long position. Without
buying the put option, his loss is S$400 as compared to a loss of S$100 from the
protective put position.
3.28 If the stock rises to S$14, Michael will let the put option expire worthless and lose
the S$100 premium. The gain from his long stock position of S$400 produces a net
S$300 (=-100+400) in profits.
3.29 Notice from Figure 3.5 that the resulting profit pattern from a long stock and buy
put is a buy call. The net result is protection against downside risk and exposure
to an unlimited upside.
Figure 3.5: Profit / Risk Profile Of A Protective Put
Profit
Long Stock
Protective
0
Stock Price
Long Put
3.30 All in all, the protective put benefits investors who are mainly bullish about the
stock, but nevertheless want downside protection. Michael uses S$1 to eliminate
the downside risk. For this reason, a strategy of buying a put option on a stock
already owned is considered a conservative strategy.
A protective put position increases breakeven point:

Profit when stock price is (S$):
6 7 8 9 10 11 12 13 14
Long Stock at
-4 -3 -2 -1 0 1 2 3 4
S$10
Buy Put 3 2 1 0 -1 -1 -1 -1 -1
Protective Put -1 -1 -1 -1 -1 0 1 2 3
D4. Selling Naked Puts
3.31 Selling a naked put seems unattractive at first. You get a limited profit when the
stock goes up and you are still exposed to great risk when the stock price goes
down. So why will anyone want to write a naked put? The answer is that if you
want to own the stock, selling a naked put addresses your need and gives you a
discount relative to its current price.
Scan the
QR code to
watch a Figure 3.6: Profit / Risk Profile Of A Naked Put
short video
explanation.
Profit
Premium
0
Stock Price
3.32 To illustrate this, suppose Donald wishes to own XYZ, but feels its current price of
S$11 is still too expensive. He sells a put for S$1 with an exercise price of S$10. If
XYZ drops to S$8, the put buyer will exercise his right to sell to Donald at S$10.
Donald receives the stock by paying S$10. However, his net cost is really S$9 (-10
+1), since Donald has received S$1 for selling the put. In the end, Donald has paid
S$9 for XYZ (which is now worth S$8), as compared to its initial price of S$11.
3.33 However, if XYZ rises to S$14, the put buyer will not sell XYZ to Donald at S$10,
since he can sell it in the open market for S$14. If Donald still wants to own XYZ,
he will need to buy it from the market at S$14, offset by the S$1 that he has
received on the put. He ends up paying S$13 for the share, instead of S$11.
E. Bearish Option Strategies
3.34 We discuss two basic bearish strategies as follows:

 Long puts; and
 Naked calls.
E1. Long Puts
3.35 Now imagine that Michael has a strong feeling that a particular stock is about to
move lower. Yet he is fearful of selling a stock short because of the potential for
unlimited losses. Rather than subjecting himself to unlimited downside risk,
buying a long put is a safer strategy. Typically, a long put strategy is deployed
when investors take a bearish position of the market.
3.36 If Michael shorts the stock, his cash inflow is S$1,000 for 100 shares. If he buys a
put, he will pay S$100, and his maximum risk is limited to S$100.
Cash Gain when price=S$6 Gain when price=S$14

Outlay (S$) (%) (S$) (%)
Scan the (S$)
QR code to Short Stock 1000 400 40 -400 -40
watch a
short video Long Put -100 300 300 -100 -100
explanation.
3.37 If stock price falls to S$6, the short stock position earns S$400, but above the
breakeven price of S$10, losses can be unlimited. At S$6, the long put earns S$300
in profits, S$100 less than the short stock position earns because of the S$100 put
premium. However, if the stock runs a lot higher beyond S$10, the maximum loss
is capped at S$100. (See Figure 3.3 for the profit / risk profile of a put option.)
E2. Naked Calls
3.38 Unlike covered calls, where the call seller owns the underlying stock and can make
delivery at a known price, the naked call seller is completely exposed to downside
risk when the stock price goes up.
Cash Gain when Gain when

(S$) (S$) (%) (S$) (%)
Short Call 100 100 100 -300 -300
3.39 Selling naked calls, meaning selling a call option without owning the underlying
stock is one of the riskiest strategies of all. Not only is the downside unlimited, the
upside is limited to the premium received.
Figure 3.7: Profit / Risk Profile Of A Naked Call
Profit
Premium
0
Stock Price
F. Neutral Option Strategies
3.40 When you are neutral on a stock, it means you are undecided about whether the
price is going to go up or down. We look at one of the more common strategies
called a straddle.
F1. Straddles
3.41 Suppose Steven expects a stock to have a big move, but he thinks that the move
can be in either direction. He simultaneously buys a call and buys a put at the same
strike price of $10 and expiration for S$1 each share. His total cash outlay is S$200
for a contract of 100 shares. This is called a bull straddle.
Scan the
QR code to Cash Profit when Profit when price Profit when
watch a Outlay price = S$6 = S$10 price = S$14
short video
explanation. (S$)
(S$) (%) (S$) (%) (S$) (%)
Long Call -100 -100 -100 -100 -100 300 300

Buy Put -100 300 300 -100 -100 -100 -100
Bull Straddle -200 200 100 -200 -100 200 100
3.42 If stock price falls to S$6 or it rises to S$14, the bull straddle earns him $200. In
fact, the larger the price movement, either up or down, the bigger will be the
profits. The greatest risk in this case is that the stock remains around S$10 where
both options expire worthless. His cost and maximum loss then will be S$200.
Figure 3.8: Profit / Risk Profile Of A Bull Straddle
Bull Straddle
15
-5 0 2 4 6 8 10 12 14 16 18 20
-15
3.43 In a bear straddle, you expect the opposite in that the market will not move much
in either direction. You simultaneously sell a call and sell a put at the same strike
(of $10) and expiration for S$1 each share. Your total cash receipt is S$200 for a
contract of 100 shares.
Cash Profit when Profit when price Profit when

Outlay price = S$6 = S$10 price = S$14
(S$)
Scan the (S$) (%) (S$) (%) (S$) (%)
QR code to
watch a Short Call 100 100 100 100 100 -300 -300
short video
explanation. Short Put 100 -300 -300 100 100 100 100
Bear Straddle 200 -200 -100 200 100 -200 -100
3.44 With a bull straddle, price volatility contributes positively to profits. It is the
opposite with a bear straddle – price volatility negatively affects profits. If stock
price falls to S$6 or it rises to S$14, the bear straddle brings you a S$200 loss. The
larger the price movement, either up or down, the bigger will be the losses. The
best situation is for price to not move at all. The bear straddle brings you the
largest profits when the stock price is around S$10. The maximum profit is S$200,
which is the cash inflow from selling the two options.
Figure 3.9: Profit / Risk Profile Of A Bear Straddle
Bear Straddle
15
-5 0 2 4 6 8 10 12 14 16 18 20
-15
G. Summary Of Options
3.45 The following table summarises options in terms of buyers / holders and sellers /
writers:
Buyer / Holder Seller / Writer

Buyer has the right to
Right or Seller has the obligation to
buy or sell – no
obligation buy or sell – no right to refuse
obligation
Obligation to sell / to go short
Call Right to buy / to go long
on exercise
Obligation to buy / to go long
Put Right to sell / to go short
on exercise
Premium Paid Received
OTC options strike price
are defined by OTC options strike price are
participants whereas defined by participants
Exercise Price exchange traded options whereas exchange traded
follow a standardised options follow a standardised
criteria for its exercise criteria for its exercise price
price
Max Potential
Cost of premium Unlimited
Loss
Max Potential
Unlimited Price of premium
Gain
4. SWAPS
4.1 A swap agreement is exactly what the name suggests, where two parties agree
to exchange cash flows at future dates. Nothing is bought or sold. If the cash
flows being exchanged are derived from financial instruments owned by either
party, there is no change in the ownership of these financial instruments.
4.2 The genesis of the swap market can be traced back to the 1970s, when foreign
exchange controls made it difficult for companies in one country to lend money
to an overseas subsidiary. A parallel loan structure was developed to circumvent
the problem, whereby two companies domiciled in different countries could
lend equivalent amounts to the other’s subsidiary.
4.3 In the early days of the swap market, banks acted as brokers in return for a fee.
They identified counterparties with offsetting needs and put them together. This
was an arduous process as finding offsetting counterparties was not
straightforward. Each transaction had to be carefully customised, and complex
documentation had to be prepared to each party’s satisfaction.
4.4 As the market evolved, banks started to “warehouse” positions by taking on one
side of a transaction in the hope that an offsetting transaction may be found
later.
4.5 In this section, we discuss five types of swap instruments:

 Interest Rate Swaps
 Currency Swaps
 Credit Default Swap (CDS)
 Equity Swaps
 Commodity Swaps
A. Interest Rate Swaps
4.6 The most common type of swap is a plain vanilla interest rate swap. It is the
exchange of the interest payments on a fixed rate loan to the payments on a
floating rate loan. Since an interest rate swap operates in the same currency,
cash flows occurring on same dates can be and are netted.
4.7 The reason for this exchange is to benefit from comparative advantage.
Company A may have greater comparative advantage in fixed rate markets to
raise funds, while Company B may have a comparative advantage in floating
rate markets. If each wishes to exploit its relative advantage, A may end up
Scan the borrowing fixed when it wants floating, and B borrowing floating when it wants
QR code to fixed. This is where a swap agreement can offer a solution to achieve their
watch a
short video desired outcomes. A swap agreement between the two companies has the effect
explanation. of transforming A’s fixed rate loan into a floating rate loan and B’s floating loan
into a fixed loan.
Example
Company A wishes to raise S$10 million. Assuming that A can borrow at

0.5% above LIBOR from a bank, or a 6% fixed rate loan. Company B
wishes to raise S$20 million. Assuming that B can borrow at 2% above
LIBOR from a bank, or at 6.75% fixed rate. In other words, A can borrow
1.5% cheaper than B in the floating rate market, but only 0.75% cheaper
than B in the fixed rate market.
A prefers a fixed rate loan, but wishes to explore its comparative

advantage in floating rate loan market. On the other hand, B prefers a
floating rate loan, and wishes to bring down the borrowing cost. Both A
and B benefit from a swap agreement.
Three-step Transactions:
(1) Company A borrows a Floating Rate Loan pays LIBOR + 0.5%.
(2) Company B borrows a Fixed Rate Loan, pays 6.75% fixed.
(3) Company A and B enter into swap agreement, whereby Company A
pays 5.75% fixed interest to Company B, and receives in return LIBOR
+0.75% floating interest on a specific notional principal amount
agreeable by both parties.
With the swap agreement, the final cost to Company A is a fixed rate 5.5%
(LIBOR + 0.5% to the bank, plus 5.75% to B, offset by the LIBOR + 0.75%
received from B), a savings of 0.5% as compared to the 6% fixed rate that it
would have incurred without the swap agreement. See below the cash flow
legs for A.
Receives LIBOR + 0.75% from B
Pays bank LIBOR + 0.5%
A
Pays 5.75% to B
The final cost to Company B is a floating rate LIBOR + 1.75% (6.75% paid on
the bond, plus LIBOR + 0.75% to A, offset by 5.75% received from A), a
savings of 0.25% as compared to LIBOR + 2% that it would have incurred
without the swap agreement. See below the cash flow legs for B
Pays LIBOR + 0.75% to A

Pays bank 6.75%
B
Receives 5.75% from A
4.8 Note that a swap agreement is based on a “notional” principal amount, used to
calculate the amount of interest payment to exchange between A and B. In this
case, the notional principal can be an amount between S$10 million to S$20
million, agreed upon by A and B.
B. Currency Swaps
4.9 With an interest rate swap, cash flows occurring on same dates are netted, only
the difference in cash flows changes hand. An interest rate swap involves only
the swapping of interest payments, and not the principal amount.
4.10 With a cross-currency swap, both the principal and interest payments are
exchanged without any netting, because the cash flows are in different
currencies, rendering netting impossible. Both principal and interest payments
are exchanged between two counterparties, at a rate agreed now, at a specified
point in the future.
4.11 Currency swaps are often used by companies that have loans denominated in
one currency, while revenues are denominated in another currency. Hence, it is
exposed to currency risk.
B1. Contrast With Futures And Forwards
4.12 The simplest currency swap structure is to exchange the principal only with the
counterparty. Such an agreement is in fact equivalent to a futures or forward
contract. A swap is more expensive than a futures or forwards for short-term
contracts, so it is rarely used. However, principal-only currency swaps are often
used as a cost-effective way to fix forward rates for longer-term futures where
the spreads are wider.
B2. Contrast With Currency Exchange
4.13 Currency swap is based on a rate agreed now, to be exchanged in the future.
The currency exchange is for an exchange of two currencies to take place now.
C. Credit Default Swap (CDS)
4.14 A CDS transfers the credit risk of a credit instrument, namely bond, note or loan,
to another party, in exchange for a series of fee payments. It is similar to
insurance because it provides the CDS buyer, who owns the underlying credit,
with protection against default, a credit rating downgrade, or other defined
"credit events".
4.15 Refer to Figure 3.10. Suppose Bank A made a 5-year loan to a borrower
(reference entity). Bank A now wishes to eliminate its exposure to the
borrower’s credit risk. This can be due to a variety of reasons: to reduce its
regulatory capital requirements; to reduce concentration of risk exposure to the
same borrower; or to reduce concentration of risk exposure to similar loan
portfolios.
4.16 Thus, Bank A (the protection buyer) enters into a CDS with Bank B (the
protection seller) based on the 5-year loan, and makes periodic premium
payments to Bank B. If the borrower (the reference entity) defaults or suffers any
of the predefined credit events, Bank B pays Bank A the par value of the loan.
4.17 It is important to note that the reference entity and the underlying credit
instrument are not parties to the CDS agreement. They are merely used as a
reference point. In fact, the CDS protection buyer need not even own the
underlying credit instrument.
Figure 3.10: Credit Default Swap
Bank A Bank B
Buys protection with

periodic payments
Payment upon default
5-year Interest &

loan loan
repayment CDS: Bank A
need not own
the loan to
effect the CDS
with Bank B.
Reference Entity
D. Equity Swaps
4.18 As with all swap agreements, an equity swap is an exchange of cash flows
between two parties. What distinguishes it from other swaps is that one set of
cash flow is equity-based, such as from a stock or from an equity index. The
other set of cash flow is often fixed income-based (either a fixed rate or floating
rate such as LIBOR), but can also be equity-based.
4.19 Equity swaps are used to substitute for a direct investment in stock markets, in
order to avoid transaction costs, to avoid local dividend tax, to avoid limitations
on leverage, or to get around rules governing the particular type of investment
that an institution or person can hold.
4.20 For example, let's say A wants to invest in stock X listed in Country C. However,
A is not allowed to invest in Country C due to capital control regulations. He can,
however, enter into a contract with B, who is a resident of C, whereby B will pay
A cash that is calculated based on a return of the shares of company X. In return,
A agrees to pay B a fixed (or floating) rate of return.
4.21 When effectively used, equity swaps can eliminate cross-border investment
barriers.
E. Commodity Swaps
4.22 A commodity swap is an agreement in which one set of payments is set by the
price of a commodity or by the price of a commodity index. The most common
examples of commodity swaps involve plain vanilla OTC agreements for a fixed-
for-floating exchange of risk in which no delivery of the physical commodity is
involved.
4.23 Commodity swaps are used by many consumers and producers of commodities
to hedge price rises over a long-term period. For example, bread makers hedge
grain prices, while shipping companies hedge fuel prices.
Example
Cost-Cutter Airlines (CCA) wishes to fix or set ticket prices for up to a year
forward being used to help to predict its future revenue. Suppose fuel prices
represent 30% of CCA’s operating costs, so any price fluctuations can
seriously affect its profits if ticket prices are fixed. How can CCA eliminate or
reduce this floating price risk besides imposing fuel surcharges?
There are a number of derivatives that CCA can use to hedge its risk such as
futures and options. However, an energy swap is the most likely instrument
as it provides a flexible, long-term OTC contract.
Airlines often enter into swap contracts of two years’ maturity involving
payment periods every six months where they either pay or receive a cash
amount as determined by the value of a specific Platts index oil price. The
swap contract relates to a specific amount of oil which the airline is either
contracted to take physical delivery of or is bought on the spot market.
By entering into an energy swap agreement, the airline effectively locks in

the price of its fuel for the two-year period.
5. CONTRACT FOR DIFFERENCES (CFD)
5.1 CFD is a contract between an investor and a CFD provider, usually a broker, that
allows investors to speculate on the price movements of an underlying security,
typically a stock, on margin.
5.2 The CFD provider quotes bid and offer prices based on current market price of
the underlying stock. CFD trades like a stock. Upon opening a position, the
investor puts up margin with the broker, and pays a commission based on the
total value of the contract. A financing charge is applicable each day that the
position is open. Interest adjustments on a short position can appear on the
investor’s account either as a debit or a credit, because the financing fee is
subtracted from, rather than added to, the interbank offered rate when
calculating interest adjustments. The profits and losses are settled when the
position is closed.
5.3 CFDs are similar to futures and options with one distinctive difference - CFDs do
not have expiry dates. A CFD is effectively renewed at the close of each trading
day and rolled forward if desired, providing that there is enough margin in the
account to support the position. The investor in a CFD can close the contract at
any time.
5.4 Similar to other derivative instruments, CFDs allow investors the flexibility to
trade on both the long and the short sides of the market. By taking a long
position, the investor receives dividends and pays interest; while by taking a
short position, the investor pays dividends and receives interest.
5.5 Compared to normal share trading, CFD is leveraged, and the loss can be greater
than the original margin amount.
Example
The share price of Apple Inc is US$194.38. An investor believes that the share
price will rise and decides to take a long CFD position. The CFD provider is
quoting US$194.34 bid and US$194.42 offer.
Step 1: Opening a Position
Buy 100 Apple CFDs at offer price. This is the
notional amount against which commission, 100 x US$194.42
margin requirement, profit and loss is = US$19,442.00
calculated.
Margin requirement is open position x
margin percentage. Typical margin for
equities is 5%-15%, depending on the US$19,442.00 x 0.05
liquidity of the underlying stock. In our = US$972.10
example, assume Apple CFDs require
margin of 5%.
Commission is 0.15%. US$19,442.00 x 0.0015
= US$29.16
Step 2: Overnight Financing
To hold this position, a financing charge is
made each night. This is normally based on
a benchmark rate per cent like (SIBOR + 0.0025+0.02
US$19,442.00 x
broker margin) / 365. For simplicity, we will 365
assume that the price of Apple shares will = US$1.20
stay the same until the market close and so,
no P&L was generated on this day.
Step 3: Closing This Position

The next day Apple share price has risen by
US$6.15, or 3.16%. The investor decides to
close the position and take profit.
CFD provider is quoting US$200.50 bid and
US$200.58 offer.
Sell 100 Apple CFDs at bid price. 100 x US$200.50
= US$20,050.00
The position is now closed, and the margin US$0.00
requirement is now zero.
The investor is charged commission of US$20,050.00 x 0.0015
0.15% on this transaction. = US$30.08
Gross profit is difference between the US$20,050.00 – US$19,442.00
opening position and the closing position. = US$608
The costs are commissions and overnight US$29.16 + US$30.08 +
financing. US$1.20
= US$60.44
Net profit after costs US$608.00 – US$60.44
= US$547.56
In summary, the investor had put up US$972.10 to cover the margin on this
trade and made a 56% gain of US$547.56 on a 3% rise in the Apple share
price. If the price of Apple shares had dropped by US$6.15 instead, he
would have sustained a 70% loss of US$681.59 (i.e. a loss of US$623 plus
costs of US$58.59) if he closes his position.
CHAPTER
20
UNDERSTANDING DERIVATIVES

Derivative contract A derivative contract is a delayed delivery agreement in which its value is
dependent upon or derived from other underlying assets.
Examples of underlying assets of a • Weather (such as the number of days in a month that temperature is
derivative contract above or below a certain level).
• Farm and agricultural outputs (such as soy bean, corn, pork belly).
• Metals (such as gold, aluminium, palladium).
• Energy (such as oil and gas).
• Financials - both physical (such as equity, bond, currency) and
intangible (such as equity index, bond index, interest rates).
• Digital - Cryptocurrencies, Non-fungible Tokens (NFT) and Central Bank
Digital Currencies (CBDCs)
Uses of derivative contracts • Useful hedging tools.
• Directional bets of the price movement of the underlying.
• Risk management tools.
Futures and forwards Futures and forwards are contracts giving the obligation to buy (a “call”
contract) or sell (a “put“ contract) the underlying assets:
• in specified quantity;
• at a specified price (the “delivery price” or “future price”); and
• on a specified future date (the “delivery date” or “settlement date”).
Pricing of forward contracts • Forward price = spot or cash price + cost of carry. Difference between
the spot and the forward price is often referred to as the premium or
discount. That is, the cost of carry is referred to as a premium when it
is positive; is referred to as a discount when it is negative.
MAIN DIFFERENCES BETWEEN FUTURES AND FORWARDS
FUTURES FORWARDS
• Standardised contracts traded • Non-standardised contracts traded over the counter (OTC) between
on exchanges. two parties.
• Subject to margin • Not subject to margin requirements.
requirements. • Settlement of gains / losses only occurs on delivery date.
• There are partial settlements However, since forward contracts are non-standard, features such as
of emerging gains / losses mark-to-market and daily margining may be negotiated into specific
through daily mark-to-market contracts.
process.
8
EXAMPLES OF COMMODITY AND FINANCIAL FUTURES
COMMODITY FINANCIAL FUTURES

Metals – base, precious Interest rates.
Grains and oilseeds – grain, Bond prices.
livestock, oilseeds, fibres
Softs – coffee, cocoa, sugar Currency exchange rates.
Energy – crude oil, gas, oil Equity stock indices.
products

Contango When the futures price is higher than the spot price.
Backwardation When the futures price is lower than the spot price.
Basis Difference between the spot price and the future price.
Initial margin Initial cash outlay.
“Margin call” When the account is below a “maintenance margin” level.
“Variation margin” Additional amount required to restore the account to the initial margin.
MAIN MARKET PARTICIPANTS
WHO REASON FOR BUYING REASON FOR SELLING

Hedgers To lock in a price and obtain To lock in a price and obtain
protection from rising prices. protection from falling
prices.
Speculators To profit from rising prices. To profit from falling prices.

Hedgers Hedgers are typically producers and consumers of the commodity. Buyers
are thus able to protect themselves against higher prices, and sellers are
able to hedge against lower prices.
Speculators Speculators are investors who buy to profit from a price increase or sell to
profit from a price decrease.
Short hedging with futures • A short hedge means to go into a short position to protect an existing
portfolio of stocks.
• In case the market falls, any losses on his portfolio holdings will be
partially offset by the gains from the short futures position. If the
market rises, he loses from the futures position, but gains from the
rise in the portfolio’s value.
Long hedging with stock index Lock in today’s prices to take advantage of the rise in prices if it does
futures occur.
Options and warrants Both give the right to buy (“call” contract) or sell (“put” contract) the
underlying security:
• in specified quantity;
• at a specified price (called the “exercise price”, or “strike price”); and
• on or before a specified date (called the “expiry date”).
Grants the right, but not the obligation.
European style option / warrant A European style option / warrant is a contract that may only be exercised
on expiration.
American style option / warrant An American style option / warrant is a contract that may be exercised on
any trading day on or before the expiry date.
9
INTRINSIC VALUE OF AN OPTION / WARRANT
PUT
CALL (RIGHT TO BUY) INTRINSIC VALUE
(RIGHT TO SELL)
“in-the- money” Strike price is less than market Strike price is more than market Positive value.
price. price.
“at-the money” Strike price is equal to market Strike price is equal to market No value.
price. price.
“out-of-the Strike price is more than market Strike price is less than market No value.
money” price. price.
Plain vanilla option “Plain vanilla option” refers to option with predetermined underlying assets, a
stated strike price, a known expiry date, without special conditions on any of the
option parameters. The value of option is based on a number of factors as follows:
• current spot price of the underlying asset;
• exercise price;
• time until expiry;
• interest rate;
• volatility of the underlying; and
• dividend rate on the underlying.
“Exotic option” “Exotic option”, by contrast, has conditions on any of its parameters. For example,
the payoff under an Asian option is based on the average price of the underlying
assets over a preset period.
Examples of exotic options • Asian option.
• Forward-start option.
• Compound option.
• Chooser option.
• Barrier option.
• Binary option.
• Rainbow option.
• Swaption.
Asian option The payoff is determined by the average price of the underlying assets over a
preset period of time.
Forward-start option The option only comes into effect at a future date.
Compound option As settlement is at expiry, the option-holder receives another option.
Chooser option The investor chooses whether the option will become a call or a put by a specified
choice date.
Barrier option This is the option used in the barrier certificates.
• Up-and-out.
• Down-and-out.
• Up-and-in.
• Down-and-in.
Binary option This option pays off either nothing or a predetermined amount.
Rainbow option The payoff of rainbow options depends on the best or the worst of the risky assets.
For example, best of x number of risky assets, or the worst of, or the maximum of,
or the minimum of.
Swaption This is an option giving the right to enter into an underlying swap agreement.
Bermuda Options Holder of Bermuda options can exercise its options at pre-set dates including of
course the expiration date. It is a hybrid between European options and American
options
Lookback options Holders of lookback options do not have an exercise price at the time of purchasing
the option. Instead, he can choose the most favourable price of the underlying
assets over the duration of the option contract.
10
Extendible options This option enables either the buyer or seller of the options to extend the maturity
date of the option by a specified period of time, at their discretion. Hence, it may
come in the form of holder-extendible option in which case the holder has the right
to extend the maturity date, or a writer-extendible option in which case the seller
possesses the right to extend the maturity date of the option.
Shout options The holder has the right to lock in a certain amount of profit when the option
is in-the-money before it expires. Having done that, the holder can continue to
participate in the upside potential in the remaining duration to maturity.
Basic option trading • Bullish Option Strategies
strategies  Long calls;
 Covered calls;
 Protective puts; and
 Selling naked puts.
• Bearish Option Strategies
 Long puts; and
 Naked calls.
• Neutral Option Strategies
 Bear straddles; and
 Bull straddles.
Long calls • Buys only a call option.
• Combination of leverage, limited downside and unlimited upside potential.
Covered calls • A covered call is a conservative strategy where one writes (i.e. sells) call options
on stock already owned (note that we are not newly buying stock).
• Investors write covered calls because they are bullish on the stock that they
own and would like to keep the stock for returns in the long term, but they feel
that the potential of the stock going up is not promising in the near term.
Protective puts • A protective put strategy calls for buying a put on stock that one has already
owned.
• Protective put benefits investors who are mainly bullish about the stock, but
nevertheless want downside protection.
Selling naked puts • Limited profit when the stock goes up and still exposed to great risk when the
stock price goes down.
• When investors wish to own a stock at a discount relative to its current price.
Long puts • Buys only a put option.
• Combination of leverage, limited downside and unlimited upside potential.
Naked calls • Naked call seller is completely exposed to downside risk when the stock price
goes up.
• Downside unlimited, the upside is limited to the premium received.
Bear straddle • Expect the opposite in that the market will not move much in either direction.
• Simultaneously sell a call and sell a put at the same strike and expiration.
• Best situation is for price to not move at all.
Bull straddle • Opposite with a bear straddle.
• Larger the price movement, either up or down, the bigger will be the profits.
SUMMARY OF OPTIONS
BUYER / HOLDER SELLER / WRITER

Right or obligation Buyer has the right to buy or sell – no Seller has the obligation to buy or sell – no
obligation. right to refuse.
Call Right to buy / to go long. Obligation to sell / to go short on exercise.
Put Right to sell / to go short. Obligation to buy / to go long on exercise.
Premium Paid. Received.
Exercise Price OTC options strike price are defined by OTC options strike price are defined by
participants whereas exchange traded participants whereas exchange traded
options follow a standardised criteria for options follow a standardised criteria for its
its exercise price. exercise price.
Max Potential Loss Cost of premium. Unlimited.
Max Potential Gain Unlimited. Price of premium.
11
Swaps A swap agreement is exactly what the name suggests, where two parties
agree to exchange cash flows at future dates.
Five types of swap instruments • Interest rate swaps.
• Currency swaps.
• Credit default swap (CDS).
• Equity swaps.
• Commodity swaps.
Interest rate swaps • It is the exchange of the interest payments on a fixed rate loan to the
payments on a floating rate loan.
• Since an interest rate swap operates in the same currency, cash flows
occurring on same dates can be and are netted.
Currency swaps • Both principal and interest payments are exchanged between two
counterparties, at a rate agreed now, at a specified point in the future.
• With a cross-currency swap, both the principal and interest payments are
exchanged without any netting, because the cash flows are in different
currencies, rendering netting impossible.
Credit default swap (CDS) A CDS transfers the credit risk of a credit instrument, namely bond, note or
loan, to another party, in exchange for a series of fee payments. It is similar to
insurance because it provides the CDS buyer, who owns the underlying credit,
with protection against default, a credit rating downgrade, or other defined
“credit events”.
Equity swaps One set of cash flow is equity-based, such as from a stock or from an equity
index. The other set of cash flow is often fixed income-based (either a fixed
rate or floating rate such as LIBOR), but can also be equity-based.
Commodity swaps A commodity swap is an agreement in which one set of payments is set by the
price of a commodity or by the price of a commodity index.
Contract for differences (CFD) • CFD is a contract between an investor and a CFD provider, usually a
broker, that allows investors to speculate on the price movements of an
underlying security, typically a stock, on margin.
• No expiry dates, provided that there is enough margin in the account to
support the position.
• Allow investors the flexibility to trade on both the long and the short sides
of the market. By taking a long position, the investor receives dividends
and pays interest; while by taking a short position, the investor pays
dividends and receives interest.
12
Part II Chapter 21. Introduction To Structured ILPS
PART II CHAPTER 21
INTRODUCTION TO STRUCTURED ILPS
CHAPTER OUTLINE
1. What Is A Structured ILP?

2. Advantages And Disadvantages Of Structured ILPs
3. Who Would Invest In Structured ILPs?
4. When Are Structured ILPs Unsuitable?
5. Governance
6. Typical Types Of Documentation And Risks
7. After Sales
Appendix 21A: Sample Benefit Illustration 1
LEARNING OUTCOMES

 know what a structured ILP is
 explain advantages and disadvantages of investing in a structured ILP
 identify the investors who are and who are not suitable for investing in structured ILPs
 understand the governance structure of structured ILPs
 list the documentation, risks and after sales actions associated when investing in
structured ILPs
CONTENTS
CHAPTER OUTLINE .............................................................................................................. 1
1. WHAT IS A STRUCTURED ILP? .................................................................................... 4
A. Payout Under A Structured ILP ............................................................................. 6
B. Common Terminology........................................................................................... 6
2. ADVANTAGES AND DISADVANTAGES OF STRUCTURED ILPS ............................... 8
A. Advantages Of Investing In Structured ILPs ......................................................... 8
A1. Professional Management ............................................................................. 8
A2. Portfolio Diversification .................................................................................. 8
A3. Access To Bulky Investments ......................................................................... 9
A4. Economies Of Scale ........................................................................................ 9
B. Disadvantages Of Investing In Structured ILPs .................................................... 9
B1. Fees And Charges ........................................................................................... 9
B2. Loss Of Investment Control.......................................................................... 10
B3. Opportunity Cost........................................................................................... 10
C. Risk Considerations For Structured ILPs............................................................. 11
C1. Counterparty Risk ......................................................................................... 11
C2. Liquidity Risk ................................................................................................. 11
D. Examples Of Structured ILPs ............................................................................... 12
D1. A Product Providing Regular Payments ...................................................... 12
D2. A Product Linked To Index Return ............................................................... 12
D3. A Product With Capital Appreciation Potential ........................................... 13
3. WHO WOULD INVEST IN STRUCTURED ILPS? ........................................................ 14
4. WHEN ARE STRUCTURED ILPS UNSUITABLE? ....................................................... 14
5. GOVERNANCE ............................................................................................................ 14
A. Legal Structure Of ILP .......................................................................................... 15
B. Investment Guidelines For Retail Funds ............................................................. 15
B1. Liquidity Risk ................................................................................................. 15
B2. Concentration Risk ........................................................................................ 15
B3. Credit Risk ..................................................................................................... 16
B4. Counterparty Risk ......................................................................................... 16
B5. Financial Derivatives..................................................................................... 17
B6. Other Restrictions ......................................................................................... 17
6. TYPICAL TYPES OF DOCUMENTATION AND RISKS ................................................ 17
A. Point-of-sale Disclosure: Product Summary, Benefit Illustration And Product
Highlights Sheet ................................................................................................... 17
A1. Product Summary ......................................................................................... 17
A2. Benefit Illustration......................................................................................... 19
A3. Product Highlights Sheet (PHS) ................................................................... 19
B. Disclosure At Policy Inception: Policy Document............................................... 20
B1. Fees And Charges ......................................................................................... 20

B2. Subscription And Redemption Of Units ...................................................... 21
B3. Switching Of Sub-funds ............................................................................... 21
B4. Suspension Of Dealings ............................................................................... 21
C. After Sales Disclosure: Policy Statements And Fund Reports........................... 22
D. Risk Considerations ............................................................................................. 23
7. AFTER SALES .............................................................................................................. 23
A. Valuation .............................................................................................................. 23
B. Pricing Information .............................................................................................. 24
Appendix 21A ………………………………………………………………………………..25
For Information Only .................................................................................................. 25
1. WHAT IS A STRUCTURED ILP?
1.1 As mentioned in an earlier chapter, life insurance is one of the possible wrappers
for structured products.
1.2 A typical life insurance policy has a protection element and a savings / investment
element. Part of the insurance premium is used to provide protection against death
or other misfortunes, such as disability or terminal illnesses. The balance of the
premium is invested, to be paid out upon policy maturity, early termination of
policy, or other occasions according to policy terms and conditions.
1.3 Traditionally, the life insurer invests the premiums collected from all policies in
common funds 1. The investment of insurance funds is at the insurer’s discretion,
subject to stated investment objectives, and regulatory solvency requirements.
Unlike unit trusts, there are no units allocated to each policy based on premiums
received. To maintain equity among policy owners, the insurer may earmark
portions of the fund to support blocks of policies, and credit investment returns
accordingly.
1.4 Participating or par life insurance policies provide both guaranteed and non-
guaranteed benefits. While the guaranteed benefits are based on the contractual
terms, regardless of the experience of the common par fund, non-guaranteed
benefits may change from year to year depending on the performance 2 of the par
fund. Insurers typically “smooth” the investment experience of the common fund
to avoid wide year-on-year fluctuation in the non-guaranteed benefits, meaning
the non-guaranteed benefits do not necessarily follow the bulls and bears of the
investment markets. Insurers do not fully adjust the investment gains in good
years, by reserving some of the gains to make up for the losses when markets
perform adversely, so that policy owners still enjoy some returns in the years of
poor investment experience. While this smoothing process maintain certain
degree of stability in the non-guaranteed benefits, it means that. policy owners
may not receive the full upside (or downside) of the investment returns on his
money, depending partly on the timing of his exit from the policy.
1.5 ILPs were introduced in Singapore in early 1990s, which adopted a different
approach to investment as compared to traditional par life policies. An ILP allows
the policy owner to direct how his premiums are invested by choosing to invest in
a number of investment funds, called the ILP sub-funds. ILP policy owners buy and
sell units in these sub-funds just as they would for unit trusts.
1.6 An ILP essentially combines a term insurance and unit trust investments in one
product. The most significant difference between an ILP and a traditional life
insurance is that the ILP policy owner bears the full investment gains and losses.
1
Separate funds are maintained based on the nature of policies issued. An insurer must maintain separate
funds for participating (par) policies, non-participating (non-par) policies, and Investment-linked Life
policies (ILPs).
2
Performance of the fund refers to the actual experience of the fund relative to the pricing assumptions, in
the areas of investment, mortality rate and expenses. Although investment experience forms the bulk of
the performance, it is not the only factor affecting the fund’s performance.
There is no smoothing of returns. If the investment experience is bad, an ILP policy

owner may even lose part or all of his principal.
Figure 4.1: Working Of ILP

Insurance Premium
Part of the premiums

is used to buy term
insurance to provide
protection.
Balance of the premiums

is invested into ILP sub-
funds as selected by the
policy owners.
Term
Insurance
ILP sub-funds
+
Unit Trust
1.7 A “structured ILP” is typically a single premium 3 ILP where the sub-funds are
invested in structured products or other structured funds. In this context,
structured products are products tailor-made for an ILP sub-fund, such that the
issuer(s) of the securities and / or instruments, or an entity other than the issuer(s),
will stand ready to unwind the products at prevailing market prices, so as to enable
the ILP sub-fund to meet redemption on each dealing day 4. A structured ILP shares
the common characteristics as other structured products: it is purchased with a
single payment; has a fixed policy term or maturity date; usually has complex
structures; and is exposed to counterparty, credit default, market, foreign currency,
liquidity, and other risks.
1.8 ILPs are investment products, subject to similar rules as applied to unit trusts.
Nonetheless, because they are life insurance policies, only a life insurer may issue
ILPs, and the terminology follows that for insurance products. The investments are
called premiums; the investment contract is called a policy; and the redemption
value available under the policy is called cash value.
3
In theory, a structured ILP can be issued as either a single premium or a regular premium policy. However,
in practice, structured ILPs are more likely to be single premium products, with the primary goal to maximise
investment returns. This is because the cost structure of single premium products is more conducive to that
goal.
4 Defined in Notice No: MAS 307.
A. Payout Under A Structured ILP
1.9 There are several ways for payments to be made under a structured ILP to the
policy owner:
(a) Death Benefits: Should the policy owner die while the policy is still in force,
the higher of:
Scan the
QR code to  the sum assured from the term insurance; or
watch a  the cash value of the policy;
short video
explanatio  or a combination of the above two depending on the policy terms
n
is paid to the designated beneficiary. Once the death benefit is paid, the policy
is terminated, and no further payment will be made.
(b) Maturity / Survival Benefits: Should the policy owner survive to maturity date,
the term insurance expires and the maturity value of the policy is paid to the
policy owner.
There are products designed to provide regular payments throughout the term
of the policy, similar to coupon payments on bonds. The amount of payment
may fluctuate based on market conditions.
(c) Other structures are possible, depending on the design of the products.
1.10 Structured ILPs are designed as investment products. As such, the protection
element is typically very low, so that more premiums are channelled into
investments. The death benefit under a structured ILP could be as low as 101% of
single premium. That is, should the policy owner die during the term of the policy,
the designated beneficiary would receive S$101,000 for a policy with a single
premium of S$100,000, or the cash value of the policy if it is higher than S$101,000.
1.11 Depending on the practice of the insurer, the cost of term insurance may be
charged in one lump sum at the inception of the policy, or charged periodically
together with other investment and administrative expenses.
B. Common Terminology
1.12 The common terms used in the life insurance industry include:
Single The one-time upfront payment which the policy owner pays
premium for the policy. It represents his principal sum of investment in
the policy.
Regular Periodic premium payments (monthly, quarterly, half-yearly
premium or yearly).
Policy owner Owner of the policy who is also the investor.
Sum assured The guaranteed amount of death benefit payable.
Cash value Amount which the policy owner receives if he terminates the
policy. Also called surrender value. It is the market value of
units in ILP sub-funds.
Benefit A year-by-year illustration of the benefits and values of the

illustration insurance policy, both guaranteed and non-guaranteed, and
the costs and charges associated with the policy, including
distribution costs, and the charges for insurance coverage.
Subscription The purchase of units in ILP sub-funds.
Redemption The return of units in ILP sub-funds for cash.
Bid price Price at which units are redeemed.
Offer price Price at which units are subscribed.
Bid / offer Difference between the bid and offer prices, usually in the
spread range of 3% to 5%. This is the insurer’s fees for operating the
sub-funds. This is separate from the investment management
fees which are charged directly to the sub-funds monthly or
quarterly, based on the assets under management (AUM) by
the investment managers. The insurer may manage the sub-
funds in-house, or outsource the investment management to
third-party managers.
Forward Subscription and redemption of units are based on bid and
pricing offer prices as determined on the next asset valuation date.
This is in contrast with historic pricing, which uses bid and
offer prices determined on the last asset valuation date.
Net asset Total value of fund assets, less total liabilities (NAV) excluding
value policy owners’ interest if this is classified as a liability).
Both assets and liabilities are valued in accordance with the

insurance regulations and other applicable regulatory
requirements.
Switching of The transfer of units in one sub-fund to another.
funds
Expense ratio The ratio of the sub-fund's operating expenses to the daily
average NAV. For Singapore domiciled funds, the calculation
of expense ratio should follow guidelines as issued by the
Investment Management Association of Singapore (IMAS).
Operating expenses include investment management fees,

trustee’s fees, administrative and custodial expenses, taxes,
legal fees, and auditing fees. Trading expenses related to the
buying and selling of fund assets are not included in the
calculation of expense ratio.
Initial sales charges and redemption fees, if any, are paid

directly by investors and, therefore, not included in expense
ratio. Also, any foreign exchange gains or losses of the fund
are not included in the calculation.
Turnover The number of times that a dollar of assets is reinvested in a
ratio given year. It is calculated based on the lesser of purchases or
sales of underlying investments of a fund expressed as a
percentage of daily NAV averaged over the same period used
for calculating expense ratio.
Trading incurs transaction costs. Therefore, the higher the

turnover, the higher will be the transaction cost, which
reduces the fund returns.
For example, a stock index fund typically has a low turnover

ratio, but an equity fund typically has high turnover,
because active trading is an inherent nature of equity
investments. An aggressive small-cap growth stock fund will
generally experience higher turnover than a large-cap value
stock fund.
Soft dollar This refers to arrangements under which products or services,
other than the execution of securities transactions, are
obtained from or through a broker in exchange for the
direction by the manager of transactions to the broker. Soft
dollars include research and advisory services, economic and
political analyses, portfolio analyses, market analyses, data
and quotation services, and computer hardware and software
used for and / or in support of the investment process of
managers.(as per MAS Notice 307)
2. ADVANTAGES AND DISADVANTAGES OF STRUCTURED ILPs
A. Advantages Of Investing In Structured ILPs
2.1 Individual investors typically do not have the knowledge, resources or time to
perform adequate analysis of investment opportunities. Nor do they typically have
large amount of funds to implement sufficient portfolio risk diversification. Thus,
a pooled-investment vehicle such as ILP offers the average investors the
advantages as mentioned below.
A1. Professional Management
2.2 Individual investors may not have the necessary knowledge and experience to
invest in sophisticated instruments, such as derivatives or structured products
based on derivatives. By investing in a structured ILP, the individual gains access
to products designed and managed by investment professionals, with specified
risk / return characteristics. The individual does not need to understand the
mechanics behind the actual execution of the investment to enjoy the investment
outcome. Although the product is managed by professional fund experts, a
potential investor/client will typically undergo an individual risk profiling with his
insurer (through a financial consultant) before he undertakes any investment
linked products to ensure that the products are suitable for him . An investor
should choose the sub-funds with the risk rating that he is comfortable.
A2. Portfolio Diversification
2.3 Diversification means investing in different assets within an asset class, and also
in different asset classes. Simply put, diversification means “don’t put all your
eggs in one basket”.
2.4 Because asset prices do not move in synchrony, the downward movement in one
asset may be offset by the upward movement in another. Hence, a diversified
portfolio is less risky and less volatile. However, it requires a large portfolio to
achieve effective diversification, often beyond the means of individual investors.
An ILP sub-fund allows individuals the means to diversify through the pooled
investment mechanism.
2.5 It should be noted that not all ILP sub-funds are diversified. There are special
purpose sub-funds that are highly concentrated in one asset class or a few entities.
A3. Access To Bulky Investments
2.6 Some investments are issued in large sizes. For example, corporate bonds are
issued in millions of dollars. Individually, investors will not have the financial
means to tap such bulky investments. Collectively through an ILP, they can access
these opportunities on par with other institutional investors.
A4. Economies Of Scale
2.7 Transaction costs are typically scaled: the larger the size of the transaction, the
lower will be the per-unit cost. An ILP sub-fund may take advantage of its buying
and selling size, and thereby reduce transaction costs for its investors.
B. Disadvantages Of Investing In Structured ILPs
2.8 Structured ILPs share some common drawbacks with conventional ILPs, as
highlighted below.
B1. Fees And Charges
2.9 An ILP has several layers of expenses.

 Front-end sales charge, typically 5% for single premium, and can be as high as
50% to 80% of first year premium for regular premium policies.
 Annual fund management fee, based on the size of the fund and asset types,
typically 1% to 2% for equities, and 0.5% to 1% for fixed incomes. A general rule
is that the asset classes requiring greater fund manager’s attention command a
higher level of fees.
 Bid / offer spread or withdrawal fees / surrender charge is in the range of 3% to

5%. An ILP sub-fund may adopt either single or dual pricing. In a dual pricing
structure, the policy owner purchases units in the fund at the “offer price” when
he makes an investment in the fund. He sells units in the fund at the “bid price”
when he liquidates all or part of his investments. The spread between the bid
and offer price is the margin to cover the insurer’s cost and profits. In a single
pricing structure, the bid and offer prices are the same. To cover its costs, the
insurer may charge a specific redemption (or surrender) charge.
 Cost of death benefit, and other charges for administering the fund, such as
audit fees, custodian fees, cost of preparing reports, administering fund
switching, etc.
2.10 Compared to unit trusts, the ILP has the added cost of death benefit, which affects
investment performance. Increasingly, structured ILPs are designed with very little
death benefit, to maximise the investment content of these policies.
2.11 An insurer may choose to invest ILP sub-funds in other unit trusts, particularly for
specialty investment areas, where the insurer does not have the expertise. This
results in an extra layer of fees and expenses for policy owners, as compared to a
direct investment in these unit trusts by the policy owners. Offsetting somewhat
the added cost is the insurer’s ability to negotiate lower upfront distribution
charges levied by the external unit trusts due to its larger buying power.
2.12 It takes time for the ILP sub-fund’s investment experience to compensate the
expenses charged. For example, total expenses for the first year can be as high as
8% of single premium, not counting surrender charges. The ILP sub-fund needs to
earn 8% in the first year just to break even for the policy owner. Regular premium
policies may not have any surrender value in the first three years because of high
front-end costs. For this reason, an ILP is not a suitable short-term investment
instrument. An investor needs to have a medium to long-term time horizon when
considering investing in an ILP, to allow investment performance to make up for
expenses.
B2. Loss Of Investment Control
2.13 The flip side of enjoying professional management expertise is the loss of
investment decisions by individual policy owners. So long as the fund manager
invests in accordance to the investment mandate, there is little that a policy owner
can do if he disagrees with the investment decisions, except to divest from the
fund which, if allowed at all, may be costly depending on market conditions and
policy terms. While some funds provide up to one free fund-switch per year,
frequent fund-switching may compromise investment objectives and time horizon
and, therefore, is not advisable. Moreover, frequent fund-switching may result in
fund managers imposing switching fees.
2.14 Keep in mind that fund managers are investment professionals. They are more
likely to make the right investment decision than individual investors. Nonetheless,
an ILP is not the right investment vehicle for investors who prefer to make
investment decisions themselves.
B3. Opportunity Cost
2.15 Opportunity cost means that, by putting money into an ILP, an investor loses the
opportunity to invest it elsewhere. Of course, there is no guarantee that putting
money elsewhere will yield better returns.
2.16 Another source of opportunity cost is from the diversification of the fund. The very
nature of diversification (offsetting gains and losses to reduce risk) means that the
good performance of a single security or a single asset class is dragged down by

others in the same portfolio.
C. Risk Considerations For Structured ILPs
2.17 In addition to the advantages and disadvantages of investing in ILPs in general, an

investor considering structured ILPs should also consider the risks of investing in
structured products, in particular:
C1. Counterparty Risk
2.18 Investors in a structured ILP are typically exposed to credit risk associated with the
counterparty issuing the derivative contracts. A structured ILP would suffer
significant losses should the counterparty be unable to fulfil the terms of the
contracts, which could be payment of cash, or delivery of securities, or providing
a guarantee.
2.19 A counterparty may experience adverse changes in its financial condition which
may not yet affect its ability to fulfil its terms of contracts. However, any resulting
downgrade in its credit rating may in turn lead to greater volatility in the price of
the security that it underwrites and, in turn, the net asset value of the ILP sub-fund.
2.20 Furthermore, the international investment banking community has become highly
inter-related. If one counterparty that issues a derivative contract defaults, it may
have a domino effect on other counterparties. Hence, investors in a structured ILP
may suffer a greater loss than they expect from the default of a single counterparty,
if other counterparties become embroiled in the credit crunch.
C2. Liquidity Risk
2.21 Derivative contracts are difficult to price and affix a market value to. Therefore,
typically, structured ILP sub-funds are valued on regular dealing day, (at least once
a month) as compared to other ILP sub-funds, which are valued daily. An investor
in a structured ILP may not be able to immediately redeem his units, when he
Scan the QR wishes to do so. However, insurers are obliged to disclose the frequency of
code to watch a
short video redemption, and the period within which redemption proceeds shall be paid to
explanation investors.
2.22 Furthermore, the size of a structured ILP sub-fund is usually smaller. Therefore,
redemptions represent a higher proportion of a structured ILP fund than they do
in a traditional ILP fund. For example, a total pending redemption of S$1 million is
10% of a S$10 million fund, but is only 1% of a S$100 million fund. While the S$100
million fund may have no difficulty in meeting the redemption requests, the S$10
million fund may find it necessary to limit the size of redemption to protect the
fund, and the remaining investors. As a result, it is common for a fund to cap the
size of unit redemption on a single day (such as 10% of total units outstanding),
restricting investor’s liquidity. When the redemption limit is reached for a
particular day, investors wishing to redeem on that day can only redeem a pro-
rated number of units. Also, early redemption may lead to a loss of certain
guarantee features, such as those for capital guaranteed funds.
D. Examples Of Structured ILPs
2.23 A great variety of structured ILPs can be designed to suit investor needs. Some
examples are mentioned below.
D1. A Product Providing Regular Payments
2.24 This is designed to provide regular payouts (such as quarterly or yearly), and a
repayment of capital upon maturity. A small amount of life insurance is added to
complete the wrapper.
2.25 However, neither the regular payments nor the principal repayments are
guaranteed. The underlying assets (derivatives or a combination of fixed income
and derivative instruments) aim to provide a cash flow to match the intended
payments. The actual delivery of the targeted cash flow depends on the underlying
assets’ performance. The insurer is not obligated to step in and make good the
intended payments should the underlying assets fail to deliver.
An example:
The Fund objective is to seek to provide policy owners with:

(i) Annual payouts of 3.50% of the Initial Unit Price per unit held by each
policy owner as at each policy anniversary; and
(ii) 100% capital guarantee on maturity.
2.26 The description may be similar to that of an ordinary bond, but the risk profile is
completely different. For an ordinary bond, the bond-issuer has an obligation to
pay the stated coupons and the principal on maturity. Failing to do so is considered
a default on financial obligation. In contrast for a structured ILP, the insurer need
not pay the regular payments at the stated level, nor the principal repayments at
maturity, if the investment experience cannot support such payments. The product
is merely structured to “seek to provide” the targeted level of returns. The insurer
does not guarantee the investment returns apart from the capital preservation.
D2. A Product Linked To Index Return
2.27 This product uses derivatives to track the performance of a selected index, and
fixed income instruments may be used to provide full or partial protection of
downside. The index may be a widely used market index (such as STI or S&P500),
or a customised basket of stocks (e.g. selected blue chips to inspire investor
Scan the QR confidence). The tracking of the index may be in the same or the opposite direction
code to watch of the movements of the index, and may be in multiple times of the index
a short video
explanation movements.
An example:
The fund seeks daily investment results, before fees and expenses, that
correspond to twice the inverse of the daily performance of the NASDAQ-100
index.
2.28 This fund uses short-selling and derivatives to track the opposite (i.e. inverse)
performance of the NASDAQ-100 index. This fund also uses leveraging techniques
to achieve multiples (two times in this case) of the movement of the underlying
index. If the NASDAQ-100 index declines by 2%, the fund is designed to go up by
4%. Keep in mind that such a leveraged fund creates multiple negative returns as
well, when the underlying index moves in the opposite direction than anticipated.
2.29 A leveraged fund, such as this example, is designed to create the leveraged effect
on a daily basis, which may differ on a cumulative basis, as illustrated below.
Underlying Index The 2x Inverse Fund

Index Daily % Fund Price Daily %
Level Movement (S$) Movement
Day 1 100 -- 100.0 --
Day 2 98 -2.00% 104.0 +4.00%
Day 3 102 +4.08% 95.51 -8.16%
2.30 When the index falls 2% (from 100 to 98) on day two, the 2x inverse fund rises 4%
(from 100 to 104). When the index rises 4.08% (from 98 to 102) on day 3, the
leveraged inverse fund correspondingly falls 8.16% (from 104 to 95.5). This is the
way a leveraged fund is designed: to track the daily movement of the underlying
index.
2.31 After two days, the underlying index has a cumulative return of 2% (from 100 to
102), but the leveraged inverse fund has a cumulative loss 4.49% (from 100 to
95.51), not 4%. Hence, this illustrates that the accumulation of daily movements
(regardless of direction or multiples) over a time period is not the same as the
cumulative movements over the same period. The higher the multiples, the higher
will be the “distortion”.
D3. A Product With Capital Appreciation Potential
2.32 This structured ILPs’ aim is to maximise capital appreciation potential, with less
focus on the safety of principal. One such product has the following stated
investment objective:
“The Fund aims to provide long-term capital appreciation and to achieve

the best possible result.
The Fund was invested as of 30 April 2010 in:

 Synthetic zero coupon bond, 85%, and
 International Derivatives Fund, 15%.”
2.33 Unlike the regular payment or indexed return products, these products are not
designed to preserve capital, or measured against any performance benchmark. In
this particular example, while the use of synthetic zero coupon bonds offer a
certain degree of protection, synthetic bonds are riskier than traditional bonds
given the use of derivatives and possibly OTC counterparty risk. Its use does not
detract from the fund’s main objective to maximise capital appreciation.
3. WHO WOULD INVEST IN STRUCTURED ILPs?
3.1 Structured ILPs are useful to investors who are seeking capital appreciation with a
medium to high tolerance for some losses on capital. They are also suitable for
investors who are interested in specialty investment areas (such as hedge funds
and private equity), but do not have sufficient experience, knowledge, resources
or access, to invest in such niche areas on their own. In deciding whether
structured ILPs are suitable, the investors should weigh the additional costs and
risks against the benefits.
3.2 An ILP has similar characteristics to a CIS. The decision to buy a structured ILP or
a structured fund, or any other CIS with similar investment strategy is also
influenced by non-investment factors, such as the relationship with the sales
representative, and the level of trust a client has on the advice of his/her advisor
which in turn translated to the type of products he / she may buy.
4. WHEN ARE STRUCTURED ILPs UNSUITABLE?
4.1 Structured products are more complex than the traditional investment
instruments, such as stocks and bonds. The more complex the product, the more
difficult it is for the investor to understand how the product behaves under
different market conditions. An investor who does not understand the features of
a structured ILP, including the maximum possible loss, should either not invest in
it, or invest in a smaller amount to minimise his exposure.
4.2 An investor with a low risk tolerance should consider carefully before investing in
a structured ILP, as it often carry a higher degree of risk as compared to the
traditional investments. There are structured products designed to resemble
bonds, with regular “coupon” payments and repayment of “par” value at maturity,
or to resemble equity investments with return linked to market performances.
However, the risk profiles may be substantially different from that of bonds and
shares, as described in previous chapters. Structured ILPs may not be suitable for
investors who do not understand the features of the product, in particular those
who do not fully understand the “risk and return” trade-off of the product.
5. GOVERNANCE
5.1 An insurer marketing structured ILPs must comply with requirements in the
Financial Advisers Act 2001, the Insurance Act 1966, related regulations and
relevant notices and guidelines issued by the MAS. They must also observe the
relevant sections of the Code on CIS (the “Code”) 5.
5.2 In particular, Notice No: MAS 307 on ILP sets out the requirements for valuation,
audit, disclosure, payments and others.
5
Paragraph 51 of Notice No: MAS 307 stipulates that an insurer should ensure that an ILP sub-fund complies
with the requirements as contained in the relevant appendices of the CIS Code, as if the ILP sub-fund were
a “fund”, “scheme” or “collective investment scheme” and product summary were a “prospectus”.
A. Legal Structure Of ILP
5.3 Assets of an ILP are held under the investment-linked sub-fund. An investment-
linked sub-fund is not a trust. Unlike a trustee (in the case of a unit trust) who holds
the fund assets on behalf of unit-holders, the insurer is the legal owner of assets
in the ILP fund. However, the ILP fund and its associated sub-funds have quasi-
trust status in Singapore, because the Insurance Act 1966 gives the policy owners
priority claims over the general creditors in the event of liquidation.
B. Investment Guidelines For Retail Funds
5.4 The Code was first issued in 2002. Since then, it has been amended several times,
most recently in October 2018, to cater to market developments and feedback from
the fund management industry. It contains core investment guidelines for all funds
(including structured funds), and special guidelines for money market funds, hedge
funds, capital guaranteed funds, index funds and property funds.
5.5 The purpose of the Code is to foster retail investors’ confidence in Singapore retail
funds, by clearly specifying the duties of the trustee and the manager, and how the
funds should be managed and valued. The Code strives to balance the investor’s
interest with industry developments, recognising that overly restrictive investment
guidelines are not necessarily to the investor’s advantage.
5.6 Do note that the investment guidelines in the Code are complex and detailed. The
purpose of this section is to highlight the general investment restrictions that exist
for retail funds in Singapore. It is not meant to capture or reproduce the Code. As a
result, some details on the conditions, qualifications or exemptions associated with
the restrictions are omitted. The readers should not assume that the restrictions listed
below are complete.
5.7 The investment restrictions imposed by the Code are meant to address the risk
factors as mentioned below.
B1. Liquidity Risk
5.8 Only liquid investments and those subject to reliable and verifiable valuation on a
daily basis are permitted under a retail CIS. This includes shares, bonds, deposits,
money market instruments, and financial derivatives. A retail CIS is not allowed to
invest in another hedge fund or a fund of hedge funds.
B2. Concentration Risk
5.9 Concentration is the “putting most of your eggs in one basket” syndrome. It not only
overexposes the fund to the issuer’s credit risk, but also affects the fund’s liquidity,
because it takes time to unwind a large position without disrupting the market. A
retail CIS is subject to the following concentration limits:
 Single issue of securities - No more than 10% of the fund’s NAV may be invested
in a single issue of securities.
 Single entity limit - The exposure to a single entity is capped at 10% of the fund’s
NAV. In calculating the limits, risk exposure to the underlying financial derivatives,
investments in securities issued by and deposits placed with the entity are to be
included. The limit is reduced to 5% for unrated and non-investment grade
corporate debt securities. The limit is raised to 35%, if the issuing entity or the
issue is guaranteed by government, government agency or supranational with
minimum credit rating.
 Single group limit - The exposure to a single group of entities (including the entity,
its holding company, its subsidiaries and related special purpose vehicles) is
capped at 20% of the fund’s NAV. The limit is raised to 35%, if the issuer or issue
is guaranteed by government or quasi-government agencies with minimum credit
rating.
B3. Credit Risk
 Securities lending - Securities lending is an arrangement under which the lender

transfers securities to the borrower by way of sale, and the borrower agrees to
transfer those securities, or securities of the same type and amount, back to the
lender at a later date via a repurchase. There must be a separate transaction which
transfers collateral to the lender to cover the risk that the future resale / repurchase
of the securities cannot be satisfactorily completed. All benefits of ownership,
except proxy voting, are transferred back to the lender under contractual
arrangements.
Securities lending by a retail CIS is permitted for the sole purpose of effective
portfolio management, with proper collaterals. The counterparty to a securities
lending agreement should be a financial institution of minimum credit rating, and
subject to prudential supervision by a financial supervisory authority in its home
jurisdiction. The fund manager should address risks associated with securities
lending, including borrower credit risk, collateral deficiency risk, settlement risk,
investment of cash collateral risk and fund liquidity risk.
 Capital guaranteed funds - A guarantee is only as good as the credit standing of

the guarantor. Therefore, guarantors of capital guaranteed funds must have a
minimum long-term credit rating. The long-term credit rating is a forward-looking
opinion about an obligor’s overall ability to meet its financial obligations that have
a maturity of more than one year.
B4. Counterparty Risk
5.10 Managers may only enter into OTC financial derivative transactions with a
counterparty which is a financial institution, subject to prudential supervision by a
financial regulator in its home jurisdiction. If the financial derivative transaction takes
place on an exchange, where the clearing house acts as a central counterparty, the
counterparty risk is taken as zero.
5.11 The counterparty exposure (as per CIS Code) is capped at 10% of the fund's NAV for
financial institutions that meet a minimum long-term credit rating. For other financial
institutions, the counterparty exposure is capped at 5%. The exposure to a
counterparty may be considered to be lower if it is backed by suitable collateral.
B5. Financial Derivatives
5.12 To mitigate the risks arising from the use of financial derivatives, the exposure of a
fund to the underlying assets of financial derivatives should be sufficiently diversified
on a portfolio basis. In addition, financial derivatives must be:
(i) liquid;
(ii) subject to reliable and verifiable valuation on a daily basis; and
(iii) able to be sold, liquidated or closed by an offsetting transaction at any time at
their fair value.
5.13 In the case of financial derivatives on commodities, the transactions must be cash
settled at all times, and the fund’s investments are sufficiently diversified across
different types of commodities.
B6. Other Restrictions
5.14 Funds invested in real estate or real estate related assets are classified as property
funds and be subject to specific guidelines in CIS Code, such as at least 75% of its
investment is in income generating real estate.
5.15 Funds should not engage in lending of moneys or granting guarantees, underwriting,
and short selling, except arising from derivatives transactions.
5.16 Fund name should be clear and not misleading. The fund name is to reflect its
geographic focus, asset type and sector focus.
6. TYPICAL TYPES OF DOCUMENTATION AND RISKS
6.1 An investor should have sufficient information before he makes an investment

decision, and be kept up to date on the performance of his investments.
Communication with customers is continuous, separated in three stages of the
product life cycle:
 disclosure at the point of sale;
 disclosure at policy inception; and
 ongoing disclosure after policy inception.
A. Point-of-sale Disclosure 6 : Product Summary, Benefit Illustration And Product

Highlights Sheet
A1. Product Summary
6.2 The MAS requires a product summary be provided during the ILP sales process. All
sales materials must contain information no older than 12 months before any such
marketing. The information that must be disclosed in the product summary includes
the following:
6
Refer to Notice No: MAS 307 for complete description of the requirements.
(i) General Information Of The Policy

 A general description, in non-technical terms, of the principal features of
the ILP, including a description of the manner in which the benefits reflects
the investment performance of each ILP sub-fund and factors affecting the
policy benefits;
 A list of the ILP sub-funds available for investment, information on the
manager and sub-manager of each sub-fund and each sub-fund’s auditors;
and
 The structure, investment objectives, focus and approach of each available
ILP sub-fund. If the sub-fund is included under the CPF Investment Scheme,
state so and indicate its risk classification.
(ii) Fees And Charges
Disclosure of all fees and charges for the ILP and ILP sub-fund, whether
through deduction from premium, cancellation of units, or deduction from
asset value of the ILP sub-fund. Where there is a provision for a maximum fee
or charge payable, highlight that fact and state that maximum.
(iii) Dealing of Units
State how units in the ILP sub-fund may be purchased and paid for; redeemed
or sold; show procedures for switching of units and how to obtain prices of
units; and the circumstances under which units subscription/redemption may
be suspended.
(iv) Risk Information
 Warning statements on the general risks of investing in the ILP and each ILP
sub-fund.
 Description and explanation of major risks peculiar to the ILP sub-fund,
including any risk arising from the markets, countries or sectors in which
the ILP sub-fund invests; the foreign currency exposure and any hedging
policy adopted; and over-concentration risk, if any.
(v) Fund Performance
 A statement of the return on the ILP sub-fund over the last one, three, five
and ten years since the inception of the ILP sub-fund, where applicable.
 A warning that any past performance of the ILP sub-fund is not necessarily
indicative of the future performance of the ILP sub-fund.
 The insurer SHALL NOT include any prediction of future or likely
performance of the ILP sub-fund.
 The insurer SHALL NOT include in the product summary, or in any of the
documents provided to the policy owners, any information on past
performance based on the simulated results of a hypothetical fund.
 The insurer SHALL NOT include in a product summary any comparison of

the past performance of the ILP sub-fund with that of another form of
investment, or another CIS or ILP sub-fund, unless:
(1) they share similar risk profile, investment objectives and investment
focus; and
(2) the past performance is calculated net of fees and charges and the basis
of calculation is stated.
(vi) Other Miscellaneous Items
The product summary should also include description and / or explanation of

subscription and redemption of units (if the ILP sub-fund is structured as a unit
trust), expense ratio, turnover ratio, soft dollar commissions, conflict of
interest, financial year-end, and any other material information.
(vii) Specific Disclosure Required For Selected ILP
Additional disclosures are required as listed in Annex A to Appendix A of CIS

Code for selected ILP sub-funds – Money market ILP sub- fund, Hedge ILP sub-
funds, Capital Guaranteed ILP sub-funds, Index ILP sub-funds and property ILP
sub-funds.
A2. Benefit Illustration
6.3 The purpose of a benefit illustration is to show the potential policy owner how the
policy value accumulates under reasonable investment expectation. One important
feature of the benefit illustration is to distinguish the guaranteed benefits from the
non-guaranteed benefits under the policy. The Life Insurance Association, Singapore
is responsible for issuing guidelines on benefit illustrations. The guidelines are
binding on all its members.
6.4 For ILP products, two hypothetical rates of returns must be used, to demonstrate the
uncertainty of the potential return. In choosing the two illustration rates, the insurer
should take into account what could be realistically expected to earn under the
adopted investment strategy. Do refer to Appendix 4A for an example of how policy
benefits are illustrated.
6.5 (Note that the example shown is only the numerical aspect of a benefit illustration. A
complete benefit illustration includes explanation of terms used, and client’s
signature acknowledging receipt of the benefit illustration.)
A3. Product Highlights Sheet (PHS)
6.6 The purpose of providing a PHS is to highlight key features and risks inherent in the
ILP sub-fund under consideration. The prospective policy owner should read the
product summary first, to gain a basic understanding of the product features, and
then read the PHS which is prepared in a question-and-answer format, to address
any questions that he may have. The PHS should not contain any information that is
not in the product summary.
6.7 There is a prescribed format of how the PHS should be prepared7, giving answers
and explanations to the following questions, at a minimum:
 Who is the sub-fund suitable for?
 What are you investing in?
 Who are you investing with?
 What are the key risks of this investment?
 What are the fees and charges of this investment?
 How often are valuations available?
 How can you exit from this investment, and what are the risks and costs in doing
so?
 How do you contact the insurer?
6.8 The answers and explanations provided in the PHS should be clear and use simple
language for ease of understanding. To this end, the insurer should observe the
following requirements:
 the use of diagrams (graphs, charts, flowcharts, tables) and numerical examples
to explain structures and payoffs of the product aids investor’s understanding, and
is encouraged;
 technical jargons should be avoided. When technical terms are unavoidable, a
glossary should be attached to the PHS to explain these technical terms;
 the PHS should not be longer than four pages, not counting diagrams and
glossary. The PHS, including diagrams and glossary, should not exceed eight
pages;
 text, including footnotes and references, should be in a font size of at least 10-
point Times New Roman; and
 an insurer shall refrain from including disclaimers in a PHS.
B. Disclosure At Policy Inception: Policy Document
6.9 A policy document is issued after the investor has purchased a structured ILP. The
policy owner is given 14 days to review the policy document and to decide if he wants
to keep the policy or cancel it. Upon cancellation, the policy owner receives a full
refund of the premium paid, adjusted for any downward market price movements in
the Net asset value (per unit) of the ILP during the period.
6.10 The policy document is the evidence of the insurance contract between the insured
and the insurer. It contains all the information found in the product summary, as well
as those described below.
B1. Fees And Charges
6.11 There are two ways to pay fees and charges under an ILP. One way is through
deduction of premium or cancellation of units. For example, the upfront sales
commission is deducted from the single premium before the balance is invested in
7
Refer to Notice No: MAS 307, Annex Ha for the prescribed template.
the underlying ILP sub-funds. Ongoing mortality and administrative charges, if any,
are payable by deducting units from the investor’s account monthly, quarterly or
annually. The other way is through payment directly from the assets of the ILP sub-
fund. For example, fund management charges and auditor’s fees are deducted from
the fund’s net asset value, before the unit price is determined. However, marketing
and promotional expenses are NOT allowed to be paid from the sub-fund.
6.12 All fees and charges payable under the policy, however they are paid, must be
specified in the policy document. Fees need not be fixed for the term of the policy.
Where the insurer has the right to make changes to the fee schedules, the insurer
must highlight that fact, and state the maximum if there is a provision for a maximum
fee or change payment. The policy document must also state how future changes
will be communicated to the policy owner.
B2. Subscription And Redemption Of Units
6.13 Most ILP sub-funds are set up as unitised funds. The policy document should specify
how units are subscribed and redeemed, such as:
 the pricing basis (i.e. whether done on a forward or historical basis, whether done
on a bid-offer or single pricing basis);
 dealing deadline;
 the minimum holding amount and minimum redemption amount; and
 stating the circumstances in which the insurer or manager for the ILP sub-fund, or
any other person may be required to purchase from the policy owner any unit
subscribed for or acquired by the policy owner, and the method of determining
the price at which the unit is to be purchased.
B3. Switching Of Sub-funds
6.14 Some policies allow switching between ILP sub-funds. There may be a restriction on
how many times switching may be done in a year. There is a cost involving in
switching funds, as the switching is done on a bid-offer basis. However, some
policies allow one switching per year free of charge, i.e. done on a bid-to-bid or offer-
to-offer basis. If switching is allowed under the policy, the policy document should
specify the procedures involved. For structured ILP, it is common to have only one
fund available, and switching is not allowed.
B4. Suspension Of Dealings
6.15 Under certain market conditions, the insurer may decide to suspend some or all of
the activities for ILP policies. For example, when a large number of policy owners
wanting to redeem their units under their policies, the insurer may need to sell off a
large portion of the portfolio to meet the amount of cash required. If the underlying
investments are illiquid, there may not be a ready market, and the sale may artificially
depress the market value. Under such circumstances, for the protection of the
remaining policy owners, the insurer may decide to suspend the unit redemption.
6.16 Where the insurer reserves the right to suspend dealings, the policy document
should describe the exceptional circumstances under which the insurer would do so.
C. After Sales Disclosure: Policy Statements And Fund Reports
6.17 At least once a year, the insurance company must send to all policy owners a
statement on the performance and status of their policies, called the “Statement to
Policy Owners”, within 30 days after each policy anniversary. For ease of
administration, the insurer may choose a common date in the calendar year to issue
the Statement to all policy owners.
6.18 The Statement is to show the transactions occurred during the statement period, and
the current values under the policy on the statement date. It should contain the
following information:
(a) number and value of units held at the end of the previous statement period;
(b) number and value of units (at point of subscription) bought during the
statement period including the average unit price8;
(c) number and value of units (at point of redemption or deduction) sold or
deducted during the statement period including the average unit price;
(d) number and value of units held at end of current statement period;
(e) fees and charges payable through deduction of premium or deduction of units,
identifying each by the purpose for which the fees and charges relate, such as
initial charge, charge for insurance coverage or switching fee;
(f) premiums received during the statement period;
(g) current death benefit at the end of the current statement period;
(h) net cash surrender value at the end of the current statement period; and
(i) amount of outstanding loans, if any, at the end of the current statement period.
6.19 In addition, the insurer must provide a “Semi-Annual Report” and the “Relevant
Audit Report” on each of the ILP sub-funds, within two months and three months,
respectively, from the last date of the period to which the report relates. These two
fund reports need not be provided for a newly launched fund, or a fund to be
terminated or reach maturity date soon9.
6.20 Among other things, the Semi-Annual Report should include (a) the market value of
investments; (b) top 10 holdings at market value; and (c) market value of exposure to
derivatives. All values must be shown in both dollar amounts and as percentage of
net asset value (NAV).
6.21 The insurer may send these statements and reports by electronic means if the policy
owner has given written consent to receive them in such a manner.
8
“Average unit price” is calculated as the value of units divided by number of units.
9
The Semi-Annual Report and Relevant Audit Report need not be provided if the reports cover a period of
less than three months from the launch of the ILP sub-fund, or the termination or maturity date of the ILP
sub-fund is within one month from the date of the report that is due to be sent to the policy owners.
D. Risk Considerations
6.22 Chapter 19 has identified various risk factors for structured products: market risk;
counterparty credit risk; liquidity risk; foreign exchange risk; risks inherent in product
structure; and others. It is not possible to completely eliminate investment risks. Even
the safest investments, the investment grade sovereign securities, carry some level
of risk that the country may default. A more appropriate response is to manage risk
according to risk tolerance.
6.23 There are various risk management techniques that an investor may adopt to
mitigate or manage the investment risks.
6.24 A common method to reduce market risks is diversification of investments across

asset classes and geographic locations, and by using negatively correlated securities.
By holding investments in a broad spectrum of asset classes and geographic
locations, the market downturn in one asset class or market is offset by the upturns
in other asset classes and markets. Likewise, the loss from one security is cushioned
by the gain from another negatively correlated security.
6.25 Credit and FX risks can be shared or transferred to another party through the use of
swaps and credit derivatives. However, keep in mind that, while the use of derivatives
may mitigate one type of risk, it introduces another - the counterparty risk.
7. AFTER SALES
A. Valuation
7.1 The value of an ILP sub-fund is based on the NAV of the sub-fund. The only
exception is a capital guaranteed fund, whose value upon maturity is the higher of
the NAV and the guaranteed amount.
7.2 Notice No: MAS 307 requires that the value of quoted investments of an ILP sub-
fund should be based on:
(a) the official closing price or the last known transacted price on the organised
market on which the investment is quoted; or
(b) the transacted price on the organised market on which the investment is
quoted at a cut-off time specified in the product summary and applied
consistently by the manager;
7.3 unless such price is not representative or not available to participants of the
organised over-the-counter market. The manager of an ILP sub-fund should be
responsible for determining, with due care and in good faith, whether the price
should be considered representative.
7.4 Nonetheless, if the manager of the ILP sub-fund believes that the transacted price
is not representative or not available to the market, the NAV should then be based
on “fair value” of the assets, which is the same valuation basis that applies to
unquoted investments of a fund.
7.5 Fair value is the price that the fund can reasonably expect to receive upon the
current sale of the asset, determined with due care and in good faith. The basis for
determining the fair value of the asset should be documented.
7.6 When the fair value of a material portion of the fund cannot be determined, the
manager of the ILP sub-fund should suspend valuation and trading of units.
7.7 A structured ILP sub-fund should be valued at least once a month.
B. Pricing Information
7.8 Unit prices of ILPs are published in newspapers, as well as on the insurer’s website.
7.9 As part of the ongoing disclosure requirements, semi-annual fund reports are
prepared for each ILP sub-fund. Among other things, the report contains the
following information on fund values and performance:
(a) investments at market value and as a percentage of NAV as at the end of the
period under review; and
(b) the performance of the ILP sub-fund and where applicable, the performance of
the benchmark, in a consistent format, covering the periods of three months,
six months, one year, three years, five years, ten years, and since inception of
the ILP sub-fund.
Appendix 21A
For Information Only
Sample Benefit Illustration 1
Prepared For: Mr John Smith Payout Frequency: Yearly
Age Next Birthday: 51 Years, Policy Term: 5 Years
Male Non-smoker
Occupation: Account Executive Sum Assured: S$10,500
Single Premium: S$10,000
Benefit Illustration Per S$10,000 Single Premium:
End Age Total Death benefit

of premiums
policy paid to-date
Guaranteed Illustrated at 1.85% Illustrated at 3.35%
year
investment return investment return
Non- Total Non- Total
guaranteed guaranteed
1 52 100,000.00 101,000 0 101,000 0 101,000
2 53 100,000.00 101,000 0 101,000 0 101,000
3 54 100,000.00 105,000 0 105,000 0 105,000
4 55 100,000.00 105,000 0 105,000 0 105,000
5 56 100,000.00 105,000 0 105,000 0 105,000
End Age Total Surrender Value

of premiums
policy paid to-date
year
1 52 100,000.00 89,250 3,460 92,710 8,650 97,900
2 53 100,000.00 89,775 2,608 92,383 6,520 96,295
3 54 100,000.00 90,300 2,559 92,859 6,398 96,698
4 55 100,000.00 90,825 2,319 93,144 5,797 96,622
5 56 100,000.00 100,000 840 100,840 2,100 102,100
End Age Total Maturity Value

of premiums
policy paid to-date
year
5 56 100,000.00 100,000 840 100,840 2,100 102,100
CHAPTER
21
INTRODUCTION TO STRUCTURED ILPS
WORKING OF AN INVESTMENT-LINKED POLICY (ILP)
Insurance
Part of the premiums

is used to buy term
insurance to provide
Balance of the
premiums is
invested into ILP
sub-funds as
selected by the Term
policy owners.
Insurance
ILP sub-funds
+
Unit Trust

Structured ILP • A “structured ILP” is typically a single premium ILP where the sub-funds
are invested in structured products or other structured funds.
• Because they are life insurance policies, only a life insurer may issue
ILPs, and the terminology follows that for insurance products.
Characteristics of a structured ILP • Purchased with a single payment.
• Fixed policy term or maturity date.
• Usually has complex structures.
• Exposed to counterparty, credit default, market, foreign currency,
liquidity risks etc.
Payout under a structured ILP • Death benefits.
• Maturity / Survival benefits.
• Other structures possible.
COMMON TERMINOLOGY OF A STRUCTURED ILP
Single premium The one-time upfront payment which the policy owner pays for the policy.
It represents his principal sum of investment in the policy.
Regular premium Periodic premium payments (monthly, quarterly, half-yearly or yearly).
Policy owner Owner of the policy who is also the investor.
Sum assured The guaranteed amount of death benefit payable.
13
Cash value Amount which the policy owner receives if he terminates the policy. Also
called surrender value. It is the market value of units in ILP sub-funds.
Benefit illustration A year-by-year illustration of the benefits and values of the insurance
policy, both guaranteed and non-guaranteed, and the costs and charges
associated with the policy, including distribution costs, and the charges for
insurance coverage.
Subscription The purchase of units in ILP sub-funds
Redemption The return of units in ILP sub-funds for cash.
Bid price Price at which units are redeemed.
Offer price Price at which units are subscribed.
Bid / offer spread Difference between the bid and offer prices, usually in the range of 3% to
5%. This is the insurer’s fees for operating the sub-funds. This is separate
from the investment management fees which are charged directly to the
sub-funds monthly or quarterly, based on the assets under management
(AUM) by the investment managers. The insurer may manage the sub-
funds in-house, or outsource the investment management to third-party
managers.
Forward pricing Subscription and redemption of units are based on bid and offer prices
as determined on the next asset valuation date. This is in contrast with
historic pricing, which uses bid and offer prices determined on the last
asset valuation date.
Net asset value Total value of fund assets, less total liabilities (NAV) excluding policy
owners’ interest if this is classified as a liability).
Both assets and liabilities are valued in accordance with the insurance
regulations and other applicable regulatory requirements.
Switching of funds The transfer of units in one sub-fund to another.
Expense ratio The ratio of the sub-fund's operating expenses to the daily average NAV.
For Singapore domiciled funds, the calculation of expense ratio should
follow guidelines as issued by the Investment Management Association of
Singapore (IMAS).
Operating expenses include investment management fees, trustee’s fees,

administrative and custodial expenses, taxes, legal fees, and auditing fees.
Trading expenses related to the buying and selling of fund assets are not
included in the calculation of expense ratio.
Initial sales charges and redemption fees, if any, are paid directly by
investors and, therefore, not included in expense ratio.
Turnover ratio The number of times that a dollar of assets is reinvested in a given year.
It is calculated based on the lesser of purchases or sales of underlying
investments of a fund expressed as a percentage of daily NAV averaged
over the same period used for calculating expense ratio.
Trading incurs transaction costs. Therefore, the higher the turnover, the
higher will be the transaction cost, which reduces the fund returns.
For example, a stock index fund typically has a low turnover ratio, but
an equity fund typically has high turnover, because active trading is an
inherent nature of equity investments. An aggressive small-cap growth
stock fund will generally experience higher turnover than a large-cap value
stock fund.
Soft dollar This refers to arrangements under which products or services, other than
the execution of securities transactions, are obtained from or through a
broker in exchange for the direction by the manager of transactions to the
broker. Soft dollars include research and advisory services, economic and
political analyses, portfolio analyses, market analyses, data and quotation
services, and computer hardware and software used for and / or in
support of the investment process of managers (as per MAS Notice 307).
14
Advantages of structured ILP • Professional Management.
• Portfolio Diversification.
• Access To Bulky Investments.
• Economies Of Scale.
Disadvantages of structured ILP • Fees And Charges – added cost of protection benefits as compared to
unit trusts.
• Loss Of Investment Control.
• Opportunity Cost to invest monies elsewhere.
Risk considerations for structured • Counterparty risk.
ILP • Liquidity risk.
Examples of structured ILP • Product providing regular payouts (such as quarterly or yearly).
• Product linked to index return.
• Product with capital appreciation potential.
Who should invest in structured • Investors who are seeking capital appreciation with a medium to high
ILP? tolerance for some losses on capital.
- In addition to looking for • Investors who are interested in specialty investment areas (such as
insurance protection. hedge funds and private equity), but do not have sufficient experience,
knowledge, resources or access to invest in such niche areas alone.
Who should NOT invest in • Investors who does not understand the features of a structured ILP.
structured ILP? • Investors with a low risk tolerance.
• Investors who do not fully understand the “risk and return” trade-off of
the product.
Governance • Financial Advisers Act (2001).
• Insurance Act (1966).
• Code on CIS (the “Code”).
• Notice No: MAS 307.
Risks to address with investment • Liquidity risk
guidelines for retail funds  Only liquid investments and those subject to reliable and verifiable
valuation on a daily basis.
• Concentration risk
 Capped at certain % on the fund’s net asset value.
• Credit risk on securities lending
 Borrower credit risk, collateral deficiency risk, settlement risk,
investment of cash collateral risk and fund liquidity risk.
• Counterparty risk on OTC transactions
 Capped at certain % of the fund’s net asset value.
• Financial derivatives
 Must be liquid; subject to reliable and verifiable valuation on a
daily basis and able to be sold, liquidated or closed by an offsetting
transaction at any time at their fair value.
Other restrictions for retail funds • With the exception of property funds, funds should not invest in
infrastructure and real estate.
• Funds should not engage in lending of moneys or granting guarantees,
underwriting, and short selling, except arising from derivatives
transactions.
• Fund name should be clear and not misleading.
Point-of-sale disclosure • Product summary.
• Benefit illustration.
• Product highlights sheets (PHS).
Disclosure at policy inception • Policy document.
• Fees and charges.
• Subscription and redemption of units.
• Switching of sub-funds.
• Conditions for suspension of dealings.
After sales disclosure • Policy statements.
• Fund reports.
• Semi-Annual report.
• Audit report.
15
Value of ILP sub-fund • Value of an ILP sub-fund is based on the NAV of the sub-fund. The only
exception is a capital guaranteed fund, whose value upon maturity is
the higher of the NAV and the guaranteed amount.
• If price is not representative or not available to the market, the NAV
should then be based on “fair value” of the assets.
16
Part II Chapter 22. Portfolio Of Investments With An Insurance Element
PART II CHAPTER 22
PORTFOLIO OF INVESTMENTS WITH AN
INSURANCE ELEMENT
CHAPTER OUTLINE
1. What Is A Portfolio Of Investments With An Insurance Element?

2. Advantages And Disadvantages Of Portfolio Of Investments With An Insurance
Element
3. Who Would Invest In Portfolio Of Investments With An Insurance Element?
4. When Are Portfolio Of Investments With An Insurance Element Unsuitable?
5. Governance And Typical Documentation
LEARNING OUTCOMES

 describe the portfolio of investments with an insurance element
 understand the advantages and disadvantages of investing in the portfolio of
investments with an insurance element
 explain who would or should not invest in the portfolio of investments with an
insurance element
 describe the governance and typical documentation of portfolio of investments with an
insurance element
CONTENTS
CHAPTER OUTLINE ............................................................................................................. 1
1. WHAT IS A PORTFOLIO OF INVESTMENTS WITH AN INSURANCE ELEMENT? ... 3
A. An Example Of Portfolio Bond Marketed In The United Kingdom (UK)........... 3
A1. Product Features……………………………………………………………........... 3
A2. Fees And Charges………………………………………………………………….. 4
2. ADVANTAGES AND DISADVANTAGES OF PORTFOLIO OF INVESTMENTS WITH
AN INSURANCE ELEMENT........................................................................................ 5
3. WHO WOULD INVEST IN PORTFOLIO OF INVESTMENTS WITH AN INSURANCE
ELEMENT? .................................................................................................................. 6
4. WHEN ARE PORTFOLIO OF INVESTMENTS WITH AN INSURANCE ELEMENT
UNSUITABLE? ............................................................................................................ 6
5. GOVERNANCE AND TYPICAL DOCUMENTATION .................................................. 6
1. WHAT IS A PORTFOLIO OF INVESTMENTS WITH AN INSURANCE ELEMENT?
1.1 A portfolio of investments with an insurance element is generally understood

as an insurance wrapper product that provides the flexibility of a wide range of
investment choices. This product may be referred to as a “portfolio bond” or
“insurance wrapper”. It falls within the definition of an ILP.
1.2 Compared to traditional life policies, ILPs provide much greater flexibility (and
responsibility) to investors over how their moneys are invested. However, an
ILP policy owner’s investment choices are limited to what the insurer offers,
and he has no say in the selection of fund managers. “Portfolio bonds” go a
step further by allowing policy owners to appoint managers of their portfolios,
within the insurer’s platform.
1.3 “Portfolio bonds” offer a wide range of investment choices. It is possible to

invest in cash and deposits, equities, bonds, derivatives and collective
investment schemes. Where CIS are wrapped under the portfolio, the
requirements under the SFA will apply.
1.4 “Portfolio bonds” are popular products for tax planning and asset protection
for individuals. It also facilitates succession planning of accumulated wealth.
Policy owners enjoy tax advantage by using the insurance platform to manage
their investment portfolios. Although they are called “portfolio bonds”, they
are NOT conventional bonds. The value of portfolio bonds moves up and down
according to the value of their underlying investments (as opposed to interest
rates, in the case of conventional bonds). Furthermore, there is no guarantee
or protection of the principals invested (as opposed to the repayment of par
value, in the case of conventional bonds).
1.5 Like other single premium ILPs, there is usually a small amount of death benefit
included to facilitate the insurance wrapper.
A. An Example Of Portfolio Bond Marketed In The United Kingdom (UK)
A1. Product Features
1.6 The International Portfolio Bond is a single premium investment bond available
to UK residents, designed for medium to long-term investments of at least five
to ten years or longer. The minimum investment is £15,000 (or currency
equivalent) for the Family or Select funds, or £50,000 if invested in External
funds or Cash deposits.
1.7 To increase flexibility, the Bond will be made up of a series of 12 identical

policies, called segments. It is unit linked, which means that the investment is
used to purchase units in the chosen fund(s), thereby pooling this investment
with those of investors with similar objectives. This has the benefit of spreading
the investment and administration costs. Funds are available with a variety of
risk profiles.
1.8 The International Portfolio Bond is about choice and flexibility. It provides a tax
efficient product “wrapper” in which your investment can be managed in one
place and in a form that is able to evolve as your financial requirements change.
The UK tax Authority will impose a deemed gain tax charge on highly
personalised portfolio bonds for UK residents.
1.9 It can be used to provide an “income” through regular withdrawals of capital

which may be useful for a range of needs, for instance, tax efficient school fees
planning, or supplementing your income in retirement. It can be used purely for
capital growth which can be realised at a time to suit you, perhaps waiting until
you are in a more favourable tax bracket. Depending on your investment
choices, you also have the option of adding either Drip-Feeding or Portfolio
Rebalancing to your bond, without further charge.
 What Is Drip-Feeding?
Simply put, drip-feeding is fund-switching implemented in small doses. Drip-
feeding has the benefit of avoiding potential market disruption when
switching funds in large quantities. Drip-feed enables a client to gradually
adjust the proportion of their funds in each investment fund at each drip-
feeding period.
 What Is Portfolio Rebalancing?

A portfolio invested 50% / 50% in two funds may become 63% / 37% after a
few years due to investment experience. To maintain the original level of risk
exposure, a rebalancing by moving units from one fund to the other is
necessary. Portfolio Rebalancing could be done as an automatic rebalancing
on a monthly, quarterly, half-yearly or annual basis.
In Chapter 4, we have discussed the relationship between opportunity cost

and risk diversification. The same applies to portfolio rebalancing.
Rebalancing means moving units from a fund to other funds with the
objective of achieving the best portfolio returns within its risk profile.
A2. Fees And Charges
A2A. Product Charges

1.10 The product charges cover the cost of setting up the bond and its ongoing
record keeping and administration, including commission paid to the financial
adviser.
A2B. Fund Charges And Other Investment Transaction Costs

1.11 Charges are made by the fund manager for running the fund, including the cost
of buying and selling the assets of the fund. Depending on the funds chosen,
there may be an initial charge and an ongoing fund charge.
A2C. Early Withdrawal Charge

1.12 There may be a charge imposed by the deposit taker or fund manager for early
withdrawals, e.g. when the investor breaks a fixed deposit early, or does not
provide the required notice period.
A2D. Surrender Charge

1.13 A charge may be payable if the bond, or any policy segment within the bond, is
surrendered. The surrender charge ensures that the insurer has recovered the
costs of setting up the bond, including any commission paid to the financial
adviser, at the point that the contract is terminated.
A2E. Valuation Charge

1.14 A yearly statement is provided on each policy anniversary. A soft copy is
available on the insurer’s website at any time, free of charge. A charge will be
imposed for sending paper valuation statement.
A2F. Payment Charge

1.15 Certain methods of payment, such as telegraphic transfers, result in additional
service fees or provider charges.
A2G. Dealing Account – Debit Interest

1.16 A Dealing Account is set up when investor elects to invest in External funds or
a combination of External and Family funds or cash deposits. This is because
“funds” are securities. Buying and selling units in funds are considered dealing
in securities. It is possible for a Dealing Account to hold a negative balance, for
instance, when the charges are applied. In such circumstances, debit interest
will accrue.
A2H. Mortality Charge

1.17 Annual charge for death benefits. Some portfolio bonds embed mortality
charge into the operating expenses of the portfolio bonds, and hence may not
be readily visible.
2. ADVANTAGES AND DISADVANTAGES OF PORTFOLIO OF INVESTMENTS

WITH AN INSURANCE ELEMENT
2.1 Portfolio of investments with an insurance element is often marketed as a

“lifestyle” policy, to satisfy an individual’s changing investment objective
during his lifetime. In his 30’s and 40’s, his main objective is capital
appreciation. In his 50’s and 60’s, his main objective is safety of principal in
anticipation of retirement. After retirement, his main objective is stability of
income and safety of principal. These products offer policy owners the
convenience of buying one policy, and being able to change asset allocation,
fund selection, and make regular withdrawals, as his primary investment
objectives and financial needs change over time.
Given the insurance structure of the wrapper, the policy owner could nominate
beneficiaries to the policy and hence create a more expedient way to transfer
his wealth without having to go through complex legal process of setting up
succession plans.
2.2 Another advantage is the convenience of having a consolidated view of

investments in a single statement from the insurer, instead of multiple
statements from various fund managers. On the other hand, the convenience
of consolidation may be accompanied by high charges levied, as insurers will

have to invest considerably in IT systems to integrate with various fund
managers’ reporting systems.
It is pertinent to note that insurance wrappers or portfolio bonds are great

considerations for clients when the tax-saving benefits are highlighted.
Nevertheless, the cost of owning a portfolio bond may outweigh the tax
benefits. Hence, it is important for an individual to consider the entire product
in totality (include the cost of owning the product) while being mindful of the
possibility of changes in tax laws in future.
3. WHO WOULD INVEST IN PORTFOLIO OF INVESTMENTS WITH AN

INSURANCE ELEMENT?
3.1 Since the main advantages are convenience and flexibility, investors who look
to invest in a portfolio of different funds may find this product attractive. Such
a product may also be used for tax planning.
3.2 Investors in high tax brackets may benefit from the favourable tax treatment for
insurance products.
4. WHEN ARE PORTFOLIO OF INVESTMENTS WITH AN INSURANCE ELEMENT

UNSUITABLE?
4.1 Portfolio bonds are investment products, designed with low level of protection
against death. As such, they are not suitable for individuals seeking insurance
protection.
4.2 The investment horizon for portfolio bonds tends to be longer as compared to
other single premium investment products, owing to the longer time period
needed to cover the higher front-end and ongoing fees and charges. This is
partly the reason why they are typically marketed as lifestyle policies, covering
different stages of the lives of the policy owners. Investors with a three to five-
year time horizon may not find the cost-benefit attractive.
4.3 Investors who do not need the flexibility offered by such products, may be
unsuitable for this product. For example, an investor who invests in one or two
funds may not benefit from the bells-and-whistles attached to the product.
4.4 Keep in mind that portfolio bonds are not bonds. While it is possible to elect to
receive regular income from the “bond”, the source of payments is redemption
of units, i.e. sale of investments.
5. GOVERNANCE AND TYPICAL DOCUMENTATION
5.1 The requirements on sale and documentation will be similar to those of the
typical ILP.
CHAPTER
22
PORTFOLIO OF INVESTMENTS WITH
AN INSURANCE ELEMENT

Portfolio of investments with an A portfolio of investments with an insurance element is generally
insurance element understood as an insurance wrapper product that provides the flexibility
of a wide range of investment choices. This product may be referred to as
a “portfolio bond” or “insurance wrapper”.
Drip-feeding Drip-feeding is fund-switching implemented in small doses.
Portfolio rebalancing To maintain the original level of risk exposure, a rebalancing by moving
units from one fund to the other.
Typical charges of a portfolio bond • Product charges.
• Fund charges and other investment transaction costs.
• Early withdrawal charge.
• Surrender charge.
• Valuation charge.
• Payment charge.
• Dealing account – debit interest.
• Mortality charge
Why invest in portfolio bonds? • Offer a wide range of investment choices.
• Tax advantage in countries where it is applicable.
Who should NOT invest in • Not suitable for individuals seeking insurance protection.
portfolio bonds? • Investors with a three to five-year time horizon may not find the cost-
benefit attractive.
• Investors who do not need the flexibility offered by such products.
17
Part II Chapter 23. Case Studies
PART II CHAPTER 23
CASE STUDIES
CHAPTER OUTLINE
1. Case Study 1 – Annual Payout Plan

2. Case Study 2 – Lifestyle Plan
LEARNING OUTCOMES

 understand structured ILPs through in-depth analysis of two case studies
CONTENTS
CHAPTER OUTLINE.............................................................................................................. 1
1. CASE STUDY 1 – ANNUAL PAYOUT PLAN ................................................................. 3
A. Product Features .................................................................................................. 3
A1. Annual Payouts ................................................................................................ 3
A2. Maturity Value ................................................................................................. 3
A3. Death / Accidental Death ................................................................................. 3
A4. Surrender / Early Termination By Policy owner............................................. 3
A5. Early Redemption By ABC............................................................................... 3
A6. Fees .................................................................................................................. 4
B. Selling Points........................................................................................................ 4
C. Risk Analysis......................................................................................................... 4
C1. Guarantee ........................................................................................................ 4
C2. Market Risk....................................................................................................... 4
C3. Early Redemption Risk .................................................................................... 5
C4. Opportunity Cost ............................................................................................. 5
D. Performance Under Different Market Conditions ............................................... 5
D1. Scenario 1: Best Possible Market Performance ............................................. 5
D2. Scenario 2: Worst Possible Market Performance........................................... 6
D3. Scenario 3: Moderate Market Performance ................................................... 6
D4. Scenario 4: Mixed Market Performance ......................................................... 8
2. CASE STUDY 2 – LIFESTYLE PLAN .............................................................................. 8
A. Product Features .................................................................................................. 8
A1. Death / Total & Permanent Disability Benefit................................................. 8
A2. Surrender / Early Termination ........................................................................ 8
A3. Fees .................................................................................................................. 9
B. Choice Fund – Fund Details ................................................................................. 9
B1. Investment Objective....................................................................................... 9
B2. Performance Benchmark ................................................................................. 9
B3. Fund Information ............................................................................................. 9
B4. Fund Performance ........................................................................................... 9
B5. Investment Holdings ..................................................................................... 10
C. Selling Points...................................................................................................... 10
D. Risk Analysis (Based On The Choice Fund) ...................................................... 10
D1. Non-guarantee ............................................................................................... 10
D2. Market Risk..................................................................................................... 11
D3. Liquidity Risk.................................................................................................. 11
D4. Derivatives Risk ............................................................................................. 11
Scan the QR
1. CASE STUDY 1 – ANNUAL PAYOUT PLAN code to watch
a short video
A. Product Features explanation
1.1 ABC Insurance Company issues a Superior Income Plan (SIP), a single premium
five-year investment-linked plan.
A1. Annual Payouts
1.2 SIP provides an annual payout, at the end of each policy year, of the higher of:
(i) a guaranteed payment of 4% of the single premium; or
(ii) a non-guaranteed payment based on the performance of a basket of six
stocks, determined as:
n
20% ×
N
where: n is the number of trading days in which all six stocks were equal
or above 92% of their initial stock prices (prices at the inception
of the policy); and
N is the total number of trading days in the policy year.
Note: Based on the above formula, the lowest value the non-guaranteed
portion may reach zero and hence, no negative payoff here.
A2. Maturity Value
1.3 Single premium will be re-paid together with the last annual payout.
A3. Death / Accidental Death
1.4 101% of the NAV will be paid upon death. In the event of accidental death, 106%
of the NAV will be paid.
A4. Surrender / Early Termination By Policy owner
1.5 100% of the NAV will be paid.
1.6 The guarantee of the minimum 4% annual payout and the re-payment of single
premium upon maturity and early redemption are provided by XYZ Bank, a non-
related entity of ABC. The guarantee is terminated if XYZ goes into liquidation.
A5. Early Redemption By ABC
1.7 After the third month, if all six stocks are equal or above 108% of their initial
stock prices, the single premium will be returned, together with the pro-rata
annual payout. The policy terminates after the payment is made.
Note: Event triggered redemption / termination is not uncommon in a structured
investment-linked policy whereby the outcome of a payout has a built-in trigger
that is linked to market performance.
A6. Fees
1.8 There is an initial fee of 5% of the single premium, payable through deduction
from the NAV of the sub-fund immediately upon investment. In addition, there
is an annual fund management fee of 1.5% of the sub-fund value, deducted from
the fund before the NAV is determined.
B. Selling Points
1.9 SIP combines the advantages of the:

(a) annual payment feature of a bond;
(b) capital appreciation potential of stocks; and
(c) capital guarantee feature of a fixed deposit.
1.10 The guaranteed annual payout of 4%, is competitive when compared to the
prevailing fixed deposit rate in 2023, with the added upside potential if the six
stocks perform well.
C. Risk Analysis
C1. Guarantee
1.11 In all financial products, guarantees come with a price. ABC must use part of the
premiums collected to pay XYZ to provide the guarantee, which is why the SIP
cannot provide the full upside potential of the six stocks. There is a trade off
between safety and return.
1.12 However, guarantees are only as good as the financial strength of the
guarantors. In this case study, the policy document states that the guarantee is
terminated if and when XYZ goes into liquidation. Without this explicit
statement, ABC as the primary party to the insurance contract must honour the
guarantee even if XYZ fails to do so. Hence, the counterparty risk resides with
XYZ for this policy.
C2. Market Risk
1.13 The NAV of the ILP sub-fund is subject to market fluctuation. Therefore, the
amount of the death benefit and the cash value upon early termination of the
policy may be lower than the original investment. Moreover, because of the
initial fees, the fund must earn at least 5% just to breakeven. It should be noted
that the underlying investments are NOT in the six stocks. The six stocks are
only used as a reference benchmark to determine the level of annual payout and
the occurrence of early redemption.
C3. Early Redemption Risk
1.14 The policy is redeemed and terminated when all six stocks are at or above 108%
of their stock prices. The maximum return under the policy is 20% on an
annualised basis. Do not be confused by the 108% reference and think that the
maximum return is 8%. The 108% is used as a reference point to determine the
occurrence of early redemption. It has nothing to do with the level of payment
to policy owners. For example, if the price of all six stocks is above 108% of the
initial price every trading day after policy inception, the policy is redeemed and
terminated after three months. The policy owner receives the originally invested
single premium, plus 20% return prorated for three months out of the year, or
4.8%. See Scenario 1 below.
1.15 The early redemption risk is a form of re-investment risk, as the policy owner
faces the risk of re-investing in a rising market. There is also an element of
market risk, as the policy owner loses the opportunity to enjoy the investment
return from a rising market.
C4. Opportunity Cost
1.16 The maximum return under the policy is 20%, and there is no downside risk,
other than in the case of early termination by the policy owner, or when bank
XYZ fails to re-pay the capital. In other words, the policy owner forgoes the full
upside potential of these six stocks in exchange for the capital guarantee. The
policy owner should form his own judgement whether the forgone potential is
commensurate with the guarantee offered.
D. Performance Under Different Market Conditions
1.17 An investor took up a S$10,000 policy. A few scenarios are considered, with
different level of performance on the six stocks.
D1. Scenario 1: Best Possible Market Performance
D1A. Investment Experience

1.18 The prices of all six stocks gradually rise to 108%, three months after the policy
inception. None of the stock prices falls below 92% during the 3-month period.
Early redemption is triggered.
D1B. Annual Payout

1.19 This will be the higher of: (a) guaranteed 4%; or (b) non-guaranteed 20% per
annum, pro-rated by number of trading days. Assuming there are 250 trading
days in the policy year, and 60 trading days in the 3-month period, then the
annual payout is the higher of 4% or 4.8% (i.e. 20% x 60 / 250), which is 4.8%.
Hence, there is only one payout of S$480 (i.e. S$10,000 x 4.8%).
D1C. Early Redemption Payment

1.20 This will be the initial single premium of S$10,000 plus a single payout of S$480.
1.21 Under this scenario, the policy is terminated after three months, and the policy
owner receives S$480 for the initial S$10,000 investment. The best market
performance for the basket of six stocks is not necessarily the best investment
scenario for the policy owner, as the policy owner’s return is capped at 20% per
annum, and the policy owner now needs to re-invest the proceeds of S$10,480.
D2. Scenario 2: Worst Possible Market Performance

1.22 The prices of all six stocks are consistently below 92% of the initial stock price
throughout the five-year period.
D2B. Annual Payout

1.23 This will be the higher of: (a) guaranteed 4%; or (b) non-guaranteed 20% x n / N.
Since the number of trading days in which all six stocks were equal or above
92% of their initial stock prices (denoted by n) is 0, the non-guaranteed return is
0, and the guaranteed 4% applies. For each S$10,000 of initial single premium,
the annual payout is S$400.
D2C. Maturity Payout

1.24 This will be the initial single premium of S$10,000 plus the final annual payout
of S$400.
1.25 Under this scenario, the return under the policy is 4% per year. The policy owner
is protected from the fall in the six stock prices, while receiving a modest return.
1.26 Under this scenario, the policy owner receives a total of S$12,000 over the five
years.
D3. Scenario 3: Moderate Market Performance

1.27 The prices of all six stocks trade consistently between 92% to 108% of their initial
stock prices throughout the five years.
D3B. Annual Payout

1.28 This will be the higher of: (a) guaranteed 4% or (b) non-guaranteed 20% x n / N.
Since n = N in this scenario, the non-guaranteed return of 20% is the higher of
the two. For each S$10,000 of initial single premium, the annual payout is
S$2,000.

of S$2,000.
1.30 Under this scenario, the return under the policy is 20% per year, the best
possible return for the policy owner (a total of S$20,000 over the five-year
period). The policy owner forgoes some of the upside potential of these six
stocks, in exchange for the downside protection.
D4. Scenario 4: Mixed Market Performance

1.31 The prices of the six stocks fluctuate, but during any trading day, at least one of
the stock prices falls below 92% of its initial stock price.
D4B. Annual Payout

1.32 The non-guaranteed portion of the payment is 0, since n = 0. The annual payout
is the guaranteed amount of 4%, or S$400 per S$10,000 investment.

of S$400.
1.34 This scenario is probably the most realistic, as the performance of the stocks in
the basket is more likely to fluctuate based on general market conditions,
industry sector, and the company’s own situations. It is important to note that
the non-guaranteed portion of the annual payout is determined by the WORST
performing stock in the basket on any given trading day. The likelihood that the
annual payout is better than the guaranteed 4% is substantially lower, when it
is based on six stocks, than if it is to be based just on any single stock in the
basket.
2. CASE STUDY 2 – LIFESTYLE PLAN Scan the QR code

to watch a short
video explanation
A. Product Features
2.1 Acme Insurance has introduced a flexible Whole Life ILP product that invests
into a variety of funds, including a structured fund called Choice Fund.
2.2 The policy is a recurrent single premium plan, where the policy owner has full
control over the timing of payment to this plan. He may use this plan as a regular
savings plan, or a single premium plan with an option to top up periodically. He
also enjoys the choice of investments offered by the Acme stable of funds to
suit his changing investment objectives over the term of the policy, with
unlimited free switches (if permitted) between funds.
A1. Death / Total & Permanent Disability Benefit
2.3 A guaranteed benefit is provided at 125% of premiums paid upon death or total
and permanent disability of the life insured. Mortality charges for the death and
disability benefit are deducted from the policy value on an annual basis.
A2. Surrender / Early Termination
2.4 100% of the NAV will be paid.
A3. Fees
2.5 There is a front-end sales charge of 5% of each recurrent single premium paid.
Annual fund management fee ranging from 1% to 2% is levied at each sub-fund
level.
2.6 For the remainder of this case study, we will assume that the policy owner has
chosen to invest in the structured fund, the Choice Fund.
B. Choice Fund – Fund Details
2.7 The Choice Fund is a closed-ended fund with a fixed maturity date. The maturity
value is at least equal to the Secure Price. (The Secure Price is set at the end of
each year at the discretion of Acme.)
B1. Investment Objective
2.8 The Fund aims to provide long-term capital appreciation and seek the best
possible result, so that the payout on each unit on the Maturity Date is at least
equal to the Secure Price.
B2. Performance Benchmark
2.9 This is not applicable, because the Fund does not any specific investment
allocation targets.
B3. Fund Information
NAV: S$0.9293
Fund Size: S$6.82 million
Inception Date: 1 April 2008
Management Fee: 1.40% p.a.
Sales Charge: None, as pricing being done on a single pricing basis
Dealing: Daily
Maturity Date: 1 April 2023
Secure Price: S$1.00455
B4. Fund Performance
Since
1 Month 3 Months 6 Months 1 Year 3 Years*
Inception*
0.58% 1.39% -3.93% -1.82% -2.47% -2.47%
* Annual compounded return.
B5. Investment Holdings
Description Market Value (S$) % of NAV

OTC Zero-coupon 6,315,634 92.6
Investment Bonds
Golden Derivative Fund 170,508 2.5
Cash & Cash Equivalents 334,197 4.9
Total 6,820,339 100.0
C. Selling Points
2.10 The ILP product combines flexibility of savings with flexibility of investments
with changing life cycles of customers. A young policy owner may start the plan
with small monthly premiums, for example, and gradually increase the regular
premiums, as he becomes more financially secure. He can also top-up his
savings when he receives lump sum payments, such as year-end bonuses.
2.11 Withdrawals can be made at any time to meet his financial needs. The single
unit pricing basis enables customers to make withdrawals, without suffering an
early withdrawal penalty, hence flexibility is a key feature.
2.12 When the investment horizon is long initially, the policy owner can afford to take
greater risks, by investing in equity funds with higher return potential. As time
progresses, his investment horizon shortens and risk tolerance changes, he can
make use of the free switching feature to re-allocate his investments to less risky
funds. In this example, the policy owner has chosen to invest in a structured
fund with a fixed maturity date. When the fund matures, he may choose to invest
in other funds, depending on his financial goals/requirements at that time.
2.13 In addition, there is a guaranteed death benefit of 125% of premiums paid.
2.14 This ILP product may be the only investment policy that the customer needs
over his lifetime.
D. Risk Analysis (Based On The Choice Fund)
D1. Non-guarantee
2.15 This is not a guaranteed product. The Secure Price is not a guaranteed minimum
return upon maturity. It is merely an investment target that the fund manager
strives to achieve. If the per unit NAV is lower than the Secure Price at maturity,
the payout is based on the unit price, not the Secure Price.
D2. Market Risk
2.16 As is the case with all investment products, the NAV is subject to market
fluctuation. After three years of operation (from 1 April 2008 to 31 March 2011),
the unit price is S$0.9293, which means that a customer invested in the Fund
since inception has lost 7% of his investment.
2.17 The Choice Fund does not have any fixed asset allocation strategy, nor a
performance benchmark. This makes it challenging for a client to assess the
market risk inherent in the Fund, because the manager has the full discretion to
invest in any asset class, as he sees fit. While the investment holdings are
predominantly in fixed income instruments currently, the manager may change
the asset mix significantly in a short period of time if he so chooses. Given the
outlined investment objective, the fund has the flexibility to deploy the strategy
for what is the best possible result for the fund. As such, with more details on
the calculation of the Secure Price coupled with the fund’s asset class
information, a policy owner could understand and appreciate better, the risk and
return balance of this fund.
D3. Liquidity Risk
2.18 The Fund size is relatively small at S$6.8 million, and at present, is heavily
invested in OTC fixed income instruments. It may temporarily be unable to
liquidate its investment holdings to meet high demand of withdrawals. When
that happens, a policy owner may receive only part of the cash withdrawal that
he needs.
D4. Derivatives Risk
2.19 The Fund depends on the exposure to an externally managed derivative fund,
to provide an upside investment potential above the return from the zero
coupon bonds. The additional return comes with additional risks when
derivatives are used to generate returns from volatility. The policy owners
should review the fund fact sheet and prospectus of the Golden Derivatives
Fund to understand its investment objective and the associated structural risks.
ACCESS TO ONLINE LEARNING RESOURCES
(1) Login using your SCI profile credentials using this link:
https://www.scicollege.org.sg/Account/Login.
(2) Click the “eBook/eMock Examination/Supplementary Notes” icon from the

Student dashboard.
(3) The examination module which you had registered for would be displayed on
your screen.
(4) Learning Resources include: eBOOK, eMOCK and video tutorials.
Singapore College of Insurance Limited
9 Temasek Boulevard #14-01/02/03
Suntec Tower Two, Singapore 038989
General Enquiry: (+65) 6221 2336
E-mail: talk2us@scidomain.org.sg
Website: www.scicollege.org.sg
Singapore College of Insurance

CPE Registration No.: 199408491M
Period of CPE Registration: 26-09-2023 to 25-09-2027

CM-LIP 1st Ed V1.0 (Full Combined)

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CM-LIP: Life Insurance and

Nurturing Asia’s Best

Any website references are correct as of the time of publication.

WARNING TO ALL EXAMINATION CANDIDATES

Chapter 1 Risk And Life Insurance 1-1

1. Risk And Insurance

Copyright reserved by the Singapore College of Insurance Limited [V1.0] i

C. Insurable Interest Required For Life Insurance Under Insurance Act

Chapter 2 Setting Life Insurance Premium 2-1

Chapter 3 Classification Of Life Insurance Products 3-1

1. Ways Of Classifying Life Insurance Products

ii Copyright reserved by the Singapore College of Insurance Limited [V1.0]

Chapter 4 Traditional Life Insurance Products 4-1

1. Common Types Of Life Insurance Policies

Chapter 5 Riders (Or Supplementary Benefits) 5-1

1. Riders (Or Supplementary Benefits)

Copyright reserved by the Singapore College of Insurance Limited [V1.0] iii

Chapter 6 Participating Life Insurance Policies 6-1

1. What Are Participating Policies?

Chapter 7 Investment-linked Life Insurance Policies (ILPs): Types, 7-1

iv Copyright reserved by the Singapore College of Insurance Limited [V1.0]

9. Investing In ILPs With CPF Savings

Copyright reserved by the Singapore College of Insurance Limited [V1.0] v

Chapter 8 Investment-linked Sub-Funds 8-1

1. Purpose And Benefits Of Investment-linked Sub-Funds

Chapter 9 Investment-linked Life Insurance Policies: Computational 9-1

vi Copyright reserved by the Singapore College of Insurance Limited [V1.0]

Chapter 10 Annuities And Other Life Insurance Products 10-1

1. What is CPF LIFE?

Chapter 11 Application And Underwriting 11-1

1. Life Insurance Proposal Form

Copyright reserved by the Singapore College of Insurance Limited [V1.0] vii

Chapter 12 Policy Services 12-1

A. Requirements For Application Of Policy Loans

viii Copyright reserved by the Singapore College of Insurance Limited [V1.0]

Chapter 13 Life Insurance Claims 13-1

Chapter 14 The Insurance Contract 14-1

1. Elements Of A Valid Insurance Contract

Copyright reserved by the Singapore College of Insurance Limited [V1.0] ix

A. The Policy Owner’s Rights

Chapter 15 Law Of Agency 15-1

1. Agency, Principals And Agents

Chapter 16 Income Tax And Life Insurance 16-1

x Copyright reserved by the Singapore College of Insurance Limited [V1.0]

K. CPF Relief For Self-Employed Persons

Chapter 17 Insurance Nomination, Wills And Trusts 17-1

1. Framework For The Nomination Of Beneficiaries (NOB)

Copyright reserved by the Singapore College of Insurance Limited [V1.0] xi

A. Different Nomination Forms

Table 1: Future Value Interest Factors For One Dollar

Chapter 18 Introduction To Structured Product 18-1

1. What Is A Structured Product?

D. Challenges Facing Structured Products

xii Copyright reserved by the Singapore College of Insurance Limited [V1.0]

Chapter 19 Risk Considerations Of Structured Products 19-1

Chapter 20 Understanding Derivatives 20-1

1. What Are Derivatives?

Copyright reserved by the Singapore College of Insurance Limited [V1.0] xiii

Chapter 21 Introduction To Structured ILPs 21-1

1. What Is A Structured ILP?

Chapter 22 Portfolio Of Investments With An Insurance Element 22-1

1. What Is A Portfolio Of Investments With An Insurance Element?

Chapter 23 Case Studies 23-1

1. Case Study 1 – Annual Payout Plan