The Certificate Examination In Investment-Linked Life Insurance

Table of Contents CHAPTER 1: Introduction To Investment-linked Life Insurance

CHAPTER 2: Key Considerations In Investment

CHAPTER 3: Types of Investment Assets

CHAPTER 4: Investment link Life Insurance Product : A World Scenario

CHAPTER 5: Types of Investment-linked Life Insurance Products

CHAPTER 6: Structure of Investment-linked Funds

CHAPTER 7: How Investment-linked Life Insurance Products Work

CHAPTER 8: Benefits And Risks Of Investing In Investment-linked Funds

CHAPTER 9: Comparison Between Investment-linked Life

Insurance And Traditional With-Profit Life Insurance Products

CHAPTER 10: Taxation And Law Covering Investment-

linked Life Insurance Products

CHAPTER 11: Identifying And Satisfying Customer’s Needs

CHAPTER 12: Marketing And After-Sales Services, Ethics

And Code Of Conduct

Prepare, guide and assist the potential agents to be and eventually excel in the compulsory exam.

**Note: For another overview and more sample questions, please refer to the contents in the CD.

Objective

1

Chapter 1 : Introduction to Investment-Linked Life Insurance

Objective: -To understand the nature of investment-linked life insurance.

Investment-linked insurance offers investors policies where:

Premiums are used to purchase funds

§ Value of policy linked to units in a special unitised fund § Value of units directly reflect the value of the underlying fund § Wide range of investment modes covering equity, fixed interest and money

market

Policyholder

Pay premium to purchase fund

Fund managed by Insurer

Protection

Investment

Value of Policy Special Unitised Fund

Investment

linked

Directly linked

Investment-linked insurance offers investors policies where:

Premiums are used to purchase funds Value of policy linked to units in a special unitised fund Value of units directly reflect the value of the underlying fund Wide range of investment modes covering equity, fixed

interest and money market

Death

TPD

PA

Health

2

Summary of Key Points: -Modus operandi of Investment-linked policy: Protection and Investment

- Protection:

(a) Death Benefits (Benefits receivable in the event the insured die)

(b) Total Permanent Disability; TPD (Benefits receivable in the event the insured

experience TPD. E.g: Full Body Paralysed)

(c) Personal Accident; PA (Benefits receivable in the event the insured

met with accident. E.g: Injury or hospitalisation incurred due to accident)

(d) Health (Benefits receivable in the event the insured being diagnosed with

health problem. E.g: Heart Attack)

3

Sample Questions 1. What is an Investment-Linked policy? a. A participating Whole Life Policy. b. A Capital and returns guaranteed policy. c. An endowment policy only d. A plan that offers clients’ coverage and investment returns. 2. All the following statements are TRUE, except; a. The Investment- Linked policy is directly linked to investment performance. b. Once the policy is in force, the clients’ investments will grow steadily. c. Fund managers will make sure that the Investment Linked policy is shielded from market fluctuations. d. The Investment Linked policy only provides coverage and nothing else. 3. What was the main reason for the steady growth of the Insurance Industry in Malaysia? a. The liberation of regulations by the Ministry of Finance and Bank Negara Malaysia. b. The introduction of Investment-Linked policies. c. The efforts by insurance companies to design and offer customer-centric and good plans. d. The robust growth of the country’s economy. 4. The investment returns under an investment-linked life insurance policy I are linked to the performance of the investment fund managed by the life office. II fluctuate according to the rise and fall of market prices. III are not guaranteed. IV are assured. a. I and III b. III and IV c. I, II and III d. I, III and IV

**Note: For another overview and more sample questions, please refer to the contents in the CD.

4

Chapter 2 : Investment Objectives Objectives: -To understand the functions of investment-linked life insurance. -To understand the factors affecting investment-linked life insurance. -To understand the performance of investment-linked life insurance. -To obtain a comprehensive introductory knowledge of the technical, taxation and other aspects of investment-linked life insurance. Investment Objectives Why Do People Invest

1. Comfortable standard of living 2. Fund for their dependants 3. Children - education fund 4. Financial position 5. Hedge inflation

6. Liability cancellation

7. Income in retirement.

8. Financial freedom

9. Paying necessary expenses and taxes

10. Financial freedom

Why Should I invest? Depend on what I want?

§ To get Regular Income, e.g. Fixed Deposit or § To get Capital Gain, e.g. Share

Investment decision depends on :-

§ Level/amount of fund § Source of the available funds

o Lump sum or o Regular

5

Risk or Security 3 consideration in investment

Individual’s need for Security

Risk of losing initial investment

Rate of return is not up to expectation

Attitude Towards Risk/ Risk tolerance

Risk Adverse

Risk Neutral

Risk Taker

Type of Investment with Certain Inherent Risk

Higher risk & uncertainty higher potential for capital & income growth

Individual’s need for Security

Risk of losing initial investment

Rate of return is not up to expectation

Attitude Towards Risk/ Risk tolerance

Risk Adverse

Risk Neutral

Risk Taker

Type of Investment with Certain Inherent Risk

Higher risk & uncertainty higher potential for capital & income growth

Investment Horizon How long will you lock into an investment depends on:

§ Age of investor § Current financial position § The needs

Accessibility Of Funds

1. The time horizon of needs of the fund –short term, medium or long term investment.

2. The cost or penalty of realizing the investment before its maturity period. I.e: Cost or penalty for early withdrawal of funds. 3. Initial cost in setting up or buying into the investment.

Tax Treatment No special tax laws on investment-linked insurance. The tax status is the same as traditional with profit life insurance products.

6

Performance of the Investment Depends on:

1. Country’s economic factors 2. Competencies, capacity of the management team 3. The invested company’s level of cost 4. The invested company – past experience and history 5. Life cycle of the investment

6. Regional and Global economic factors Key Considerations In Investment a) Safety : - depends on the risk appetite of the customer. - relatively safe investment return more conservative, but client forego growth and income stream. b) Income - Risk-Return trade (Higher risk, higher return and vice versa) c) Growth - Realise capital gains and derive profits from the growth of investments.

Funds Availability

- Amounts of funds available for a person to invest.

- Method: Scrutinize personal budget.

- Importance of drawing personal budget:

(a) Take control of spending

(b) Find money to save and invest

- Personal budget can be drawn from:

(a) Cash Flow = Cash Inflow – Cash Outflow

(b) Net Worth = Total Assets – Total Liabilities

7

(a) Monthly Cash Flow Analysis

Cash Inflow RM Salary 5,000.00 Rental 500.00 Commissions 1,000.00 Others 1,000.00 TOTAL CASH INFLOW 7,500.00

Cash Flow = Cash Inflow - Cash Outflow Net Cash Flow = RM 7,500 - RM 6,500 = RM 1,000 (b) Simple Net Worth Analysis

No Assets (Present Value) Amount (RM) Liabilities Amount

(RM) 1 House 220,000.00 Housing Loan Balance 200,000.00 2 Car 30,000.00 Car Loan Balance 35,000.00 3 EPF 20,000.00 Credit Card Balance 5,500.00 4 Savings Account 1,500.00 Personal Loan balance 10,000.00 5 Ins. Cash Value 20,000.00 Others 15,000.00 Net Worth 26,000.00

TOTAL 291,500.00 TOTAL 291,500.00 Diversification Diversification in investment involves reducing the risks of investment by putting the fund under management into several categories of investment

“Do not put all your eggs in one basket” IMPORTANT: Diversification DO NOT completely eliminates the risk of investing in stocks in a Portfolio.

Cash Outflow RM Rental/Housing Loan Payments 1,000.00 Groceries and Utilities 750.00 Childcare/ Parents allowance 500.00 Education Expenses 250.00 Loans (Car, Credit Cards etc) 2,000.00 Insurance Premiums 500.00 Savings 500.00 Misc 1,000.00

TOTAL CASH OUTFLOW 6,500.00

8

Summary of Key Points:

-Risk presents anywhere and in all circumstances. -Risk is measured through probability. -Method to overcome risk: (a) Insurance contract (b) Non-Insurance contract -Trade-off: (a) Risk Vs Security (b) Risk Lover Vs Risk Averse -Optimistic investors prefer higher risk. -Pessimistic investors prefer lower risk. -Higher is the expected return, the higher is the risk and vice versa. -Knowledge of one’s risk profile and preferred investment horizon are needed to avoid mismatch of risk, return and maturity date. -Key considerations in Investment (Safety, Income and Growth) - Personal budget: (a) Cash Flow = Cash Inflow – Cash Outflow (b) Net Worth = Total Assets – Total Liabilities -Diversification used as the solution.

9

Sample Questions 1. An agent owes the client a moral obligation to… a. Educate a client to be an expert investor. b. To recommend specific funds to invest in. c. Educate clients’ with some basic and sound investment principles. d. Make decisions on behalf of the client. 2. Clients want to invest; i. To lead a comfortable lifestyle. ii. To be comfortable during retirement. iii. To amass great wealth. iv. To provide adequate funding for their children’s needs. a. i,ii,iv only. b. i,ii,iii only. c. i,ii,iv only. d. ii,iii,iv only. 3. What must an agent do to ensure the client is given proper advice on investment? a. Ensure that there is a right combination of objectives and make sure proper risk analysis is done. b. Show the wide selection of investment for the client to choose from. c. Motivate the client to borrow money to invest in guaranteed investment vehicles. d. Ensure that the advice is advantageous to the agent and the insurance company. 4. What are the factors that can affect commodity prices? I Demand and supply II Weather conditions III Pest attacks IV Insecticides a. I, II and III b. I, II and IV c. II, III and IV d. I, II, III and IV 5. A liquid instrument which carries little or no risk of losing the principal amount is known as a. cash and deposits b. treasury bills c. commodities d. shares.

10

6. Every single investment vehicle can be categorized based on fundamental characteristics. What are they? I Safety II Taxation treatment III Growth (capital gains) IV Income (steady stream of income) a. I and II b. I, II and III c. I, III and IV d. II, III and IV 7. Who has a greater or wider choice of investment available? a. A long term investor b. A small time investor c. A fixed income investor d. An investor with large funds **Note: For another overview and more sample questions, please refer to the contents in the CD.

11

CHAPTER 3: TYPES OF INVESTMENT ASSETS Objectives: - To understand the various types of investment assets. - To understand the advantages and disadvantages of the respective investment assets. Type of Investment Assets

1. Cash & Deposits 2. Fixed Income Securities 3. Shares 4. Unit Trusts 5. Investment Trust 6. Property 7. Real Estate Investment Trust (REITs) 8. Derivatives 9. Exchange Traded Funds (ETF) 10. Sukuk Bonds 11. Capital Guaranteed Fund 12. Commodities

13. Life Insurance 14. Annuities Cash And Deposit

§ All liquid instrument § Short term debts instruments. § These Cover.

Central bank

Institution Issued at discount rate

Discharged at face value

Short Term investment. Usually < 1 year The government guarantees the investment.

I.e.: No risk (Exception: Politically instability)

• Treasury Bills

Treasury Bills Bank Accounts

12

Spot market, a type of cash markets are market which quote prices referred to the current market price of an item available for immediate delivery

Fixed Income Securities

§ Investor lend money to issuer (government or company) § Return in fixed interest § Capital repayment at maturity § Regarded as IOUs § Traded in secondary market

Low yield in return Capital erosion in the case of high

inflation

Rates stated at the inception will not change in response

to changes in market interest rates

Penalty for early withdrawal

Minimal risk (loss of principal)

Safest type of investment, (Considered no risk

as it is guaranteed by government)

Highly Liquid

13

Types of fixed income securities

§ Money market instruments § Government bonds § Corporate bonds § Convertible bonds § Preference shares

Fixed Income Security: Government Bonds - Objective: Government raise funds from the public

- Extremely low default risk or credit risk

- Interest payments and repayment of principal are guaranteed § Safest – little or no default or credit risk

§ Government guarantees to pay interest and repay principal

§ Fixed interest rate

§ Issued when government needs money to finance project

Classification of bond § short term bonds (<5 years to maturity) § medium term bonds ( 5 - 10 to maturity) § long term bonds (> 15 years to maturity) Fixed Income Security : Corporate Bonds Objective: Corporate companies raise funds from the market. Types of corporate stocks

1. Debenture Stocks 2. Loan Stocks 3. Convertible Stocks

14

Note: Unsecured non-convertible bonds yield the highest return.

• Secured loans • Fixed charge on

company’s property or assets

• Fixed rate & term • Option to repay the

debenture stocks holders earlier.

• Trustee appoint: - Supervise interest &

capital payment - If default, act for

investor

• Unsecured loans • Fixed interest rate

& term • Risk losing capital • Less secure than

debenture stocks, so higher interest rate

• Convertible to ordinary shares of a company on a fixed date

• Become part of owner & entitled to profits through dividends declared

Debenture Stocks Loan Stocks Convertible Stocks

Debenture Stocks

Loan Stocks

Government Bonds

Risk

Return

15

Shares

Share price influenced by:

§ Currency performance

§ Market’s view on company

§ Country’s economy

§ Interest rate levels

§ Inflation rate

§ Company’s earning

•Shareholder receives fixed dividends if company earned profit

•Have priority claims

•Prioritized compared to ordinary share holders in the event of profit or loss

•Share prices are less volatile

• No voting rights

• Investor is a shareholder

• Shareholder owns part of the company

• Return in the form of dividends

• Shareholder may or may not receive dividends

• Dividend rate fluctuates according to company’s profits

• High liquidity

• Strong potential of capital appreciation

• Share prices are more volatile

• Excluded from tax

• Market risk and specific risk

• Subject to inflation hedge

• Voting rights

Preference Shares Ordinary Shares

2 main types

Preference Shares Ordinary Shares

16

Unit Trusts Modus Operandi

In Malaysia, unit trusts are supervised by the Securities Commission Unit Trust: § Provides capital gain through hundreds of different securities § Diversification § In term of unit pricing § Generate income – dividends, interests and capital gains

Investor

Open ended Fund

Pool of Funds (managed by professional fund

managers)

Kept by: Trustee and governed by a Trust Deed

Managed by: The Investment manager(Fund manager)

17

Investment Trust

“A closed-end fund and does not have to dispose off its assets if large number of

investors sell their shares”

• Bewildering array of funds

• Extra costs for switching • Spread of investments

• Lower risk compared to shares

• Professional service (fund managers)

• Minimize paperwork to investors

• Income from dividend can be reinvested

• Partial utilization

Advantages Disadvantages

Pool of Funds (managed by professional fund managers)

Investor A

Closed-end fund

Investor B

(6) $

(5) Sell

(1) RM (2) Units

(4)

(3) Invest

18

Investment Trust is: § Similar to unit trust § Buying and selling transaction at Secondary Market. I.e: Bursa Malaysia § More flexible § Much simpler § More accessible § More cost effective for small investor

e.g: AFFIN Fund Management Sdn. Bhd. BHLB Asset Management Sdn. Bhd. Maybank Investment Management Sdn. Bhd.

Property 3 types of real estate investment: • Agricultural Property • Domestic Property • Commercial / Industrial Property

• Formed by Trust Deed • Purchase units in trust,

not shares in company • Open-ended fund

i.e: no fixed redemption date

• Disposes assets when large numbers of investors cash-in

• Lower risk

• Registered under Companies’ Act

• Purchasing shares in company

• Closed-end funds i.e: fixed redemption date

• No asset disposals if large numbers of investors cash-in

• Higher risk

• Preferably not presumed as very short term investment (not < 3 years)

Unit Trust Investment Trust

19

Real Estate Investment Trust (REITS) It is a latest asset classification that has potential to have fair return on investment. Main criteria’s: • Alternative asset group to equities and bond • REITs company manage and distribute rental • Return in the form of dividends

• Agriculture

• Domestic

• Commercial/ Industrial

Location Type of building

Land quality & fertility Location Value of building

• Potential capital appreciation

• Steady income flow • Low risk • By mortgaging: capital

is freed

• During recession: Property difficult to be disposed off

• Less liquid

Advantages Disadvantages

20

Derivatives Derivatives are financial instruments whose values are linked to the price of the underlying instruments in the cash markets.

Investor can buy a right, not obligation, to purchase or sell a security • At a future date (within a specified time period) • At a fixed price • Terms are normally 3, 6, 9 months

Derivatives Warrants Warrants -Transferable Subscription Rights (TSR) allows option holders the right to convert to ordinary shares at: Predetermined conversion ratio or; Fixed price ; Within a specified time period

Similar to call option Attach free with loan stocks or rights Usually detached from the loan stock and traded separately in securities market

Disadvantage: • On expiry, warrants which are not exercised lose their value completely

2 popular derivatives:

Stock Options Financial Futures

Options Warrants Futures

Call A right to buy

Put A right to sell

21

Future

Future Commodity

For commercial buyers and sellers Can be bought as:

- Physicals - Futures

The Malaysian Commodity exchange for Trading futures in crude palm oil, crude palm kernel oil, tin, rubber, and cocoa. Generally, it is:

• Volatile • Depend on supply & demand • Other factors e.g. weather • Very high risk

Physical Commodities & financial instruments

Traded in Cash Market

Forward Markets Price of an item

for deferred delivery

Spot Markets Current market price

of item Available for

immediate delivery

Future Markets

22

Exchange Traded Funds (ETF) Exchange Traded Funds (ETF) or exchange-traded product (ETF) is an investment fund traded on stock exchanges. ETF Criteria includes: • Holds assets (stocks or bonds) • Similar to unit trust (exception: listed and traded as stocks and shares • Price is approximated to be same as the underlying assets • Mostly track an index Type’s of ETFs includes: (a) Index ETFs (b) Commodity ETFs or ETCs (c) Bond ETFs (d) Currency ETFs or ETCs (e) Actively managed ETFs (f) Exchange-traded grantor trusts (g) Leveraged ETF Malaysia Scenario examples are: -AFFMY1 -CIMBA40 -FBMKLCI-EA -MYETFDJ Sukuk Bonds Sukuk is taken from the Arabic language that basically means financial certificates which is equivalent to bonds. As permissibility in Islam disallows the usage of fixed income and bonds that bears interest income, Sukuk is being formatted to be in line with Islamic law on investment principles.

• Low Cost • Tax efficiency • Stock-like features • Close-ended fund i.e: fixed redemption date

Advantages

23

Capital Guaranteed Fund (CGF) • Investment vehicle offered by certain institutions • Initial capital invested is guaranteed from any losses. • Investor’s do not incur losses with exception it is not redeemed prior to the maturity date

• Commercial paper • Provide investor a share of ownership in the underlying asset • Investors enjoy the division of assets in proportion to their investment • Investors bear the credit risk of the issuer • Issued by pooled funds (Mutual funds) • Based on hard assets that generate steady income and expectations • Originators may or may not guarantee the sukuk • Investors receive a fee equal to the income of the underlying assets • Issued by Special Purpose Vehicles (SPVs), subsidiaries of banks, trust

called SPV • Mostly issued in dollars • Unlike conventional bonds (tangible assets based instead of debt based) and in compliance with Syariah principal • 14 kinds of Sukuk (most used: Sukuk Al Ijara & Sukuk Al Musharaka)

Criteria’s

• High asset allocation in guaranteed investment instruments. Normally up to 80-90% total fund size. • Benchmark comparison with Fixed Deposit rate because slightly higher in risk than FD. • Investment horizon normally 3-5 years • Offered only during offer period. No more subscription after closing date and have to wait for another series to be launched. • Normal value per unit starts at RM1.00 for ease of return calculation • Higher initial investment compare to UT fund • Min initial investment amount is RM 5,000 • Entry fee is relatively low compared to other instruments (service charge is 1.5% practiced by industry) • Redemption fee before maturity, range from 0.3% to 1.5% of Net Asset Value (NAV) • Examples: (a) OSK-UOB capital guaranteed Funds Series (b) RHB Unit Trust (c) Hwang-DBS capital Guaranteed Fund

Features

24

Life Insurance

Annuities § Pays lump sum - then gets periodical smaller amounts until death. § To protect loss of income

- Arising out of excessive longevity.

Immediate Annuity § Yearly payments begins immediately and continues throughout the life of the

annuitant Deferred Annuity § Annuity contract whereby the annuity payments will begin at a determined time in

the future

Term

Endowment

Whole Life

Annuity

• Investment that provides a return upon death, disability, critical illness or maturity.

• Returns linked to

investment performance § Indirectly § Directly

Whole Life & Endowment Policies

• Purely protection plan • Payment of sum

assured upon death or death/TPD

• Upon maturity:

nothing paid out

Term

25

Summary of Key Points: -11types of investment (Cash & Deposits, Fixed Income Securities, Shares, Unit Trusts, Investment Trust, Property, Derivatives, Exchange Traded Funds, Sukuk , Capital Guaranteed Funds, and Life Insurance) -Criteria’s of each asset and asset groups -Similarities and differences of each asset and assets groups -Advantages and disadvantages of each asset and assets groups -Risk and return on each assets and asset groups -Volatility of each asset and assets group -Tenure (time horizon) of the assets -Supervisory board of each asset and assets group

26

Sample Questions 1.The following instruments fall under Corporate Bonds EXCEPT; a. Debenture Stocks. b.Loan Stocks. c. Convertible Stocks. d.Warrants. 2.Sukuk have the following characteristics EXCEPT a. They are issued by pooled funds. b.They adhere to strict Syariah principles. c. They can be guaranteed or not by their originators. d.They can only be bought by Banks and Financial Institutions. 3.Mr. Indran wants to invest his money in a conservative steady income generating investment vehicles. Your suggestion to him would be to put his money in; i. Treasury Bills, Sukuk Bonds, REITs, ii. Preference Shares, Warrants, Derivatives. iii. Fixed Income Securities, Government Bonds, Corporate Bonds. iv. Commodities, Futures, REITs. a. i,ii,iii,iv b.i,iii c. ii,iii d.iii,iv 4. What type of investment allows an investor to buy a right to purchase or sell a security at a fixed price within a specified time period? a. Shares b. Options c. Property options d. Unit trust options 5. Treasury bills are generally considered to be of no risk. When is this NOT true? a. When the share market drops b. When the bank interest rate falls c. When the property market crashes d. When the country is politically unstable 6. Which type of investments offer bigger capital and income growth? a. Investments with no risks b. Investments with little risks c. Investments with higher risks d. Investments with highest risks

27

7. Who are appointed to supervise the way a company performs its obligations in respect of debenture stocks? a. Bankers b. Lawyers c. Trustees d. Arbitrators 8. What are the types of investments of property funds? a. Real estate only b. Property shares only c. Individual property only d. Real estate and property shares 9. Which of the following is/are NOT readily available for most individual investors? a. Property b. Investment trusts c. Annuities and pensions d. Buying up a new company 10. What is the main disadvantage of property funds compared to equity funds? a. Property has lower liquidity b. Property carries a lower risk c. Property funds are a safer investment d. Property funds are difficult to sell at a profit 11. Which funds are at the top end of the risk-return graph? a. Cash funds b. Equity funds c. Balanced funds d. Managed funds **Note: For another overview and more sample questions, please refer to the contents in the CD.

28

CHAPTER 4 : A WORLD SCENARIO

Objectives: - To be aware of the history and establishment process of investment-linked life insurance. - To be familiarize of the establishment process of investment-linked life insurance. History: 1957 - 1st policy issued in UK. known as unit-linked policy. 1976 - In US, known as variable life policy. 1992 - In S’pore, launched by Prudential currently, market leader. 1997 - Berjaya Prudential Assurance Bhd (1st Launch) 1998 - Maybank Life Assurance Bhd.

The term ‘Investment-linked’ in Malaysia shall be similar to the term “Unit-Linked” in the United Kingdom and to the term “Variable Life” in the United States.

The first new generation investment-linked life insurance product was the Hambro Whole Life Plan introduced in 1977

The introduction of the Enhanced Investment Scheme (EIS) by the Central Provident fund in 1993 is one of the factors which contributed to the expansion of the investment-linked insurance business in Singapore

Insurance agents and agency office employees dealing in variable life insurance must register with the National Association of Securities Dealers Insurance companies or the sales company dealing in variable life insurance must register as a broker-dealer Insurance agents and agency office employees dealing in variable life insurance must pass an examination in securities business

Summary of Key Points: -History of Investment-linked policy -Factors affecting expansion of Investment-linked products -Registration Rules and Organizations -Regulated exams that need to be passed by the insurance industry players

29

Sample Questions 1. The first Investment-Linked Insurance plan was introduced by which company in Malaysia? a. Mayban Life Assurance Berhad b. Syarikat Takaful Malysia Berhad. c. Berjaya Prudential Assurance Berhad. d. Malaysian Assurance Alliance Berhad. 2. The Investment-Linked Life insurance policy was introduced to these countries 30 years ago EXCEPT:- a. United States Of America. b. United Kingdom. c. Malaysia. d. Singapore. 3. Adam lives in the UK. He was impressed by the Investment-Linked Life Insurance policy that you had bought when he was down for a holiday in Malaysia. He now is in London and wants to buy a similar plan. What plan should he say that he wants to buy to his agent? a. Investment-Linked Life Insurance Plan. b. Universal-Variable Life Insurance Plan. c. Variable Life Insurance Plan. d. Unit-Linked Life Insurance Plan. **Note: For another overview and more sample questions, please refer to the contents in the CD.

30

CHAPTER 5 : TYPES OF INVESTMENT-LINKED LIFE INSURANCE PRODUCT

Objectives: - To understand the nature of investment-linked life insurance. - To understand the charges and fees imbued in investment-linked life insurance. - To understand the various types of investment assets - To be knowledgeable of the guidelines governing risk based capital.

How do Investment-linked Life Insurance Policies Work

Policyholder

Pay premium to purchase fund

Fund managed by Insurer

Protection

Value of Policy Special Unitised Fund

Investment

linked

Directly linked

Investment-linked insurance offers investors policies where:

Premiums are used to purchase funds Value of policy linked to units in a special unitised fund Value of units directly reflect the value of the underlying fund Wide range of investment modes covering equity, fixed

interest and money market

Death

TPD

PA

Health

Investment

31

How do Investment-linked Life Insurance Policies Work

Charges Policy Fee Annual fund management fee Bid-offer spread Reduction in allocation of units -Unallocated premiums Initial units Mortality charges Surrender charges

Policy Fee to cover the administrative expenses of setting up the investment-linked life

insurance policy Annual Fund Management Fee Investment management charges Deduction of 05% to 2% annually from fund accumulated

Mortality Charges Dependent on age Cover mortality cost of the policy Can be a recurrent charge (e.g. monthly) –funded by cancellation of units on a

regular basis Allows policy owner to vary sum assured over time

Policy Owner’s Units Surrender WithdrawalDeath claim

Life Office Marketing & set up

expenses

Cancel units to pay Mortality charges

& policy fee

Single Premium/Top Up

32

Surrender Charges Charge deducted from value of units at surrender Represents initial expenses incurred but yet to be recovered The initial units • All of the policy owner’s premium allocated to buy investment units • Units allocated in early years is known as initial units. • Initial units will have higher annual management charges such as 6% per annum

throughout the term of the policy contract • Means that their cash value of the initial units is much lower than their face value

for the years • Is much less commonly used these days than in the past

The protection cost: § Are generally covered by cancellation of units in the fund § Are generally met by explicit charges stipulated openly in the policy terms § Vary with age of policy owner and level of cover

Reduction Allocation (Unallocated Premium) • Part of the policy owner’s premium is set aside for unallocated premium to meet

marketing (e.g commission) and policy setting up expenses Types of Investment-linked Insurance Policies § Single Premium Investment-linked Whole Life Plan § Regular Premium Investment-linked Whole Life Plan § Investment-linked Individual Pension Plan § Investment-linked Permanent Health Insurance § Investment-linked Dread Disease Insurance § Investment-linked Education Insurance § Investment-linked Takaful Policies

Selling price of units

Offer Price

Bid Offer Spread

Price at which the units are cashed when the policy matures, surrendered or used to pay charges

(-) = Bid price

33

Single Premium Investment-linked Whole Life Insurance Plan § Long-term saving and investment § 125% of the single premium paid § Min amount RM3,000 § There is no fixed term § Top-ups or injection are allowed

Regular Premium Investment-linked Whole Life Insurance Plan § Premium paid at regular intervals, monthly, quarterly or annually § Two distinct purpose:

§ Investment § Life protection

Investment-linked Individual Pension Plan § Involves a high allocation of the premium through simply accumulating the fund to retirement

Investment-linked Permanent Health Insurance § Provide health coverage § Contains cash value

Investment-linked Dread Disease Insurance § Advances the whole of the face amount in the event of the diagnosis § Risk cost is reviewed on a regular basis Investment-linked Education Insurance § Provide funds for future education § Main selling policies in almost all insurance companies in Malaysia Investment-linked Takaful Policies § Family takaful plan that combines investment and takaful cover § Provides death and disability benefits § Policy holder decides on contribution’s allocations towards protection and investment

34

Risk Based Capital Guidelines Initial start period: I Jan 2009

• Framework to ensure adequate capital resources to reflect underlying risk profiles of individual insurers. • To manage business more effectively, by identifying sources of risk, implement appropriate measures to mitigate, manage or remove risks. • Eg: Insurers with high risk assets will be required to hold more capital reserves. Insurers with low Capital Adequacy Ratio (CAR) have to inject additional capital.

• Enable insurers to achieve sustainable profitability whilst safeguarding policyholder interest • Enhance overall risk awareness • Improved the quality of operational risk and corporate governance. • Insurers enhance operations to improve their risk profile: i. Improve quality of risk selection and underwriting ii. Reduce volatility in loss experience through better claims management. iii. Greater emphasis on product design and pricing • Ensure good risk management practices proper monitoring and control of investments. Thus, insurer are required to: i. Establish adequate internal controls ii. Include rigorous audit procedures iii. Install effective procedures iv. Derive suitable plans v. Undertake regular stress testing vi. Ensure key staff have appropriate levels of skills, experience, expertise and integrity

Objectives

Criteria’s

35

Summary of Key Points: -Modus operandi of Investment-linked policy: Protection and Investment - Protection: (a) Death Benefits (Benefits receivable in the event the insured die) (b) Total Permanent Disability; TPD (Benefits receivable in the event the insured experience TPD. E.g: Full Body Paralysed) (c) Personal Accident; PA (Benefits receivable in the event the insured met with accident. E.g: Injury or hospitalisation incurred due to accident) (d) Health (Benefits receivable in the event the insured being diagnosed with health problem. E.g: Heart Attack) -7 Types of investment-linked policy (Single Premium Investment-linked Whole Life Plan, Regular Premium Investment-linked Whole Life Plan, Investment-linked Individual Pension Plan, Investment-linked Permanent Health Insurance, Investment-linked Dread Disease Insurance, Investment-linked Education Insurance, Investment-linked Takaful Policies) - Risk Based Capital enhance overall risk awareness by ensuring insurers to achieve sustainable profitability whilst safeguarding policyholder interest -Risk Based Capital guidelines objectives and criteria’s

36

Sample Questions 1. What are the fees and charges that are levied on an Investment-linked product? i. Policy Fee, Management Fee, Buying Price, Surrender Charges. ii. Unallocated Premiums, Selling price, Withdrawal Charges, Free look Charges. iii. Bid Price, Offer Price, Mortality Charges, Initial Units. iv. Allocated Premium, Withdrawal Charges, Mortality Charges, Initial Units. a. i,ii only. b.i,iii only. c. i,ii,iii only. d.ii,iii,iv only. 2. What are the following supplementary benefits that can be added to an investment-linked fund? i.Dread Disease Rider

ii.Loan Cancellation Rider iii.Medical Benefits Rider iv.Holiday Planner Rider. a. i,ii,iii. b.i,iii,iv. c. i,iii. d.ii,iii,iv. 3. Which of the following statement about Investment-Linked Takaful Product is TRUE? a. This product was solely created to satisfy the needs of all Muslims in Malaysia so as to provide a savings and protection program. b.Conventional insurance companies also provide Takaful cover to the Malaysian public. c. Due to the importance placed in Syariah compliance, Investment-Linked Takaful is generally unpopular and is only bought by religious people. d.Takaful products do not have the kind of flexibility that other Investment-linked products have. 4. Using the single pricing method, calculate the cash value of 4,000 units at a unit price of RM1, a mortality charge of 2% and a RM100 policy fee. a RM3,500 b RM3,800 c RM3,820 d RM3,620

37

5. What does the investment-linked permanent health insurance offer? I Health cover on disability income II Medical expenses III Death cover IV Cash value a I and II b I and IV c II and III d III and IV 6. What type of investment-linked insurance plan provided practically NO life protection at all? a Single premium insurance plan b Regular premium insurance plan c Investment-linked individual pension plan d Investment-linked permanent health insurance 7. How can an ordinary investor gain access to well diversified investment-linked funds managed by professional investment managers with proven track records? a By buying an investment-linked life policy b By buying a whole life with-profit policy c By buying an endowment life policy d By buying an annuity 8. The Takaful investment-linked life plans are developed by a takaful companies b composite insurers c Bank Negara Malaysia d Syarikat Takaful Malaysia Sdn. Bhd. 9. The Risk-Based Capital Framework for insurers was implemented on a 1 January 2008 b 1 January 2009 c 1 February 2009 d 1 October 2009 10. The _______ of an investment-linked life insurance policy must be at least 18 years old. a nominee b assignee c life assured d policy owner **Note: For another overview and more sample questions, please refer to the contents in the CD.

38

CHAPTER 6: STRUCTURE OF INVESTMENT - LINKED FUNDS

Objectives: - To understand the structure of investment-linked life insurance. - To understand the types of investment-linked funds. - To instill a sense of social and professional responsibility in those selling investment- linked life insurance products.

Investment - linked funds can be structured into: § Accumulation units § Distribution units

Types of Investment – linked Funds § Cash funds § Equity funds § Bond funds § Property funds § Specialized funds § Diversified funds § The number of unit purchased

Accumulation Units

Investment income is ploughed back into the fund. Unit prices will increase over the long term.

Distribution Units

Investment income is used to purchase additional units to be distributed to the policyholders. Price of units remains unchanged but policy owner gets more units.

Accumulation Distribution

Fund Investment

Capital

Income

In long term, unit price will rise

Fund Investment

Capital

Income

Unit price unchanged

39

TYPE INVESTMENT AREAS REMARKS

Cash Funds • Cash • Bank Deposits

Low risk, secure

Equity Funds • Stock, shares Capital Appreciation Bond Funds • Government &

corporate bonds • Fixed income

instruments

Property Funds • Real estate • Property trust

Illiquid assets.

Specialized Funds

• Geographical area • Specialized

industries

Risk of Currency Exchange

Diversified Funds

• All kinds of assets • E.g.: equity, bond,

cash

Balance Funds • Funds invest fixed proportion of specified assets.

• 70% in equity • 30% in bond

Risk & Return based on Type of Funds Switching § Switch part or all of the investment from one fund to another fund § For the purpose of retirement and education fee planning § Switches between funds may : -

- Be offered free of charge - Be offered free of charge for a limited number of switches - Incur a specific charge for each and every switch

Return

Risk

Bond Funds

Managed Funds

Equity Funds

Cash Funds

Balance Funds

*

*

*

*

*

40

Summary of Key Points: -Investment-linked structure (Accumulation and Distribution)

- Types of Investment-linked Funds (Cash Funds, Equity Funds,Bond Funds ,

Property Funds, Specialized Funds, Diversified Funds, Number of Unit Purchased)

-Risk and Return on Types of Funds

-Funds switching criteria’s

41

Sample Questions 1. Investment-linked funds can be structured into two ways, namely accumulation units and distribution units. In accumulation units, the investment income of the funds is a. Ploughed back into the fund, thus the unit prices will increase over the long term b.Ploughed back into the fund, thus the unit prices will decrease over the long term c. Used to purchase additional units to be distributed to the policy owners, thus the unit price remains unchanged but the policy owners get more units d.Used to purchase additional units to be distributed to the policy owners, thus the unit price decreases and the policy owners get more units 2. In risk-return profile of cash funds, bond funds, balanced funds, managed funds and equity funds, a risk-return graph will show that

i. higher return normally comes with lower risk ii.higher return normally comes with higher risk iii.at the top end of the graph are the equity funds

iv. the relatively risk less cash funds sit at the bottom end of the graph a. i,ii&iii b. i,ii,iv c. i,iii,iv d. ii,iii,iv 3. The switching facility under investment-linked life insurance policies is very useful _______. a. For the purpose of assets planning by the trustee b. For the purpose of profit planning by the life policies c. For the purpose of financial planning by the policy owners d. For the purpose of sales planning by the fund managers 4. In _________, the investment income of investment-linked life insurance policy is ploughed back into the fund. a an accumulated units fund b an accumulated bonus fund c a life insurance reserve fund d an accumulated interest fund 5. In what ways is an investment-linked fund divided amongst the respective policyholders? a The fund is divided into a number of units b The fund is divided by the number of the policyholders. c The insurer declares the value according to the sum insured d The reinsurer declares the value according to the sum insured

42

6. Investment-linked funds can be structured in two ways namely and ___ a terms units; annuity units b warrants units; rights units c investment units; mortality units d accumulation units; distribution units 7. Investment-linked funds normally consist of what kinds of investments? I Secured equity stocks II Fixed interest securities III Certain types of bonds only IV A wide range of equity stocks a I and III b I and IV c II and III d II and IV 8. What will ultimately affect investment decision? a Property pricing b The level of available funds c Fluctuations in the share market d The availability of management advice **Note: For another overview and more sample questions, please refer to the contents in the CD.

43

CHAPTER 7 : HOW INVESTMENT-LINKED INSURANCE PRODUCTS WORK

Objective: - To understand the working of investment-linked life insurance.

The Working Of Investment -Linked Life Insurance

The value of each unit Example: § Investment-linked fund is RM1 million § Number of units is 100,000 units § The value of each unit = RM10 per unit § (i.e. RM 1 million divided by 100,000 unit)

Policy owners are allowed to top-up their policies at any time, subject to a minimum amount.

Cash Value = (Number of units x Unit price) - (Mortality charge + Policy Fee) = (3,800 units x RM 1.00) - ([3,800 units x RM1.00 x 1%] + RM100) = RM3,800 - (RM38+RM100) = RM3,800 - RM138 = RM3,662

Single premium/Top-up

Allocated premium used to buy units

from investment-linked funds at offer price

Unallocated premium

Life Office

To meet marketing and set-up expenses

Unit which belongs

to policy owner

Cancel units (To pay mortality charge & policy fee)

Surrender claim

Withdrawals

Death claim

44

1. Number of units 2. Cash Value 3. Annual Yield on Gross Premium

Ø Return on Gross Premium Ø Annual yield

Case Study 1 : Single Pricing Method

Number of Units = RM4,000 – (RM4,000 X 5%) RM1.00 = RM4,000 – RM200 RM1.00 = 3,800 units Step 2: Cash Value = (Number of units x Unit price) - (Mortality charge + Policy Fee) = (3,800 units x RM 1.00) - ([3,800 units x RM1.00 x 1%] + RM100) = RM3,800 - (RM38+RM100) = RM3,800 - RM138 = RM3,662 Assume unit price after 10 years is RM1.97

Single Pricing Method

Methods of Calculating Benefits

Dual Pricing Method

Premium = RM4,000 Unit Price = RM1.00 Service charge = 5% Policy fee = RM100 Mortality charge = 1%

45

Step 3: Ending value of investment = (Number of units X Unit price ) – (Mortality charge + Policy fee) = (3,800 unit X RM1.97) – ([3,800 unit X RM1.97 X 1%] + RM100) = RM7,486 – (RM74.86 + RM100) = RM7,486 – RM147.86 = RM7,311.14 Beginning value of investment = RM4,000 Step 3.2: RGP = Ending value of investment Beginning value of investment = RM 7311.4 = RM 1.828 RM 4000.0 Annual yield = (RM1.828)1/10 -1 = 0.062 or 6.2% Case Study 2 : Dual Pricing Method Premium = RM4,000 Unit Price = RM1.00 Bid-offer spread = 5% Policy fee = RM100 Mortality charge = 1% Step 1: Number of Units = RM4,000 RM1.00 = 4,000 units Bid price = RM1.00 X (100% - 5%) = RM1.00 X 95% = RM0.95 Cash Value = (Number of units X Bid price) – (Mortality charge + Policy fee) = (4,000 unit X RM0.95) – ([4,000 unit X RM0.95 X 1%] + RM100) = RM3,800 – (RM38 + RM100) = RM3,800 – RM138 = RM3,662

46

Top Ups • Policy owners are allowed to top-up their policies at any time, subject to a minimum

amount. Withdrawal Benefit § Multiply by the unit price for the single pricing method § Multiply by the bid price for the dual pricing method

Example: Unit price (for single pricing) / Bid price (for dual pricing) At time t = RM2.00 If a policy owner withdraws 500 units, 500 units x RM2.00 = RM1,000.00 Surrender Value § Allows policy owners to surrender their policy units at any time § Surrender charges are deducted from the value of units at surrender Death Benefit § The sum assured chosen by the life assured or the value of the units in the fund at the bid price, whichever is higher § The sum assured chosen by the life assured plus the value of units in the fund at the bid price The Working Of Investment -Linked Life Insurance

RM

years years

Death Benefit : Unit Value or Sum Assured (whichever is higher)

Death Benefit : Unit Value + Sum Assured

Unit Benefit

Unit Benefit

Sum Assured

Sum Assured

Death Benefit

47

Regular Premium Policies § Operate under similar principles as single premium policies

Summary of Key Points: -Modus operandi of Investment-linked premium, claims, and withdrawal -Allocated and unallocated premium -Methods of calculating benefits: (a) Single Pricing Method (Number of units, Cash value, Ending value of

investment, Return on Gross Premium, and Annual Yield) (b) Dual Pricing Method (Number of units, Cash value, Withdrawal benefit,

Surrender Value, Death Benefit)

48

Sample Questions 1. Policy fee payable by an investment-linked insurance policy owner is to cover ______________. a. The mortality costs of the investment-linked life insurance policy b. The administrative expenses of setting up the investment-linked life insurance policy c. The handling charges by professional investment managers d. The price for each unit bought under the investment-linked life insurance policy 2. Which one of the following statements about investment-policies are TRUE? i. Offer price is used to determined the number of units to be credited to the account ii. The margin between the bid and offer price is used to cover the marketing cost of the policy iii. The policy value is calculated based on the bid price of units allocated into the policy a. i&ii b. i&iii c. ii&iii d. i,ii& iii 3. Single premium investment-linked life insurance policy: a. Has no death benefit b. Has cash value c. Must be issued with a minimum of RM 3,000 d. Must be issued with a minimum of RM 5,000 4. The payment made to the insured upon the cancellation of a policy is called a surrender value b penalty payment c investment value d return of premium 5. The charges deducted from the benefits received by a policyholder are I the policy fee. II the mortality charge. III an additional 5% charge. IV the administration charges. a II and III b I, II and III c I, II and IV d II, III and IV 6. In investment-linked insurance, when is the investment premium placed in a unitized fund? a At the time the premium is paid b At the time the policy is taken up c At the time the post-dated cheque is received d At the time the policyholder agrees to pay the full premium

49

7. At which price does the policyholder buy the units in an investment-linked life insurance policy? a The bid-offer price b The cash price c The unit price d The bid price 8. The structure of the charges of an investment-linked life policy is I stipulated openly by life office. II specified in the policy document. III made known to policy owner at the outset. a I only b I and II c II and III d I, II and III 9. An investment-linked life insurance policy has a free-look provision of at least _______ days. a 14 b 15 c 21 d 30 10. If a policyholder buys units on the dual pricing basis, how many units can he get by paying RM10,000 for a unit priced RM2? a 5,000 units b 6,000 units c 8,000 units d 10,000 units **Note: For another overview and more sample questions, please refer to the contents in the CD.

50

CHAPTER 8: BENEFITS AND RISKS OF INVESTING IN INVESTMENT - LINKED FUNDS

Objectives: -To understand the reason for people to invest in investment-linked life insurance. -To be knowledgeable on the characteristics of the investment-linked life insurance.

Benefits And Risks Of Investing In Investment - Linked Funds

Risk of Investing in Investment-linked Funds

1. Investment Risk The sum assured is always guaranteed but the unit value is not guaranteed 2. Cash value & maturity benefit

Based on value of units. It will rise and fall drastically according to stock market volatility (for equity funds)

3. Charges

Characteristic § Investment-linked policies generally have a larger exposure to equity investment

than with profits and other conventional policies § Commissions and office expenses are met by a variety of explicit charges, some of

which are variable § The policies can be used for investment, as source of regular savings and protection § The cash values and protection benefits are determined by the investment performance of the underlying assets

Why Do People Invest?

Flexibility

Expertise Access

Administration

Pooling/ Diversification

51

Summary of Key Points: -Characteristics of Investment-linked policies -Risk of investing in Investment-linked funds -Benefits of investing in Investment-linked funds

52

Sample Questions 1. The disadvantage found in an investment-linked policy are; i. It is subjected to the smoothening process of the company. ii. It is subjected to no charges if the company does not make any investment returns. iii. It is subjected to fixed charges specified in the policy document. iv. It is subjected to the vagaries of the stock market. a. i,iii only. b. i,ii only. c. ii,iv only. d. iii,iv only. 2. The flexibility offered by the Investment-Linked policy includes the following; i. Policy owner can ascertain the level of premium that needs to be paid. ii. Policy owner can decide to add single or multiple top-ups. iii. Policy owner is subjected to a definite amount of premium iv. Company will not charge any fees for premium holidays taken. a. i,iv only. b. i,iii only. c. i only. d. i,ii only. 3. The benefits of an Investment-Linked policy are as follows; i. The ability of the company to pool and diversify. ii. The flexibility it offers. iii. The minimal charges levied on the policy. iv. The insulation of market risks by the company for the client. a. i,ii only. b. ii,iv only c. i,iii only. d. iii,iv only. 4. Under the calculation of death benefits on unit value or death cover basis, what are the criteria for payment upon death? a. The unit value b. The sum assured c. The unit value plus sum assured d. Unit value or death cover, whichever is higher 5. What is the minimum death benefit for investment-linked life insurance policies? a RM3,000 b RM5,000 c RM10,000 d RM12,000

53

6. What distinguish investment-linked insurance policies from unit trust products? a The minimum death benefit is provided under only investment-linked policies b There is no difference; both are investment vehicles c There is no guarantee for unit trust products d Unit trust products incur higher cost **Note: For another overview and more sample questions, please refer to the contents in the CD.

54

CHAPTER 9: COMPARISON BETWEEN INVESTMENT-LINKED LIFE INSURANCE & TRADITIONAL WITH PROFIT

LIFE INSURANCE PRODUCTS Objectives: - To understand the similarities and differences of investment-linked life insurance and traditional with profit life insurance products. - To understand the risks and benefits of investment-linked life insurance. Comparison Between investment-linked Life Insurance & Traditional With Profit Life Insurance Products:

The Risk • The risk of fluctuations of the unit price of the policy that may rise or fall, depending on the current market situation • The risk of the cash and maturity values of the policy being adversely affected if the bid price of the units falls • The policy owner who are risk averse should buy investment-linked life insurance policies with low equity investment

The Benefits § The policy benefits are directly linked to the investment performance of the underlying assets § The fund provides a highly diversified portfolio, thus, lowering the risk of investment

Returns & Risk - Fixed amount payable. It does not depend on investment performance - No investment risk Premium Computation - Sum assured driven - Fixed at inception based on sum assured

Without profit

Returns & Risk - Bonuses are not directly linked to life office investment performance - Life office smoothen the peaks & troughs of investment return - Types of bonuses: cash, reversionary & terminal Premium Computation - Sum assured driven - Fixed at inception based on sum assured + expected bonus payable

Returns & Risk - Policy values according to the underlying assets - Return & risk directly transferred to policyowners Premium Computation - Account driven - Premium flexibility: payment, top-up, premium holiday - Life office has right to vary some of the charges

With profit Investment-linked

55

§ The fund relieves the investor from the hassle of administering his/her investment § The fund enables small investor to participate in a pool of diversified portfolio in which he/she, with low investment capital is unlikely to have acceded to § The investment-linked policyholder can vary his premium payments, take premium holidays, add single premium top-ups and change the level of sum assured easily § The investment-linked policyholder can have access to a pool of qualified and trained professional fund managers Term Assurance Term Assurance policy is not suitable for investment purpose because it is meant solely for protection needs

Traditional With – Profit Life Insurance The allocations to policy owners in the form of bonuses:

i. Are not directly linked to the life offices investment performance ii. Have already been smoothened by the life office iii. Do not have the peaks and troughs of investment return as in good investment

years of life offices, contributions have been made to reserves and vice versa Reversionary Bonus “Is paid at the time of death under the life policies or on maturity of the policies”

Summary of Key Points: -Comparison between Investment-linked and traditional life insurance (with and without profit) -Risk of investing in Investment-linked funds (fluctuations of the unit price, cash and maturity values, low vs high equity investment-link life insurance policies)

-Benefits of investing in Investment-linked funds (highly diversified, policy benefits directly linked to underlying assets, enable small investors to invest etc)

56

Sample Questions

1. The fundamental differences between traditional with-profit life insurance policies and investment-linked life insurance policies include ________ .

i. Investment-linked life insurance policies are less likely to offer more choice in terms of the type of investment funds ii. The investment element of investment-linked life insurance policies is made known to the policy owner at the outset and is invested in a separately identifiable fund which is made up units of investment ii. Investment-linked life insurance policies offer the potential for higher returns iii. Traditional with profits life policies aim to produce a steady return by smoothing out market fluctuation a. i,ii,& iii b. i,ii&iv c. i,iii,iv d. ii,iii,iv 2. The following statement about surrender value under traditional with-profit life insurance

products is TRUE: a. The amount of surrender value is usually higher than the amount under without – profit policies and it varies with the age of the assured, being lower at older age b. In the case of with-profit policies, the net cash surrender value includes the surrender value of the reversionary bonus up to the date of surrender c. Other than term insurance of more than 20 years, limited payment is made when such insurance policies are surrender d. When a with-profit insurance policy is surrender, the surrender value is calculated by multiplying the bid price with number of units. 3. The criteria for comparing traditional life insurance products with investment-linked life insurance products include ______________

i. The life offices management expertise ii. The products investment returns and risks iii. The policies premium computation iv. Death benefit provided under the policies a. i,ii,&iii b. i,ii,&iv c. i,iii,& iv d. ii,iii, & iv

57

4. Name some of the criteria used to compare conventional insurance products with investment-linked insurance products. I Investment risks II Investment return III Surrender benefit IV Management expenses a I and II b I, II and III c I, II and IV d II, III and IV 5. Name some of the financial instruments used by investment-linked funds. I Cash funds II Diversified funds III Specialized funds IV Money market funds a II and IV b I, II and III c I, II and IV d I, II, III and IV 6. Under the current investment-linked whole life plans the policy has total flexibility to alter a policyholder's need for investment and protection in accordance with the a market trend b change of law c insurers suggestion d policyholder's wishes 7. Under a regular premium investment-linked insurance plan withdrawals and surrender are a not allowed b allowed after a certain period c allowed after the premium is fully paid d allowed when the investor becomes invalid 8. Investment-linked life insurance policies a will never suffer any investment losses b lack smoothing process of traditional with-profit life policies c have a greater smoothing process than traditional with-profit life policies d always receive greater investment returns than traditional with-profit life policies 9. Which type of policy does NOT have the surrender benefit? a A term life policy b A whole life policy c An endowment policy d A policy without profit

58

10. What is the difference between endowment assurance and whole life assurance? a There is no difference b Whole life policies only pay upon the death of the insured c Endowment assurance usually has a shorter term and an early maturity date d Whole life policy pay upon the policyowner’s retirement from employment 11. Once declared, the ____ can be withdrawn at once by the policyholder a cash bonus b terminal bonus c survival benefit d reversionary bonus 12. Traditional guaranteed without-profit life insurance products do NOT include a temporary assurance b investment-linked life insurance c non-participating whole life insurance d non-participating endowment insurance 13. What are the DISADVANTAGES of an investment-linked life policy as compared to a conventional with profit life policy? I An investment-linked life insurance policy is more flexible. II The policyholder shoulders all the risk of investment himself. III There are few guarantees under an investment linked life policy. IV In times of poor market sentiments, the policyholder of an investment-linked life insurance policy can lose all his investment. a II and III b I, II and III c II, III and IV d I, II, III and IV **Note: For another overview and more sample questions, please refer to the contents in the CD.

59

CHAPTER 10 : TAXATION & LAW COVERING INVESTMENT-LINKED INSURACE PRODUCTS

Objective: - To familiarize on the taxation and law that governs investment-linked life insurance. Taxation of Investment – Linked Life Insurance § Same as other forms of life insurance policies. § RM6000 § RM3000

Tax relief is allowed in respect of premiums paid on life insurance and deferred annuities which is on the § Individual’s life § The life of the spouse of the individual § The joint lives of the individual and his/her spouse

Taxation Treatment § Capital gain is not taxable § Capital losses is not tax deductible § If personal tax rate is less than corporate tax rate, shareholder is entitled to rebate on the portion of the dividend paid as tax § Income Tax Act, 1967

Taxation & Law Covering Investment – linked Insurance Products Law Covering Investment-Linked Life Insurance Insurance Act 1996

§ The protection of public interest § The promotion of fairness and equity § The fostering of competence § The playing a development role

60

Investment –linked Insurance Business Definition Section 7(2)(b) Insurance Act, 1996: The effecting and carrying out of a contract of insurance on human life or annuity where the benefits are, wholly or partly, to be determined by reference to the value, or the income from, property of any description or by reference to fluctuations in, or in an index of, the value of property of any description” BNM Guidelines § Requirement for approval § Separate funds § Investment limits § Valuation of assets § Valuation of liabilities § Age limit of Policy owners § Free-Look Provision § Minimum death Benefit § Minimum premium payment § Intermediation

BNM’s Circular JPI: 1/1997 § Specification of Assets for the purpose of a Licensed Insurers Margin of

Solvency § Is not applicable to the investment-linked funds, in view of the nature of the

business that investment-linked funds could be invested 100% in equities § Specifies the extent of a class of assets or description of assets that may be

taken into account for the purpose of a licensed insurer’s margin of solvency Age Limit & Free Look Provision § Age limit of policy owner – at least 18 years old § Free look provision – 15 days

Summary of Key Points: -Taxation of Investment-linked insurance -Tax relief of Investment-linked insurance -Law Governing Investment-linked insurance and Investment-linked insurance business. E.g.: BNM guidelines (Circular JPI: 1/1997)

61

Sample Questions 1. The following statements about taxation are true, EXCEPT a. Capital gain is not taxable b. Capital losses is not tax deductible c. Dividend income is not subjected to withholding tax according to the prevailing corporate tax rate d. If personal tax rate is less than corporate tax rate, shareholder is entitle to rebate on the portion of the dividend paid as tax 2. The principal legal document regulating income tax in Malaysia is the __________ a. Income Tax Act , 1967 b. Insurance Act, 1996 c. Contracts Act, 1950 d. Companies Act, 1965 3. Under the free-look provision a. There is no free-look provision in an investment-linked policy as there is no life Insurance b. The agent can decide when he wants to deliver the policy c. The agent can decide within 15 days of the issuance of the policy to demand a full refund of all his units at offer price d. A policy holder has only 15 days from the date he receives the policy document to examine and decide the suitability of the policy and demand a full refund 4. With regard to Bank Negara Malaysia's circular JP: 1/1997, what factors must be taken into account to measure a licensed insurer's margin of solvency? I The extent of liability of the insurer. II Class of assets of a licensed insurer. III Description of assets of a licensed insurer. IV The extent of a class of assets of a licensed insurer. a I, II and II b I, II and IV c II. III and IV d I, II, III and IV 5. The principal legal document regulating income tax in Malaysia is the a Company Act, 1965 b Insurance Act, 1996 c Income Tax Act, 1967 d Income Tax Act, 1976

62

6. The premium relief is allowable when the _________ is on the life of the spouse of the individual. I life insurance II deferred annuity III general insurance a I only b II only c I and II d II and III **Note: For another overview and more sample questions, please refer to the contents in the CD.

63

CHAPTER 11: IDENTIFYING & SATISFYING CUSTOMERS’ NEEDS Objectives: - To understand the process of providing advice prior to investment-linked life insurance sale. - Apply the process relevant knowledge. - Giving financial advice to meet the customer need. Process of Providing Advice

Gathering relevant financial data

Establishing Relationship

Establishing current financial position and

goals

Process of providing advice

involving 3 stages

Developing plans and strategies to achieve

goals

Implementation of agreed recommendation

Discuss possible recommendations

Monitoring the portfolio

64

Step 1: Establishing Relationship

§ Convince customer on the assistance that could be offered by the agent § Comprises of various methods (Normally taught by agent’s managers § Important process as it enables the agents to do preliminary screening on the client’s financial objectives and goals.

Step 2: Gathering Relevant Financial Data

This includes: (a) Customer personal details (b) Customer financial position (c) Customer financial plans and objectives? (d) Current types of investments and insurance are in force? (e) Customer attitude towards risk? Step 3: Establishing current financial position and goals

Primary process: Establishing a relationship (trust)

with the client

Importance: Assist the agent to analyze the customer’s need

Analyzing those data’s (relevant financial data) and come up with

an analysis that helps to establish the customers’ current

financial position and future goals.

65

This includes: (a) Needs & priorities (b) Type of investment-linked life insurance policies and investment fund (c) Financial ability (d) Refer to another expert advisor in a specialist field Step 4: Developing plans and strategies to achieve goals

§ Analysis on the matter will derive various recommendations that will satisfy the customers goals on areas such as:

- Adequate insurance coverage for liability cancellation, basic protection, on medical cover, disability cover, dread diseases cover etc.

- Planning for children’s education - Retirement Planning - Asset Accumulation - Estate Planning

Step 5: Discuss Possible Recommendations

This includes: (a) Explanations on the recommendations (b) Provide the options AND alternatives (c) Arrange for review at regular intervals

Importance: Develop pertinent plans that will help the customer to achieve their goals

Subsequent to the development of the plan, agents shall discuss

on the recommended plans in detail with the customers.

66

Step 6: Implementation of Agreed Recommendations

§ Requires time and discipline of the customer in order for it to be successful Monitoring The Portfolio

Actions needed: - Assisting customer in switching and adjustments to ensure that the customer gets the best possible return from the policies.

§ Monitored periodically from time to time

§ Customer sould receive the policy progress information regularly

§ Unexpected changes might occur at any point in time. Eg: Salary rise/fall, New born child

§

§

§

As the client agreed to a specified recommendation, implementation is done as per discussion and any changes must be communicated to client prior to putting it through

Summary of Key Points: - 7 steps in realizing customer need based policy (ESTABLISHING relationship with the client, GATHERING all relevant financial data, ESTABLISHING current financial position and goals, DEVELOPING plans and strategies to meet the goals., DISCUSS possible recommendations, IMPLEMENTATION of the agreed recommendations, MONITORING the portfolio) - All the steps must be done turrently to obtain best results. - Every step must be practiced in accordance to the sequence - Failure to follow the steps in a sequential basis may incur loss of trust, business, etc.

67

Sample Questions 1. Arrange the financial planning process in order; i. Establishing relationship with the client. ii. Discuss possible recommendations. iii. Establishing current financial position and goals. iv. Implementation of the agreed recommendations. v. Monitoring the portfolio. vi. Gathering all relevant financial data. vii. Developing plans and strategies to meet the goals. a. vi,i,ii,iii,iv,v,vii. b.i,vi,iii,vii,ii,iv,v. c. i,ii,iii,iv,v,vi,vii. d.i,vi,iii,ii,vii,iv,v. 2. The CFF will address the following areas; i. Customer’s Personal and Dependents Details. ii. Life and Financial Priorities and Goals. iii. Risk Return Ratio. iv. Net Worth Analysis. a. i,ii,iii. b.i,ii,iv. c. i,iii,iv. d.ii,iii,iv. 3. Why is important for agents to establish a good relationship with their clients? a. To ensure that the client is well taken care of and, will assist him in providing add on business and quality referrals. b.To establish himself as a very good agent in the eyes of the company. c. To be able to attract more people to join him in carrying out insurance business. d.To ensure that no other agents will approach his client to sell life insurance products. 4. What does the term 'prospects' refer to? a Potential products b Potential customers c The future of the agent d Percentage of closing a deal 5. The promotional message delivered to a prospect by an agent is known as the a sales report b marketing plan c sales presentation d purchase presentation

68

6. What are the factors involved in the customer's shopping around for a suitable product to meet his needs? I The value involved. II Professional advice. III The benefits derived from the purchase. IV The customer's experience in buying the product. a I and IV b II and III c I, III and IV d II, III and IV 7. ___________must be done if there is a major change that might have happened to the clients' investment account. a A regular review b An ad hoc review c An emergency review d An accidental review 8. The customer fact find form contains the following information, EXCEPT: a medical history b cash flow analysis c customer's risk profile d life and financial priorities and goals 9.When marketing investment-linked life insurance products, which of the following are the final step in a structured approach? a Monitoring the portfolio b Gathering all relevant financial data c Implementation of the agreed recommendations d Developing plans and strategies to meet the goals **Note: For another overview and more sample questions, please refer to the contents in the CD.

69

CHAPTER 12: MARKETING & AFTER SALES SERVICE ETHICS & CODE OF CONDUCT

Objectives: - To understand the nature of marketing plan. - To obtain knowledge on after sales ethics . - To abide code of conduct. - To abide LIAM Guidelines. Marketing Owing to changes in the market environment, many insurance companies now sell their products on a Market Oriented Basis. Marketing involves:- § Planning & control § Market identification § Product development § Pricing § Selection of distribution channel § Promotion Sales Plan

Sales Goal Sales Plan Objectives

Sales Strategy

Implementation & Control

70

Personal Selling § Product knowledge § Market knowledge § Knowledge of buying process § Knowledge of selling process § Selling techniques

Consumer Buying Decision Process Problem recognition

The Selling Process § Locating the prospective customer § Creating a sales presentation § Conducting the sales interview § Handling objection § Closing the sales

Problem recognition

Information Search

Evaluation of Alternative

Policies

Purchase

Post Purchase Evaluation

71

After Sales Service § Carry on the responsibilities § Dispel the customer cognitive dissonance § Provide a basis for future sales § Re-emphasize the insurance agent commitment § Encourage the policy owner to call the agent § Explain the policy provisions, term and condition § Obtain names of referred leads and other prospects § Strengthen the customer relationship and help encourage persistency

An insurer must provide each investment-linked policy holder with a policy statement and the fund performance report Free-look provision A policy holder has only 15 days from the date he/she receives the policy document to examine and decide the suitability of the policy and demand a full refund

Ethics and Conduct § Integrity § Complying with law, principles and practice relating to financial advice § Professional and honorable § Observing & applying codes of good practices

Twisting § Specific form of misrepresentation § It refers to an agent inducing a policy holder to discontinue policy with another company without disclosing the disadvantage of doing so § It includes misleading or incomplete comparison of policies § Misrepresentation resulting in inducing policy owner to cancel or have his policy made paid-up in order to purchase a new policy to earn more income for the agent

LIAM Guidelines § Part I - Guidelines on the Code of Conduct § Part II - Life Insurance Selling § Part III - Statement of Life Insurance Practice

72

Summary of Key Points:

- Marketing Plan (Planning & control, Market identification, Product development, Pricing, Selection of distribution channel, Promotion) - Sales Plan (Objectives, Sales goal, sales strategy, Implementation & control) -Personal selling knowledge and techniques (Product knowledge, Market knowledge, Knowledge of buying process, Knowledge of selling process, Selling techniques) -Consumer buying decision process (Problem recognition, Information search, evaluation of alternative policies, Purchase, Post purchase) -Selling process (Locating the prospective customer, Creating a sales presentation, Conducting the sales interview, Handling objection, Closing the sales) -After sales services ( Responsibilities, Customer cognitive dissonance, Basis for future sales, re-emphasize agent commitment, policy explanation, strengthen customer relationship etc) -Ethics and conducts (Integrity, Compliances, Professional, Good practices) -Twisting (Misrepresentation, Inducing policy holder, Misleading, Incomplete comparisons of policy etc) -LIAM Guidelines (Part I, II, III)

73

Sample Questions 1. A sales plan includes the following: i. Sales strategy. ii. Hard selling techniques. iii. Sales goal. iv. Objectives- these can be in terms of a target market. a. i,iii,iv. b. ii,iii,iv. c. i,ii,iv. d. i,ii,iii. 2. Generally, a market-oriented insurance company should undertake the following functions; i. Planning and control. ii. Market identification. iii. Product development. iv. Undercut slow agents with productive ones. a. i,ii,iv. b. i,ii,iii. c. i,iii,iv. d. ii, iii, iv. 3. Sebastian is very unhappy with the policy that was given to him. He wants to make a complaint. To whom can he complain to help him correct the situation? i. Bank Negara’s Insurance Mediation Bureau. ii. LIAM. iii. The particular Insurance Company. iv. The Newspaper. a. i,iii,iv. b. i,ii,iii. c. ii,iii,iv. d. i,ii,iv. 4. What is an important ingredient for a successful sales interview? a A change in the sales plan b A reduction in the product pricing c The agent's skill in handling objections from a prospect d The agent making objections and drawing the prospect's attention to the advantages of the

product

74

5. Why is the personal delivery of a policy regarded as an important aspect of providing after- sales service? I The customer's cognitive dissonance is alleviated by the agents' reassurance that the right purchase has been mode. II The agent can take the opportunity to obtain more names of referred leads and other prospects. III It re-emphasizes the agent's commitment to providing the policyholder quality service. IV The policyholder is encouraged to call the agent whenever the need arises. a I, II and III b I, III and IV c II, III and IV d I. II, III and IV 6. Which of the following is considered inconsistent with after-sales service? a Establishing the customer/agent relationship b Strengthening the customer/agent relationship. c Providing a basis for future sales on current needs d Explaining the policy's provisions terms and conditions 7. ________ is a form of misrepresentation in which a policy owner is induced to discontinue an existing insurance policy, and purchase a new policy. a Twisting b Switching c Withdrawal d Money laundering **Note: For another overview and more sample questions, please refer to the contents in the CD.

Key Summary Points

TOPIC 1 INTRODUCTION

KEY CONSIDERATIONS

Policyholder

Pay premium topurchase fund

Fund managed by Insurer

Protection

Investment

Value of Policy Special

Unitised Fund

Investment Performance

linked

Directly linked

•Death • TPD •PA •Health

Investment Objectives Funds Available Risk or Security Investment Horizon Accessibility of Funds Taxation Treatment Performance of the Investment Diversification

TYPES OF INVESTMENT ASSETS

TOPIC 3 TYPES OF INVESTMENT

1. Cash & Deposits 2. Fixed Income Securities 3. Shares 4. Unit Trusts 5. Investment Trust 6. Property 7. Real Estate Investment Trust (REITs) 8. Derivatives 9. Exchange Traded Funds (ETF) 10. Sukuk Bonds 11. Capital Guaranteed Fund 12. Commodities 13. Life Insurance 14. Annuities

Risk and Return

Moderate to high

Moderate to high

Moderate to high

Moderate to high

Moderate to high

RETURN Derivatives eg. Warrants, options etc

Growth funds eg.small caps

Equity fund

Index linked

Managed/Balanced fund

Bonds/ fixed income securities

0 Risk ( )

In an efficient market, an asset/security that promises high return is also high risk.

Risk Return Profile

TOPIC 4

TOPIC 5

UK – Unit- linkedUS – Variable Life

Distribution – Pay dividends and split units

Accumulation – Price/ unit increase, Unit remains

Distribution – Price/ unit remain, units increase

Accumulation

Distribution

Time

Time

HOW INVESTMENT - LINKEDINSURANCE PRODUCTS WORK

BENEFITS OF INVESTING IN INVESTMENT – LINKED FUNDS

Single premium/Top-up

Allocated premium

used to buy units from

investment-linked

funds at offer price

Unallocated premium

Life Office (To meet

marketing and set-up expenses) Unit which belongs

to policy owner

Cancel units

(To pay mortality charge & policy fee)

Surrender claim

Withdrawals

Death claim

1. Pooling/Diversification

2. Flexibility

3. Expertise

4. Access

5. Administration

STEPS IN FINANCIAL PLANNING

Step 1: ESTABLISHING relationship with the client. Step 2: GATHERING all relevant financial data. Step 3: ESTABLISHING current financial position and goals.

STEPS IN FINANCIAL PLANNING

Step 4: DEVELOPING plans and strategies to meet the goals. Step 5: DISCUSS possible recommendations. Step 6: IMPLEMENTATION of the agreed recommendations. Step 7: MONITORING the portfolio.

Answer for Sample Questions - PCE

Chapter 1: 1.d 2.a 3.d 4.d

Chapter 2: 1.c 2.d 3.d 4.d 5.d 6.c 7.c 8.d 9.d 10.d

Chapter 3: 1.a 2.a 3.c 4.b 5.b 6.d 7.a 8.d 9.c 10.b 11.d

Chapter 4: 1.d 2.b 3.b 4.c 5.a 6.c 7.c

Chapter 5: 1.b 2.a 3.a 4.a 5.c

Chapter 6: 1.d 2.d 3.c 4.d 5.d 6.b 7.c 8.a 9.? 10.b 11.d 12.d 13.c

Chapter 7: 1.d 2.c 3.d

Chapter 8: 1.a 2.d 3.d 4.d

Chapter 9: 1.b 2.d 3.c 4.d

Chapter 10: 1.a 2.b 3.a 4.c 5.c 6.a

Chapter 11: 1.d 2.a 3.c 4.d

Chapter 12: 1.d 2.b 3.d 4.a 5.d 6.a 7.d 8.a 9.d 10.b

Chapter 13: 1.b 2.c 3.a 4.d 5.d

Chapter 21: 1.a 2.c 3.d 4.d 5.d 6.d 7.c 8.d 9.d

Chapter 22: 1.a 2.b 3.b 4.d 5.b 6.c 7.a 8.d 9.c 10.b 11.d 12.c

Chapter 23: 1.b 2.b 3.c 4.c 5.b 6.d 7.d 8.b 9.d

Chapter 24: 1.c 2.d 3.a

Chapter 25: 1.d 2.b 3.a 4.d 5.d

Chapter 26: 1.d 2.c 3.b 4.c

Chapter 27: 1.a 2.d 3.c 4.b 5.d

Chapter 28: 1.b 2.d 3.b

Chapter 29: 1.c 2.b 3.a 4.c 5.c 6.c

Chapter 30: 1.c 2.b 3.c 4.d 5.c 6.d 7.b

Answers for Sample Questions CEILLI

Chapter 1: 1.d 2.d 3.c 4.c

Chapter 2: 1.c 2.c 3.a 4.b 5.a 6.c 7.d

Chapter 3: 1.c 2.d 3.b 4.b 5.d 6.c 7.c 8.d 9.d 10.a 11.b

Chapter 4: 1.b 2.c 3.d

Chapter 5: 1.b 2.c 3.b 4.c 5.b 6.c 7.a 8.a 9.b 10.d

Chapter 6: 1.a 2.d 3.d 4.a 5.a 6.d 7.d 8.b

Chapter 7: 1.b, 2.d 3.c 4.a 5.c 6.a 7.c 8.d 9.b 10.a

Chapter 8: 1.d 2.d 3.a 4.d 5.b 6.a

Chapter 9: 1.d, 2.b 3.a 4.b 5.b 6.d 7.b 8.b 9.a 10.c 11.a 12.b 13.c

Chapter 10: 1.c 2.a 3.d 4.c 5.c 6.c

Chapter 11: 1.b 2.b 3.a 4.b 5.a 6.c 7.b 8.a 9.a

Chapter 12: 1.a 2.b 3.b 4.c 5.d 6.a 7.a