ceilli training slide

TMTDA/ADA/CEILLI/PPT/Eng/August2015

Certificate

Examination In

Investment-Linked

Life Insurance

(CEILLI)

Tutorial

Certificate Examination In

Investment-Linked Life Insurance

(CEILLI) TUTORIAL

2


TMTDA Ground Rules

Proper Attire

No Smoking

Maintain

Cleanliness

Switch Off/Silent

Handphone

No Side Talking

Be Punctual

3


This course will help participants to :

1.Learn and understand basic knowledge about

investment-linked life insurance

2.Prepare to sit for the CEILLI examination

4

Course Objectives


CEILLI Chapters Overview

5

1. Introduction to Investment-Linked Life Insurance

2. Mechanisms and Features of Regular Premium Investment-Linked

Life Insurance

3. Mechanisms and Features of Single Premium Investment-Linked

Life Insurance

4. Considerations for purchasing an Investment-Linked Policy

5. Investment Considerations

6. Types of Investment Vehicles and Potential Risks

7. Common Types of Investment-Linked Funds

8. Pertinent Guidelines on Investment-Linked Business

9. Agents Professional Approach and Guidelines


Chapter 1

INTRODUCTION TO

INVESTMENT-LINKED

LIFE INSURANCE


Total number of Investment-

Linked insurance grew between

2012 and 2013.

7

248,305,252,495 Sum assured (2012)

284,679,163,295 Sum assured (2013)

The Life Insurance Association of Malaysia’s (LIAM) report

Introduction to Investment-Linked

Life Insurance

Distribution of annual premium that

has gone into Investment-linked

Insurance policies has increased.

48.4% (2012)

55.2% (2013)

Part of this growth is due to the fact that, Insurance companies in

Malaysia have stepped up their efforts in designing and offering very

good plans that continue to meet customers’ needs.


8

Investment-Linked policy owners can choose :-

• With selected annual premium

1. Amount of coverage needed

• Based on age

• Opt for higher coverage amount

2. Choose min. sum assured

• Long-term savings

3. Accrue returns


Life Insurance


Policyholder

Fund

managed

by Insurer

Pay

premium

to

purchase

fund

Investment

Protection

Death

TPD

Value of

Policy

Special

Unitised

Fund

Investment

Performance

linked

Directly

linked

(Everyday

fluctuations

of market

forces)

Depends

On

9


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.

10


Life Insurance


RM 5,000 for

5,000 units

(RM1/unit)

Aft

er

2 y

ears

5,000 units x

RM3/unit =

RM 15,000

Lose all

premiums paid

and coverage

provided

RM3/unit

RM0/unit

Therefore, policyholders who choose to take Investment-Linked

policies must realize that they are also responsible to monitor the

performance of their policy to ensure a reasonable return, other than

the fund manager. 11


Life Insurance


Investment-

Linked Unit-Linked Variable Life

UK U.S.A. Malaysia/ Singapore

Refers to the same thing

/

12


Life Insurance

UK U.S.A. Malaysia/ Singapore


1. What are the factors that have contributed to the steady growth

of the life insurance industry in Malaysia since 2000?

I. The Malaysian Government granting more flexibility to life

insurance companies to run business operations based on their

own management philosophies and at their own prudent

discretion.

II. Malaysia’s dynamic economic growth experience.

III. Life insurers designing and offering customer-centric plans.

IV. The introduction of investment-linked insurance and the

steady growth of this product.

A. I and II

B. II and III

C. III and IV

D. II

13

Sample Questions


2. Which of the following is the correct description of an

investment-linked life policy?

A.A participating policy offering lifetime coverage

B.A capital guaranteed policy

C.An endowment policy which provides minimum

returns

D.A policy offering protection while also investing in

funds which form the basis for returns to the policy

owner

14

Sample Questions


3. An investment-linked life insurance policy is also

known as the following in some parts of the world:

I. Mutual fund-linked policy

II. Unit-linked policy

III. Variable life policy

IV. Universal life policy

A. I, II, III and IV

B. I, II and III

C. II, III and IV

D. II and III

15

Sample Questions


4. Investment-linked funds are managed by

I. The insurer’s own professional managers in its internal

investment department

II. Fund managers/fund houses appointed by the insurer through

outsourcing

III. Outsourcing to the funds of unit trust companies since

investment-linked funds are similar to unit trust funds

IV. The insurer’s board of directors who can make special

decisions on the types of investment vehicles to offer to

policy owners


B. I

C. I and II

D. I and IV

16

Sample Questions


5. Since investment-linked insurance has an investment element, a

prospective policy owner is allowed to opt for

I. a nominal amount of sum assured of his selection.

II. no life protection at all.

III. at least the minimum amount of sum assured according to

age, basic premium paid and a formula set by the relevant

regulator.

IV. the sum assured offered by the insurer concerned based on its

internal underwriting guidelines in relation to the financial

status and circumstances of the intended policy owner.

A. I

B. I and II

C. III

D. IV

17

Sample Questions


6. Which of the following statements are correct?

I. Policy owners of investment-linked plans should be made to

understand that they wholly bear the gains or losses from the

investment portion of their policies.

II. As responsible corporations, life insurers are obliged to be partly

responsible for any drastic drop in prices of funds under their

custody; thus, they have to bear part of the losses suffered by policy

owners if such incidents occur.

III. For investment-linked policies, an individual can invest in a

diversified portfolio with a sum as low RM1,200 per year. This is

possible as the overall collected premiums contributed by

investment-linked policy owners form a sufficiently large pool for

spreading over varied stocks or securities in the market.

IV. An average income earner may not possess ready sufficient liquidity

to invest in a spread of assets if he wants to do it in the open market

on his own.

A. I, III and IV

B. II and III

C. I and II

D. I, II, III and IV

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Chapter 2

Mechanisms and

Features of Regular

Premium Investment-

Linked Life Insurance


Mechanisms and Features of

Regular Premium Investment-Linked

Life Insurance

Introduction

1)To understand the mechanisms and features of regular

premium (investment-linked) in order to explain the

product effectively to clients.

2)To understand the primary focus for regular premium

(investment-linked) is protection.

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1. Minimum Regular Premium

a) Minimum annual premium varies from RM1,200 to

RM1,800 depends on the product and the marketing

directions of an insurer.

b) Regular premium investment-linked insurance (RP-IL)

more inclined towards protection than investment.

21



Life Insurance


2. Allocated and Unallocated Premium

22

Insurance Premiums

Allocated:

For Investments

Add Investment Returns

Less insurance charges, policy fee and fund

management fee

Unallocated:

For Insurer

Less agent’s commissions and

management expenses



Life Insurance


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Allocated Premium

• It is an account for buying units in vehicles earmarked by the

various funds offered by the insurer.

• Monthly COI, annual fund management fee, one-time policy

fee, other charges (nominal administrative, service charge)

will be deducted from this account.

• While the value of invested units called account value

continues to accrue in the policy.

• Ratio will increase

• First year 40 – 50%

• Rate increase until 7th year

• After 7th year, ratio will be 100%



Life Insurance


3. Regular and Ad Hoc Top-Up Premium

Regular Top-Up

• Purpose of TU = To enhance accumulation of units.

• Each TU to be deducted by 5% (upfront charge).

• Others placed into policy owner’s fund/s.

• Regular TU paid together with basic RP at each

due date.

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Life Insurance


25

3. Regular and Ad Hoc Top-Up Premium

Ad Hoc Top-Up

• Pay any time.

• No limit to the amount and frequency.

• Keep a policy in force when account value gets

depleted



Life Insurance


4. Sum Assured Multiple Rule (SAM)

• Imposed by Bank Negara Malaysia (BNM).

• Min. amount of coverage based on basic annual

regular premium amount and age of new policy

owner.

• SAM factor for age range:

(1-16) is 60

(56 and above) is 15.

26



Life Insurance


27


Example:

56 year old man wants to insure himself

= Rm 5000 a year.

He will have to be covered for at least

RM 75000 (5000 X 15).

16 years old minimum coverage is

RM 300,000 (5000 X 60).

**Regular premium excluded when calculating the min.

sum assured.



Life Insurance



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Age SAM Factor

1 to 16 60

17 to 25 55

26 to 35 50

36 to 45 35

46 to 55 25

56 and above 15



Life Insurance



• Premium-Paying Rider (PPR) excluded for the purpose of

SAM calculation.

• Unit-Deducting Rider (UDR) caters for the deduction of

COI from account value.

• Treatment depends on 2 types of UDR:

a) Riders with Sum Assured (SA) payable on death

b) Riders without SA payable on death

29



Life Insurance


SAM formula for UDR:

Total Sum Assured

(Total Annual Premium – Notional Premium of Riders)

a) Example 1 (Riders with SA):

Man at age 30 wants:

1)RM 300,000 (basic coverage) + RM 300,000 (critical illness cov.)

= RM 600,000

2)RM 600,000/50 (SAM factor from 30 years old)

= RM 12,000 (Annual premium)

30



Life Insurance


b) Example 2 (Riders without SA)

To deduct notional premium.

Man at age 24:

1. set aside RM 3,600 a year for basic plan.

-Notional premium for rider = RM 200.

-The minimum SA for basic coverage will be RM 3,400

2.(Notional premium) X (multiple factor depending on age)

(RM 3,600 – 200) X 55 = RM 187,000

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Life Insurance


5. Optional Riders

• Riders available either:

Premium-Paying Rider (PPR)

OR

Unit-Deducting Rider (UDR)

PPR requires extra regular premium to be paid for the

rider with the basic premium.

UDR need not extra regular premium but it entails the

additional COI charge for the rider to be deducted from

investment account value.

**Agency commissions are payable from PPRs, not from UDRs.

32



Life Insurance


6. Account Value

• Receive value of units if surrender policy.

• After deduction of tax and all applicable charges.

• Value of policy depends on 2 factors:

1. Value of each units

2. Number of units the policy has accumulated to

date

• Number of units with every premium invested &

value of each unit = Value of policy

• However, value of policy may depreciate if fund’s

investments fall in value. 33



Life Insurance


7. Partial Withdrawal, Surrender and Charge

• Most insurer do not limit the frequency of withdrawal.

• But remaining account value must not go below a certain

minimum (e.g. RM 1,000).

• Depletion of account value due to withdrawals may cause

balance to be insufficient to meet higher COI at older

age.

• Alternative option:

a) Make ad hoc Top Ups

b) Surrender of policy

- Depending on number of years of a policy before

cut-off point. 34



Life Insurance


8. Fund Switching and Switching Fee

• Switch part of all their investment from one fund to

another fund

• Switching between funds may

oBe offered free

or oFree for only a limited number of switches for a

period of time

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Life Insurance


9. Premium Holiday

Options:

• Using the account value to cover premiums when due

premium is not paid.

• Deduct COI and other management charges

• Allowed to cover basic sum assured only - riders will

lapse UNLESS account value is sufficient to cover both

BSA and riders

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Life Insurance


37

10.Free-Look Period

• 15 days free look period from date of policy delivery.

• To cancel plan within this period, the insurer will

refund :-

Unallocated premiums

value of units - allocated at the unit price at the

next valuation date

Insurance charges and policy fee that have been

deducted



Life Insurance


11. No Lapse Guarantee Period

• Investment-Linked (IL) policy WILL NOT LAPSE in the first

few years.

Condition?

1. Regular premium has been paid without fail

2. No premium holiday has been affected

3. No changes have been effected to the policy

(including partial withdrawal and fund

switching) 38



Life Insurance


12. Death Benefit Mechanism

• Basic sum assured plus the accrued account value.

• Thus, DB amount cannot be lesser than the basic SA

Dual Pricing and Single Pricing

39



Life Insurance


13. Dual Pricing and Single Pricing

• Dual pricing = bid-offer spread (5% difference).

Offer price per unit (unit purchase price)

Bid price per unit (unit sale price)

• Single pricing = either acquisition or disposal of units in

a fund is at the same price per unit.

• Charges for acquisition (upfront charge) or disposal

(back end charge).

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Life Insurance


41

14. The Long Horizon

• Leverage cumulative effect from protection and

investment perspectives.

• Protection amount (Death benefit) increases over the

years

(SA coupled with the cumulative account value)

• Investment in long run, the Dollar Cost Averaging

creates positive impact on the cumulative effect of the

account value.



Life Insurance


15. Dollar Cost Averaging

Concept:

• Prices , acquire more units at lower prices

• Prices , units acquired at lower prices will appreciate

in value.

• Means leveraging

price fluctuations.

42



Life Insurance


16. Spread-Out Risk among Varied Assets

• Overall impact is the averaging effect on the price of the

fund with the spreading out of risk.

17. Retirement plan, Medical plan, and Education

plan

43



Life Insurance


44



Life Insurance

Mr. A

1) Wife & 1 Son

2) Active unit trust

agent

3)No EPF, no life

insurance

4)Taxable income 2013 = Rm50k


45



Life Insurance

17.Retirement plan, Medical plan, and Education plan

Taxable income 2013 = Rm50k

Rm 50k income, according to tax

rate (as of 2013)

tax payable would be Rm 2,850

=


17.Retirement plan, Medical plan, and Education plan

BUT ……

46



Life Insurance

• medical plan cover medical expenses & education plan for child’s education.

• Pay RM 6,000 a year for regular premium (ILP), protected for RM 300,000.

• Accumulating units in an investment fund

• Paid RM 1,500 a year for qualified investment-linked med plan

• Paid RM 1,500 a year for investment-linked educational plan

• RM 6,000 + RM 1,500 + RM 1,500 = RM 9,000 tax relief. Chargeable income would be RM 41,000 instead of RM 50,000.

Buy investment-linked life plan for retirement income


1. Which options are open to policy owners of a

regular premium investment-linked plan?

I. A policy owner may opt for higher a sum assured than the

minimum amount stipulated by the Sum Assured Multiple rule.

II. A policy owner can pay top-up premium to accelerate the

accumulation of the account value in the policy.

III. A prospective policy owner can apply to combine a single

premium plan with a regular premium plan into one policy.

IV. A prospective policy owner can select the death benefit based

on either the sum assured or the account value, whichever is

higher.

A. I and II

B. I, II and III

C. II and III

D. I, III and IV

47

Sample Questions



I. Top-up premiums can either be paid on a regular basis or at

any time.

II. Most insurers impose a minimum amount for both regular top-

ups and ad hoc top-ups.

III. Most insurers allow ad hoc top-ups once a year and impose a

maximum amount.

IV. An upfront charge, normally around 5 per cent, is deducted

from each top-up.

A. II, III and IV

B. I, II and IV

C. I and IV

D. I,II,III and IV

48

Sample Questions


3. A female, aged 30 years, has budgeted to set aside

RM3,000 a year for a basic regular premium

investment-linked plan with a Unit-Deducting

Hospitalization Rider. According to the SAM formula, the

multiple factor for her age is 50 times. How would you

calculate the minimum sum assured for the basic plan?

A.RM3,000 minus the notional premium for the rider, multiply by 50.

B.RM3,000 multiply by 50.

C.RM3,000 multiply by 55 times.

D.RM3,000 minus the notional premium, then multiply by 55 times.

49

Sample Questions


4. Which of the statements below are correct?

I. All life insurers impose an early partial withdrawal charge and an

early surrender charge.

II. High partial withdrawals may cause the future account value to be

insufficient to cover the higher cost of insurance at older ages.

Therefore, it is prudent for a policy owner to make ad hoc top-ups to

replenish the units and the account value.

III. Depending on the practices instituted by individual life insurers, all

fund switches may be processed free of charge, or be free for the

first switch or first few switches within a policy year and a fee is

charged for subsequent switches.

IV. The investment risk profile of a young investor or policy owner may

likely change from the aggressive category to the conservative

category as he advances in age; hence, he may want to progressively

shift more of his equity assets to fixed income or bond fund until he

gets close to retirement age.

A. I, II, III and IV C. I, III and IV

B. II and III D. II, III and IV 50

Sample Questions


5. Identify the correct statements from those given below.

I. The free-look period is 15 days commencing from the date of delivery of

policy contract to the policy owner.

II. The no-lapse guarantee clause stipulates that as long as premiums are paid

without fail by the grace period and there was no previous premium holiday

or partial withdrawal, the regular premium investment-linked policy will

never lapse over the entire policy tenure although the account value may be

insufficient to cover the cost of insurance at any point in time.

III. The no-lapse guarantee clause stipulates the regular premium investment-

linked policy will not lapse in the first few years (e.g. 2 years) even though

the account value is not sufficient to cover the cost of insurance, provided:

• All premiums were paid during the period

• No premium holiday was exercised during the period

• There was no partial withdrawal or fund switching during the period

IV. As the basic death benefit of a regular premium investment-linked policy is

basic sum assured plus account value, the life insurer will continue to deduct

the cost of insurance for the basic coverage as long as the policy remains in

force.

A. I, III and IV C. II, III and IV

B. II and III D. I, II, III and IV

51

Sample Questions


6. Select the correct statements from the following.

I. The Dollar Cost Averaging phenomenon leverages the long term or

the acquisition of more fund units when prices are down and the

appreciation of units already acquired when prices go up.

II. Some assets in a fund may perform well in a given short period while

some may not, but the overall impact is the averaging effect due to

the spreading out of risk. With prudent management by fund

managers, the unit price is likely to be higher in the longer run.

III. The maximum tax relief for a qualified regular premium investment-

linked medical plan and an education plan is RM3,000 a year. If a

policy owner has both, the combined limit is also RM3,000.

IV. Whether a policy owner has a qualified regular premium investment-

linked medical plan or an education plan, or both, he qualifies for a

tax relief of up to RM6,000 a year.

A. I, II and IV

B. I, II and III

C. I and III

D. II and IV

52

Sample Questions


Chapter 3

Mechanisms and

Features of Single

Premium Investment-

Linked Life Insurance


54

Mechanisms and Features of Single Premium


Introduction

Priority for policy owners of single premium investment-linked

would be investment, protection second.

1. Minimum Basic Single Premium

• RM5,000 to RM20,000

2. One-Time Unallocated Premium Charge

• Unallocated portion spans over the first 6 years in reducing

ratios.

• Normal charge is around 5%.

• Top-ups = same charge.

• If 5% is the upfront charge, the balance of 95%will acquire

units in fund/s.


55

3. Sum Assured Formula

• Basic sum assured = 125% of single premium (SP) paid.

• Allows insurers lower it to 105% of SP.

4. Death Benefit Formula

• All TUs excluded from BSA formula.




5. Cost of Insurance Deduction and Sum at Risk

Mechanism

• If account value exceeds BSA, DB will be the account value.

• Unless account value is still below BSA, COI will be deducted.

• COI deduction cover the shortfall between account value and SA.

• Shortfall difference = Sum at Risk (SAR)

• Account value increases, COI reduces. If account value exceed

basic SA, COI cease. If account value drops again below BSA,

COI deduction resume.



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TMTDA/ADA/CEILLI/PPT/Eng/August2015 57




58

1. Single premium investment-linked insurance is said to be more

inclined towards investment than protection because

A. generally, about 95% of the single premium is allocated for

investment in fund units.

B. the policy owner has the discretion to opt out of any

protection coverage so that no cost of insurance will be

deducted from the account value.

C. the usual sum assured is 25 per cent above the single premium

outlay and may be lowered to 5 per cent above the premium

for older age groups, i.e. RM125,000 for SP of RM100,000,

RM105,000 for senior ages with the same premium.

D. once the account value exceeds the basic sum assured, the

death benefit will be the account value, not inclusive of the

sum assured.

Sample Questions


2. Mrs. A, aged 45, signs up for a single premium investment-

linked plan by paying an initial RM100,000. Six months

later, she pays another RM100,000 as top-up. The total sum

assured in her policy after payment of the top-up is

A. RM250,000.

B. RM125,000.

C. RM205,000.

D. RM210,000

59

Sample Questions


3. Which of the statements below are correct regarding single

premium investment-linked insurance?

I. Most insurers set their minimum basic single premium as

ranging from RM5,000 to RM20,000, depending on product

design.

II. All insurers set the minimum basic single premium at

RM5,000.

III. Top-up premiums, if any, also bear the same normal upfront

or unallocated premium charge ratio of around 5% as the

basic single premium.

IV. Cost of insurance will be deducted regardless of whether the

account value is above or below the basic sum assured at any

point in time.

A. I, III and IV

B. I and III

C. II and IV

D. II, III and IV

60

Sample Questions


61

4. Which statement/s relate(s) to the application of cost of insurance

(COI) in single premium investment-linked insurance?

I. COI is based on the sum assured or account value, whichever

is higher.

II. When the account value of a single premium investment-

linked policy is still below the sum assured, the shortfall gap

between the two levels is called sum at risk.

III. Deduction of COI is based on the shortfall amount from the

account value level to the sum assured level.

IV. COI is based on the difference between the sum assured and

account value at any point in time.

A. I

B. III

C. II and III

D. IV

Sample Questions


62

5. Top-ups for single premium investment-linked plans are

encouraged when

I. the market is on the upturn and unit prices are rising.

II. a market downturn sets in not long after policy inception,

thus causing the sum at risk to prolong longer than expected,

based on the initial premium outlay.

III. the nation is experiencing a period of strong economic or GDP

growth.

IV. the policy owner believes in the impact of Dollar Cost

Averaging and wants to leverage that to boost the account

value instead of relying on just one single outlay.


B. I and III

C. II and IV

D. I, II and III

Sample Questions


63

6. The few mechanisms and features of single premium investment-linked

plans which differ from regular premium investment-linked plans are:

I. The sum assured formula for single premium plans is different than

that for regular premium plans.

II. The death benefit formula for single premium plans is not guided by

the same minimum Sum Assured Multiple rule applicable to regular

premium plans.

III. The allocated premium ratio for single premium plans is different

from that for regular premium plans.

IV. While the policy is kept in force, the cost of insurance deductions

for single premium plans may not be continuous because the

formula is based on sum at risk, unlike regular premium plans which

are based on sum assured.

A. I and IV

B. I, II, III and IV

C. II, III and IV

D. I, III and IV

Sample Questions


Chapter 4

CONSIDERATIONS FOR

PURCHASING AN

INVESTMENT-LINKED

POLICY


Benefits

Benefits

Access

Expertise

Administration Pooling/

Diversification

Flexibility

Considerations for Purchasing an

Investment-Linked Policy

65

Transparency


1) Pooling or Diversification

Offer an access to a “pooled” or “diversified portfolio”

of investments.

The fund normally consist of wide range of equity

stocks and fixed income securities.

A well-diversified investment-linked fund has better

risk characteristics than a less-diversified one.

66

Benefits




Flexibility

Change level of

premium payment

Premium holiday

Single premium

top-ups

Change level of sum assured

Switch between funds Withdrawals

Benefits

67

2) Flexibility




3) Expertise

• Professional fund managers

4) Access

• Gain access to well diversified investment-linked

funds

5) Administration

• Day-to-day administration of investment.

• Keep track of investment through the unit statement

provided regularly and the unit price published in

financial pages of major newspaper.

Benefits

68




69

Benefits

6) Transparency • Transparency relating to official sales materials

presented at the point of sale.

• Transparency details example: Proposal summary

Name of basic plan, names of riders, coverage amounts, overall premium.

Descriptions of benefits and excluded risk

Statement of Cost Of Insurance (COI)

Cost Of Insurance (COI) will be levied monthly and deducted from fund/s up to maximum tenure.

Statement of Premium Holiday (PH)

PH will be applied when due premium is not received

Statement of Investment returns

Based on assumed rates of return

For plans and riders




70

Special Advisory Highlights

Policy owner can maximize the investment element by opting to pay the minimum basic annual premium and the balance as regular top-up.

Can increase sum assured without a corresponding increase in annual premium.

Policy may lapse if insufficient account value for deduction of charges due to higher COI.

Can add top-ups or reduce basic sum assured (within min. Sum Assured Multiple rule) in the later years to maintain policy.

Charges may change by insurer, giving 3 months’ notice.

COI increases with attained age.

All investment risks are borne by the policy owner.




71

Elements contained in the table of illustrated values and benefits are:

Breakdown of annual premium and coverages

Selected fund/s and proportion ratio, if more than 1 fund (in %)

Amount of allocated and unallocated premium according to policy years. Support by a table of allocated premium ratio for first 6 years

Basic sum assured

COI amount for basic sum assured and riders

Amount of other charges – policy years

Amount of annual fund management fee

Projected cumulative account value – high and low scenario

Projected cumulative death benefit amount

Commission amount




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Assumed rates of return of funds

With high and low scenarios for first and after 20 years according to Bank Negara Guidelines

Actual historical returns

Funds in the past 5 years

Short descriptions

Underlying assets of each available fund

Policy Disclosure Sheet (PDS)

Policy owner to read PDS and general terms and conditions

Requirement for intended policy owner to sign

Acknowledgement upon reception and understood the contents of sales quotation and PDS.




The sum assured guaranteed but the value of units is not

guaranteed.

Risks of short-term fluctuations in cash value

73

1) Investment Fluctuations

2) Charges The administration fee, insurance charge, fund management

fee are usually not guaranteed.

Subject to regular review and can be changed by giving a

written notice over a specific period e.g. 3 months

Risks




No Regular Premium

Investment-Linked Plan Whole Life Participating Plan

1 Whole life coverage up to age

100

Whole life coverage up to age 100

2 Account value is not guaranteed Cash value is guaranteed

3 Surrender value based on an

accrual in account value payable

Surrender value based on cash

value plus vested bonus or

dividend

4 Death benefit payable from sum

assured plus account value.

Maturity benefit is payable from

account value.

Death or maturity benefit

payable from sum assured plus

vested bonus or dividend

5 Policyholder can choose from

funds

Investment instruments by

insurer

74




75

No Regular Premium


6 Policyholder can choose a

higher sum assured with same

premium

Premium amount is based on

sum assured

7 Can add riders via COI

deduction from account value.

Has to pay extra premium for

riders

8 Top-up premium allowed Top-up premium not allowed

9 Partial withdrawal from

account value

No partial withdrawal allowed

from cash value except

surrender value of bonus or

dividend

10 No policy loan feature Policy loan available with

interest




No Regular Premium


11 Can choose to request PH Automatic premium loan

feature with interest

chargeable

12 Tax relief Tax relief

13 Min. age 18 apply own life Min. age of 10-15 require

parental consent.

76




1. The benefits of an Investment-Linked policy are:

I. It provides access to a diversified investment portfolio. Thus, it has better risk characteristics than a non-diversified portfolio.

II. It offers flexibilities

III. Fixed nominal charges are levied on the policy.

IV. The life insurer insulates the policy owner against market risks.

A. I and II.

B. II and IV.

C. I and III.

D. I, II, III and IV.

77

Sample Questions


2. When an investment-linked policy reaches maturity, the maturity value will be

A. The basic sum assured and the account value.

B. The account value.

C. The account value plus terminal/maturity bonus.

D. The basic sum assured and the account value plus terminal/maturity bonus.

78

Sample Questions


3. What are two similarities between a regular premium investment-linked plan and a whole life participating plan?

I. Both plans provide lifetime coverage up to maximum age 100.

II. Both plans allow the addition of rides without additional premium.

III. Both are entitled to the same income tax relief treatment for premiums paid.

IV. The minimum age for an individual to apply on own life, and not as juvenile application arrangement, is age 16 for both products.

A. I and II.

B. II and III.

C. I and III.

D. I, II, III and IV.

79

Sample Questions



I. The minimum age for applying a regular investment-linked policy on own life is age 18 last birthday.

II. A minor aged 16 last birthday who is applying for an investment-linked policy on own life needs parental consent.

III. A minor aged 16 last birthday can apply for a whole life participating policy without parental consent.

IV. Minors aged 10 to 15 last birthday can apply for a whole life participating policy with parental consent.

A. I, II, III and IV.

B. I, II, and III.

C. I and III.

D. I, III and IV.

80

Sample Questions


5. As the sales illustration document printed by any life

insurer is meant for reference and view by a prospect, a sales intermediary is expected to observe certain rules. These are: The sales intermediary must

I. get the new policy owner to sign the illustration as acknowledgement of having understood the contents.

II. get the new policy owner to sign the policy disclosure sheet and also to sign it himself to declare that proper presentation has been carried out and the non-guaranteed elements have been explained.

III. highlight that all investment risks are borne by the policy owner, that all fees and charges may be changed by the insurer giving 3 months’ notice, and that the cost of insurance increases with attained age.

IV. explain that the projected returns may be deemed likely returns of the selected funds based on the past 5 years’ historical performance.


B. I, II, and III.

C. I, III and IV.

D. I and III. 81

Sample Questions


6. Which of the following statements regarding a life insurer’s sales illustration/quotation document are correct?

I. The projection of future returns is based on the past 5 years’ performance experience of a specific fund or funds proposed to the prospect.

II. Projected returns are based on assumed rates for the high and low scenarios of the specific fund/s.

III. Normally, the actual historical returns of the various offered funds in the past 5 years are also shown for the purpose of transparency.

IV. Projection of values is based on assumed rates of return up to 20 years.

A. I and III.

B. II, III, and IV.

C. I, III and IV.

D. II and III. 82

Sample Questions


Chapter 5

INVESTMENT

CONSIDERATIONS


1. There is an increasing need for sound and proper

advice on how, what, when, where and why

investments must be done.

2. Client should know the basic considerations in

order to make a sound judgment on investments.

84

Investment Considerations

Introduction


1. Investment Objectives

2. Availability of Funds

3. Risk or Security

4. Investment Horizon

5. Accessibility of Funds

6. Taxation Treatment

7. Investment Performance

8. Diversification

85



Fundamental Investment Objectives

Safety

- Returns – conservative - Try its best to create a hedge against inflation

Growth

To hold the stocks for a long time to derive profits from the growth of the investments.

Income

To see a steady stream of income


86



• Comfortable standard of living

• Funds for dependents

• Funds for death

• Income in retirement

• Improvement in financial position

• Funds for children’ education

• Hedging inflation

• Liability cancellation

• Achieving Financial Freedom

Other Investment Objectives


87



• Clients have to do analysis to make sure that they:

1. Have enough money to put aside for investment.

2.Will be able to follow through with the

investments.

88




Warrant Buffet advises

“you need to first set aside money for

investment before thinking about

spending it.”

89



a. Simple Monthly Cash Flow Analysis b. Simple Net Worth

Analysis

90

There are two types of fund analysis :




a) Simple Monthly Cash Flow Analysis

Income – Expenditure = RM 3,500- RM2,500

= RM 1,000

*Client can utilize the RM1,000 to fund an investment plan.


91


No Income RM Expenditure RM

1. Salary 3,000.00 Housing Loan Payments 1,000.00

2. Rental 500.00 Groceries and Utilities 750.00

3. Commissions 1,000.00 Childcare/Parents’ allowance 500.00

4. Others 1,000.00 Education Expenses 250.00

5. Loans

(Car, Credit Cards, etc.)

2,000.00

6. Insurance Premiums 500.00

7. Savings 500.00

8. Misc. 1,000.00

TOTAL 7,500.00 6,500.00


b) Simple Net-Worth Analysis

Assets – Liabilities = RM 240,000 - RM200,000

= RM 40,000

*Client can utilize the RM40,000 to fund an investment plan. 92



No Assets RM Liabilities 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. Insurance

Cash Value 20,000.00 Others 15,000.00

TOTAL 291,500.00 265,500.00


Return

Risk

Risk/ Return Trade-off

3. Risk or Security

Returns are directly proportional to the risk in investment.

93



The difference between high risk and low risk:

94

Risk Description

High risk/

aggressive

A mutual fund or stock can potentially

achieve higher returns because of

greater volatility.

Low risk/

conservative

A mutual fund or stock will trade close

to its historical average prices and will

tend to be quite stable.

3. Risk or Security



Know your Investment risk profile (e.g. age, family

situation, experience ) to determine how best to allocate

your savings amongst various risk asset.

95

3. Risk or Security

INDIVIDUALS REACT TO RISK DIFFERENTLY

Risk Taking/Seeking

(Aggressive)

Risk Indifferent

(Neutral)

Risk Averting

(Conservative)

LOW OR NO RISK MODERATE RISK

HIGH RISK



What is the concept of “risk” in investment?

1.Is the Volatility or how widely the price of a stock or

mutual fund fluctuates.

2. Fluctuations Risk, because you stand to make

and also lose more money, compared to a fund that doesn’t

fluctuate as wildly.

96

3. Risk or Security



1. The length of time a sum of money is expected to

be invested (when and how much money will be

needed), or

– can be defined as the total length of time that an

investor

– expects to hold a security or a portfolio.

2. Generally, the shorter the investor's horizon, the

lower the risk he/she should be willing to accept.

97

4. Investment Horizon



• A client will need the money to settle a specific event. With this in mind, we can divide the accessibility of funds into 3 components :

1. The time when the client needs the fund.

2. Cost/ penalty that the client has to pay if client exits early.

2. Initial/set up cost in setting up or buying into the investment.

98

5. Accessibility of Fund



• Knowing the implication of tax treatment for the

particular investment portfolio is important before

the investment decisions are made.

• It would have the impact on the actual return.

• No special tax laws on investment-linked

insurance. The tax status is the same as traditional

with profit life insurance products.

99

6. Taxation Treatment



The performance depends on the following factors: :

100

7. Performance of the Investment

Country’s and global economic factors.

The competencies and capabilities of the management team.

The invested company’s level of costs.

Past experience.

History of the company.

Life cycle of the investment.



Diversification is the process of investing across different

asset classes and across different market segments.

101

8. Diversification

Minimize Risks & Maximize

Returns

“Do not put all your eggs in one basket”

Important:

Diversification DO NOT completely eliminates the risk of

investing in stocks in a portfolio..



1. An example of investment in Money Markets is

A. 5-Year Bond.

B. Currencies and Forex.

C. Treasury Bills.

D. Savings account.

102

Sample Questions


2. People generally 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 education and their upbringing.

A. II, III and IV.

B. I, II, and III.

C. I, II and IV

D. II, III and IV.

103

Sample Questions


3. Which statement below explains what a simple

(current) net worth analysis involves?

A. The forecast of a person’s future net wealth and

financial status (e.g. middle income, upper middle income, etc.)

B. A calculation of the sum of assets in current monetary terms that a person presently owns, not including any future inheritance

C. The total sum of all assets owned by a person in present value minus the existing total sum of all liabilities he is obliged to settle. The balance, if any, is his present net worth to his family in the event of his early demise.

D. A personal plan outlining the targets for values of current and future assets to be achieved at a certain time in the future.

104

Sample Questions


4. The main purpose of an agent conducting a risk profile

on his potential client is

A. to assess whether the potential client is willing to use a major portion of his savings or liquid assets to purchase a large investment-linked plan.

B. to help the potential client understand his own risk profile, i.e. whether he has conservative, aggressive or balanced risk characteristics, and also to consider the type of asset categories suitable for his profile.

C. to assess whether the potential client will be attracted to the product/s being offered.

D. to assess whether the potential client is willing to forego some of his existing liquid assets in order to buy an investment-linked product.

105

Sample Questions


5. Which of the statements below are true?

I. A person’s investment horizon is the length of time that he is prepared to hold a particular asset before he liquidates it.

II. The investment horizon of an individual, among other factors, also depends when he needs liquidity in the future date for specific objective/s.

III. The cost or penalty that an investor has to pay in the event he needs to liquidate the asset earlier than expected also has a bearing on his choice of investment horizon.

IV. It is pertinent for an agent to strike a clear understanding with a potential client as to how much the latter is willing to set aside or commit for acquiring an asset


B. I, II, and III.

C. II, III and IV

D. I, II and IV.

106

Sample Questions


6. Which of the following statements is correct?

A. Diversification means spreading out investment in different asset categories or fund types.

B. Diversification not only means spreading out investment in different asset categories or fund types, but also acquiring various assets of the same category or fund type.

C. Investment-linked funds in Malaysia confine the investment diversification to assets in the country as a way of discouraging the outflow of funds.

D. When the stock market shows signs of going up, an investor should give key focus to leverage the market trend and switch all fixed income or bond assets to equities.

107

Sample Questions


Chapter 6

TYPES OF

INVESTMENT

VEHICLES AND

POTENTIAL RISKS


Common instruments available include:

1 Cash and Deposits

2 Fixed Income Securities

3 Shares

4 Unit Trusts

5 Properties

6 Real Estate Investment Trusts

7 Sukuk

8 Bonds

9 Capital Guaranteed Funds

10 Commodities

Types of Investment Vehicles and

Potential Risks

109


1. Refers to all liquid instruments that carry little

or no risk.

2. Cash has no value in itself. It is of value only as a

medium of exchange.

3. The definition of cash in this course will include

short-term debt instruments :

Treasury Bills

Bank accounts

110

1) Cash and Deposit


Potential Risks


a) Treasury Bills

Tax alone is insufficient to finance amenities such as roads and

schools, government come up with borrowing on a short-term

basis.

Treasury Bills are short-term government funding vehicles

issued on a regular basis with repayment within a year.

They are :

» Issued by Bank Negara Malaysia

» Safest type of investments

111

1) Cash and Deposit


Potential Risks


a) Treasury Bills

112

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: Political instability)

1) Cash and Deposit


Potential Risks


b) Bank Accounts

These are fixed deposits placed with banks for

fixed periods with fixed interest rates for that

period.

For example: Current Accounts, Fixed Deposits,

Time Deposits and Offshore Accounts.

113

1) Cash and Deposit


Potential Risks


b) Bank Accounts

The factors that may influence the choice of

deposits:

1. Funds available for investment.

2. The duration the funds can remain in the account.

3. Will there be emergency withdrawals.

4. Prevailing market conditions.

114

1) Cash and Deposit


Potential Risks


b) Bank Accounts

Deposit insurance:

Established by the Government to protects

depositors against the loss of their insured

deposits

Launched in September 2005

Managed by PIDM

115

1) Cash and Deposit


Potential Risks


b) Bank Accounts

(I) PERBADANAN INSURANS DEPOSIT MALAYSIA (PIDM):

• A government agency established under the Akta

Perbadanan Insurans Deposit Malaysia 2005.

116

• OBJECTIVES:

1. Administer a deposit insurance system.

2. Provide insurance against the loss of part or all

of deposits of a financial institution.

3. Provide incentives for sound risk management in

the financial system.

4. Promote and contribute to the stability of the

Malaysian financial system.

1) Cash and Deposit


Potential Risks


b) Bank Accounts

PERBADANAN INSURANS DEPOSIT MALAYSIA (PIDM):

The benefits of deposit insurance are:

1.The protection is automatic.

2.PIDM protects depositors holding deposits with

banks.

3.There is no charge to depositors for this insurance

4.Should a bank fail, PIDM will promptly reimburse

depositors their deposits.

117

1) Cash and Deposit


Potential Risks


• It is a security or certificate showing that the investor

has lent money to the issuer, in return for fixed

interest income and repayment of principal at

maturity.

Investor lend money to issuer (government or

company)

Return in fixed interest

Capital repayment at maturity

Regarded as IOUs

Traded in secondary market

118

2) Fixed Income Securities


Potential Risks


1. Active secondary market

• Can be bought and sold at anytime

• Opportunity to realize capital gains

2. Inactive secondary market

• The investors’ money is locked up for the full life

span of the security.

119



Potential Risks


There are three types of Fixed Income Securities:

a) Government Bonds

b) Corporate Bonds

c) Preference Shares

120



Potential Risks


a) Government Bonds

It is a financial instruments used by the

government to borrow money from the public. The

investor gets the interest + capital on maturity.

121

Advantages vs. Disadvantages

No. Advantages Disadvantages

1 Very safe. In times of high

inflation, capital can be

eroded.

2 Guaranteed

marketability and

income for the future.



Potential Risks


b) Corporate Bonds

It is a financial instruments used by the companies

to borrow money from the public to fund the

growth of their companies operations.

There are three categories of Corporate Bonds:

Debenture stocks

Loan Stocks

Convertible Stocks

122



Potential Risks


b) Corporate Bonds

Debenture Stocks – Secured Loan

• Trustees are appointed to supervise the way the

company performs

• In the event of a default, the trustees act for

the investors.

• Interest rates for corporate bonds tend to be

higher than government bonds and the security

is lower than government bond.

123



Potential Risks


b) Corporate Bonds

Loan Stocks – Unsecured Loan

• The investor may or may not get back his capital

depending on the company’s performance.

• Compared to debentures, loan stocks are much less

secure and therefore carry a higher interest rate.

124



Potential Risks


b) Corporate Bonds

Convertible Stock

•Convertible to ordinary shares of a company on a fixed

date

•Become part of an owner & entitled to profits through

dividends declaration

125



Potential Risks


b) Corporate Bonds

Advantages and Disadvantages of Corporate Bonds

126

Advantages Disadvantages

1 Higher return than

government bonds

More riskier than

government bonds

2 More marketable and

can be sold for capital

gains



Potential Risksc


1. A shareholder owns part of the company and

possesses voting right.

2. Shareholders are not liable for the debts of the

company.

3. The cost of buying and selling shares includes:

• Stockbroker’s commission

• The difference between buying price and

selling price.

127

3) Shares


Potential Risks


There are two kinds of shares :

a)Ordinary

b)Preference

a)Ordinary shares

The holder is a part owner of the company and is entitled

to share in its profits in the form of :

a) Dividends (paid net of basic tax rate)

b) Capital gain from the shares by an increase in the

share price (not liable to tax)

128

3) Shares


Potential Risks


b) Preference shares

1. Holder has a right to a fixed dividend provided

that there are enough profit made.

2. This right takes precedence over the right of

ordinary shareholders to dividends.

3. They are slightly more secure than ordinary

shares but less profitable.

129

3) Shares


Potential Risks


Share price influenced by:

•Currency performance

•Market’s view on company

•Country’s economy

•Interest rate levels

•Inflation rate

•Company’s earning 130

3) Shares


Potential Risks


Advantages and Disadvantages of Shares

131


1 Investors participate

directly in the future of

the company

High risk

2 Good dividends and

capital appreciation

3 Very liquid (can be

traded in the open

market)

3) Shares


Potential Risks


1. A pool of funds contributed by many investors

kept in trust by a trustee (usually a bank) and

managed by a professional fund manager.

2. Regulatory body will be Security Commission.

132

4) Unit Trusts


Potential Risks


Investors Open-ended fund

Trustee

(usually bank)

kept the fund;

govern by trust deed.

Fund Manager

to manage.

Regulatory Body: Securities Commission

133

4) Unit Trusts


Potential Risks


Trust Deed: A unit trust is established by a trust deed.

•This deed enables a trustee to hold the pool of money

and assets in trust on behalf of the investors.

•A trust deed is set up of:

Power for fund managers to invest

Price structures

Registration of unit-holders

Remuneration of fund managers

Accounting & auditing rules

134

4) Unit Trusts


Potential Risks


3. Unit trusts have no fixed redemption date.

4. The investment in unit trusts could generate

income in the form of

a) Dividends

b) Interest

c) Capital gains.

135

4) Unit Trusts


Potential Risks


Advantages and Disadvantages of Unit Trusts :

136


1 Lower risks, compared to

shares

Bewildering array of

funds

2 Professional investment

services are provided

Extra costs or charges

3 Investor can utilize a

portion of his EPF from

account A to purchase EPF

approved unit trusts

4) Unit Trusts


Potential Risks


137


Potential Risks


138


• 3 types of real estate investment:

a. Agricultural property

b. Residential property

c. Commercial/ industrial property

• The price of an agricultural property depends on:

a. Quality of land

b. The location of the land

c. The types of crops grown

d. The value of the buildings on the land / Existing

facilities on agricultural property

5) Properties

139


Potential Risks


Advantages

Good capital

appreciation

Steady flow of income

Low risk

Disadvantages

Difficult to be

disposed off during

recession

By mortgaging, capital

can be free

140

5) Properties


Potential Risks


1. A new asset class investment which has similar concept

like unit trust, e.g. STAREIT

2. REITs based companies will invest, manage and

distribute rental as dividend back to the investors.

3. REIT returns averagely in develop market is around

3-5%.

4. Similar concept like unit trust

141

6) Real Estate Investment Trust (REITs)


Potential Risks


5. Invest, manage and distribute rental as dividend back

to investor

6. Trade in Bursa Kuala Lumpur with ease of buying and

selling back like a normal equity

7. Invest into high profile and high value properties for

better return

8. Long term retirement plan.

142



Potential Risks



•Good capital

appreciation and steady

flow of income

•Low risk

•Mortgaging the property,

capital can be freed

•Economic recession,

property could be

difficult to be disposed

off



Potential Risks


1. Sukuk is the Arabic name for financial certificates.

2. Islamic equivalent of bonds

3. Sukuk securities are comply with Islamic law

4. Commercial paper which gives the investor a share of

ownership in the underlying asset.

5. Its investment principles which prohibits the charging,

or playing of interest

144

7) Sukuk Bond


Potential Risks


6. The Sukuk are equity securities which have the

following characteristics:

i. Pooled funds (Mutual funds)

ii. Hard assets that generates steady income;

iii. May be guaranteed or not by originators;

iv. Investors receive a fee equal to the income of the

underlying assets;

v. Securities issued by Special Purpose Vehicles (SPVs);

vi. Most Sukuk are issued in dollars;

vii. Differ from conventional bonds because based on

tangible assets, not debt.

145

7) Sukuk Bond


Potential Risks


1. Investment vehicle offered by institutions that

guarantees investor’s initial capital investment

from any losses provided that investor don’t

redeem your investment before the maturity date.

2. However, the amount of return is capped at a

specific rate although the actual investment may be

higher.

146

8) Capital Guaranteed Fund


Potential Risks


149

9) Commodities

1) Represent an avenue for investors to venture out of stocks or bonds.

2) Gaining from price movements.

3) One of the way is by futures contract

• Agreement of buy/sell – specific quantity, specific price

• Categorized as a derivative product

• Entails speculating future price movements


Potential Risks


1. Malaysian Treasury bills are debt instruments that are

considered safe because

I. they are issued by the Government of Malaysia.

II. they are short-term instruments.

III. they are guaranteed by the World Bank.

IV. their tenure is normally 12 months.


B. I, II, and III

C. I and II

D. I, II and IV

150

Sample Questions



I. Normally, when interest rates fall, the prices of fixed income or

bond assets may rise; when interest rates rise, their prices may

drop.

II. Government bonds are safer than corporate bonds but their

returns are comparatively lower.

III. The maturity period of short-term government bonds is usually

less than 5 years; for the medium-term ones, it is usually 5-10

years and for the long-term ones, it is usually above 15 years.

IV. Preference shares are hybrid securities with both equity and

fixed income characteristics. In the event the company

concerned winds up, preferred shareholders have the first right

to be compensated from the company assets first before normal

shareholders.


B. II, III and IV

C. I, II and III

D. I and IV

•

151

Sample Questions


3. The similarities and differences between unit trusts and single

premium investment-linked plans are:

I. The investment approach of both are similar.

II. The life insurance protection element is not part and parcel

of unit trust products, whereas for single premium

investment-linked plans, it is.

III. Unit trusts do not impose cost of insurance and policy fee

charges since the life protection element is absent.

IV. A trustee must be appointed for unit trusts but this is not

compulsory for single premium investment-linked plans.

A. I and II

B. I, II, III and IV

C. II, III and IV

D. I and III

152

Sample Questions


4. Which of the following statements about Real Estate

Invest Trusts (REITs) is NOT true?

A. REITs operate in a way similar to unit trusts.

B. Rental income from the properties invested by a

REIT is distributed to investors in the form of

dividend.

C. A REIT can invest in a wide range of properties like

malls, office blocks, apartments, commercial lots,

hotels, etc.

D. REITs may acquire shares in property development

companies.

153

Sample Questions


5. Which of the statements below is incorrect?

A. Sukuk are like bonds but they are based on Shariah-

compliant principles.

B. Malaysia is the world’s largest issuer of sukuk.

C. Sukuk securities are issued by Malaysia in Ringgit

only.

D. Sukuk securities issued by Malaysia can be in USD.

154

Sample Questions


6. The protection offered by PIDM on the deposits placed in banking

institutions and policies bought from insurance companies

operating in Malaysia is granted

I. to all banks, insurance companies, takaful operators,

reinsurance companies and retakaful operators which have

business operations in Malaysia.

II. only to banks, insurance companies and takaful operators

which are member institutions of PIDM.

III. with a levy charged to all member institutions and non-

member institutions at differing rates.

IV. with a levy charged to member institutions.

A. I and III

B. I and IV

C. II and IV

D. III

155

Sample Questions


Chapter 7

COMMON TYPES OF

INVESTMENT-LINKED

FUNDS


Types of IL Funds

• There are seven types of IL funds:

157

1. Fixed Income/Cash and Money Markets Funds.

2. Equity Funds.

3. Property Funds and REITs.

4. Managed Funds.

5. Balanced Funds.

6. Specialised Funds.

7. SUKUK

8. Risk vs Returns of investment-Linked Funds.

Common Types of Investment-Linked Funds


Types of

Funds

Investment Vehicles Remark

Cash Cash/bank deposits Low risk,

secure

Bond/Income

/Fixed

Income

Government/Corporate bonds -

Equity Equity assets (stocks & shares) Capital

appreciation

Property and

REITs

Real estates/property shares

Illiquid asset

158

Types of IL Funds



159

Types of

Funds


Managed Wide variety of asset

allocation

Moderate

Balanced Funds invest fixed proportion

of specified assets.

70% in equity

30% in fixed income

-

Specialised •Based on geographical

regions or particular

industries

• ASEAN fund, China fund,

mining, plantation, etc.

Risk of

currency

exchange

Types of IL Funds



160

Types of

Funds


SUKUK • Comply with Islamic law

• Based on tangible assets

instead of debt

Low risk

Types of IL Funds



Risk-return

161

Risk

Return

Cash Funds

Bonds

Funds

Managed

Funds

Balanced

Funds

Equity

Funds

Property

Funds

Derivatives



Risk-return of Investment-Linked Funds

162

Bond Equities

Debt funds Features Stocks and shares

Lower risk Risk Higher risk

Stable Return Higher (Depending on stock market)

**To lower risk of loss in equity fund:

• mechanism of Dollar Cost Averaging via continuous contributions to fund

over a long horizon

• spread-out to various stocks in one equity basket.



163

Risk potential correlates with return potential

Actual local bond fund:

1. “P’ Bond Fund of “C” Bank Group (a) Current Average Volatility Factor @ July 2014: 0.89

2.35%

8.43%

5.84% 5.69%

3.87% 3.51%

2008 2009 2010 2011 2012 2013

Year

Calendar Year Performance (%)

Average Performance: 4.94



164

2. FBM-KLCI Index

(a) 1 Year Volatility (%) : 6.5

(b) Total Return 2013 (%) : 14.0

To Conclude:

a) Bond fund: Low Risk/Volatility = Low Return

b) Equity fund: High Risk/Volatility = Higher Return

BUT ! **Note that higher risk (Equity fund) will face a steeper drop in return

than bond funds when market faces downturn

Risk potential correlates with return potential

Actual local bond fund:



Risk-return of Investment-Linked Funds

165

Advantage

of IL funds

Services from

professional fund

managers



1. Sukuk is gaining ground in terms of transaction volumes in

Malaysia, including for investment-linked funds because

I. this investment vehicle is becoming more popular

among investors.

II. of the strong support from the Government and mega

corporations, especially Malaysian ones.

III. of its higher return experience compared to

conventional bonds because of special incentives

provided by the Government.

IV. it is traded only in Malaysian Ringgit.

A. I, II and III

B. I and II

C. II and III

D. I, II, III and IV

Sample Questions

166


2. The average yield of Malaysian Treasury bills with

tenures of 6 to 12 months is

I. around or slightly better than 3%.

II. normally around 4 to 5 per cent.

III. normally of very low volatility ratio but in periods

when the Government embarks on mass mega

projects and needs funding, it may issue bills with

yields as high as corporate bonds.

IV. with wide variance, depending on the type of bill.

A. I

B. II and IV

C. I, II, III and IV

D. IV

167

Sample Questions


3. If is safer to rely on professional fund managers

appointed for investment-linked funds than to invest

directly in the stock market because

I. an ordinary individual is generally not equipped to identify the

right stock that will reap gain.

II. the professional fund managers’ role is to ensure the assets and

vehicles achieve a certain minimum growth rate according to

the various stages of time span; otherwise, the fund managers

and life insurer will be obligated to make up the shortfall.

III. it is not easy for an ordinary individual to pick the right time to

buy and the right time to sell for optimising capital gains.

IV. ordinary individuals, especially those occupied with work, do

not have the time and knowledge to properly monitor market

trends.


B. I, III and IV

C. I, II and III

D. II, III and IV 168

Sample Questions


4. Malaysian bonds are deemed to be

I. more volatile than global bonds.

II. less volatile than global bonds.

III. rated at very high preference because the

country’s economy is growing vibrantly.

IV. experiencing better yields than global bonds for

many years.

A. I and III

B. II

C. III and IV

D. IV

169

Sample Questions


Sample Questions

5. Compared to government bond funds, corporate bond

funds have

I. lower yields and lower risks.

II. higher yields and higher risks.

III. more or less similar yield and risk ratios.

IV. a longer tenure.


B. II

C. III and IV

D. IV

170


6. If an insurer has an investment-linked fund tracking the

FBM-KLCI index, it means

I. the fund manager refers to the index as the benchmark for

guiding the fund’s investment strategy and also the return

targets in the ensuing years.

II. the insurer is obligated to grant the returns according to the

ratios experienced by the index. If the actual return of the

fund in any period is lower than that shown by the index, the

insurer will top up the difference. .

III. the fund invests in the same stocks of the companies

identified by the index.

IV. the fund invests in stocks of companies in the same

industries as the companies identified by the index.

A. I and IV

B. II

C. I and II

D. III

•

171

Sample Questions


Chapter 8

PERTINENT

GUIDELINES ON

INVESTMENT-LINKED

BUSINESS


173

Guidelines on Investment-Linked Business

IL Guidelines issued by Bank Negara

(Ref. BNM/RH/GL 010-15)

• in the sales of investment-linked policies

Professional and proper conduct

• Carry out every business day

Valuation of units

• Once in a financial year

• When there is appreciation in the NAV over a 6-month period

Insurers can undertake unit splits, with the conditions:


174




• Insurers to seek policy owners’ consent before deducting

Premium holidays

Requirement for min. death benefits not applicable with top-up premiums


175

• Unallocated premium

• Value of units (allocated) at unit price on next valuation date

• Deducted insurance charges and policy fee

Policy cancelled with 15 days free-look period, insurer refund:

• Min. fund size not reached, insurer shall refund monies contributed with interest/investment profits earned

Initial offer period shall not exceed two months





176

• Provide separate Fund Fact Sheet for each IL funds

• Provide statement on the value of policy

• Provide report on the performance of each IL fund to

policy owners

• Publish latest NAV per unit of IL funds daily in

newspapers or insurer’s website

Insurers shall:





177

Maximum gross rates for sales illustrations

Illustrated Return for Generic Funds X% Y%

Equity 2% 9%

Managed 3% 8%

Bond 4% 7%

* Max. period of projection should not exceed 30 years

**The guidelines also apply to family takaful products.

To sell family takaful products by takaful operators must pass the

Takaful Basic Examination.





1. Valuation of units in an investment-linked fund must

be done

A. six days in a week, including Saturdays (half day).

B. every business day.

C. every day.

D. seven days a week. For a day that falls on a

weekend or a public holiday, valuation processed

by the automated system will be based on the

same unit price as the previous business day.

178

Sample Questions


2. The guidelines stipulated by the regulatory authority in allowing a

life insurer to undertake unit splits for an investment-linked fund

once a year is on the condition that “there is sustainable

appreciation on net asset value (account value) over a six-month

period preceding the split.” Which statements below is correct

regarding the above statement?

A. This means that appreciation over the 6-month period must be

considered substantial by reasonable standard compared to the

previous 6 months.

B. This refers to an appreciation rate of at least 20 per cent at the

end of the current 6 months over the previous 6 months.

C. This refers to an increase in the average monthly net asset value

(account value) consecutively for 6 months.

D. This means that the discretion to define “sustainable appreciation”

may lie with the life insurer as long as there is growth in the fund in

the prevailing 6 months over the previous 6 months, subject to the

approval of the board of directors.

179

Sample Questions


3. Since part of the initial premium of a regular premium

investment-linked plan may already have been allocated and

invested to acquire fund units by the time the customer decides

not to take the plan within the 15 days free-look period, in what

manner will the refund be made?

A. Refund of full initial premium

B. Refund of full initial premium minus policy fee and medical

examination expenses (if any) incurred by the life insurer

C. Refund of unallocated premium + net asset value (account

value) at next valuation date + insurance charges and policy

fee already deducted - medical examination fees if any

D. Refund of unallocated premium + net asset value (account

value) – cost of insurance and policy fee-medical

examination fees if any

180

Sample Questions


4. Life insurers offering investment-linked insurance are

obligated to provide certain fundamental “transparencies” as

required by regulatory guidelines. These are:

I. a separate Fund Fact Sheet for each of the funds.

II. a statement on the policy owner’s net asset value (account

value) details at least once a year.

III. a performance report on each fund of the policy owner at

least once a year.

IV. publishing of fund unit prices daily in at least one national

English newspaper and one national Bahasa Malaysia

newspaper, and on the insurer’s website.

A. II, III and IV

B. I, II and III

C. I and II

D. I, II, III and IV 181

Sample Questions


5. Which of the statements below regarding sales illustrations for

investment-linked plans are correct?

I. The low and high projection for an equity fund should not be above

2% and 9% respectively for the first 20 years.

II. The low and high projection for a managed fund should not be

above 3% and 8% respectively for the first 20 years.

III. The low and high projections for a fixed income/bond fund should

not be above 4% and 7% respectively for the first 20 years.

IV. For projected illustrations beyond 20 years, insurers must abide by

the low scenario rates of 2%, 3% and 4% for equity funds, managed

funds and bond funds respectively. The high scenario rates for the

same three funds are 6%, 5.5% and 5% respectively.


B. I, II and III

C. I and II

D. II, III and IV 182

Sample Questions


6. What are the prerequisites for the launch of a new

investment-linked fund?

I. A minimum fund size can be set by the insurer.

II. The initial offer period shall not be more than 2 months from

the date of launch.

III. If the minimum fund size is not reached by the end of the

initial offer period, the insurer can call off the fund and

refund all premiums collected.

IV. The insurer will also have to pay interest or profit from the

premiums collected during the initial offer period to the

intended policy owners.

A. I and II

B. I, III and IV


D. I, II and III

183

Sample Questions


Chapter 9

AGENTS

PROFESSIONAL

APPROACH AND

GUIDELINES


Objective:

Marketing

Agents Professional Approach & Guidelines

185

The objective of satisfying customers’ requirement can be

achieved through:

• usage of financial needs analysis

• knowing customer tools

• sales illustrations

The management process responsible for

identifying, anticipating and satisfying

customers requirements profitably

TMTDA/ADA/CEILLI/PPT/Eng/August2015 186

To engage in personal selling requires:

Product Knowledge

Market Knowledge

Knowledge of Buying Process

Knowledge of Selling Process

Selling Techniques



187

Customer Buying Decision Process vs. Selling Process

Buying Decision Process Selling Process

1. Problem recognition

2. Information search

3. Evaluation of

alternative process

4. Purchase

5. Post purchase

evaluation

1. Locating of

prospective customer

2. Creating sales

presentation

3. Conducting sales

interview

4. Handling objections

5. Closing the sales



188

Problem Recognition

Information Search

Evaluation of Alternative Policies

Purchase

Post-Purchase Evaluation

Customer Buying Decision Process vs. Selling Process



189

1) Problem Recognition

• Customer Fact-Find (CFF) form

• Minimum details required to be recorded in CFF are :- 1. Personal details

2. Personal and family circumstances

3. Objectives regarding needs, i.e. protection, retirement

4. Risk appetite or tolerance

5. Elements identified in a financial needs analysis

6. Advice by agent/intermediary

7. Recommendation of appropriate product by the

agent/intermediary

8. If policy owner prefers specific product information only,

he/she should declare in form

9. Signature by new policy owner

10.Signature by agent/intermediary

Customer Buying Decision Process



190

2) Information Search • Need has been perceived, consumer search for information.

• This effort depends on :-

a) The consumer’s experience in purchasing product

b) Importance of the purchase (benefits)

c) Value involved

3) Evaluation of Alternative Policies

• Important factors for the selection of an insurer are :-

a) Reputation of the insurer (60%);

b) Quality of coverage and services provided (26%);

c) Policy benefits (14%);

Other factors which have influence on the consumer decision are :

a) Agent’s personality and friendliness;

b) Agent’s professional capability;

c) Premium and other terms.




191

4) Purchase • Make the decision to purchase one of the alternative

products

5) Post-purchase evaluation

• Keeps in contact with customers

• Provides important information of risk evaluation

• Better chance of securing the loyalty of the customer




192

The Selling Process

Locating Prospective Customer

Sales Presentation

Conducting Sales Interview

Handling Objections

Closing the sale



193

1) Locating the Prospecting Customer • Prospecting = Identify, contacting, & qualifying potential

customers

a) Current and past customers

b) Friends

c) Business associates

d) Seminars or education classes

e) Promotion and advertising activities campaigns

2) The Sales Presentation • Visual aids

• Must use sales brochures or sales illustrations authorized by

insurer

3) Conducting the Sales Interview • Creating interest

• Create a product to satisfy prospect’s need

The Selling Process



194

4) Handling Objections

5) Closing the Sale • Follow-up interview

The Selling Process


Locating Prospects

Presentation

Interview Handling

Objections

Closing


195

After-Sales Services

1. Cognitive Dissonance (psychological state) where customers

feel uncertain.

2. After sales service can reinforce the customers’ original

decision to buy the product.

3. Opportunities as such:

– Address post-sales concerns

– Remind about future financial needs

– Obtain names of referred leads

– Strengthen relationship with customer

– Encourage persistency



196

Explain contractual provisions

Policy owner sign delivery

“acknowledgement slip”

Agents return signed slip to

insurer

**15 days cooling-off period commences from the date of policy delivery

acknowledged by policy owner.

After-Sales Services



197

LIAM Guidelines on the Code of Conduct

PART I – Guidelines

on the Code of

Conduct

Part II – Life

Insurance Selling

Part III- Statement

of Life Insurance

Practice

1. Statement of

Philosophy

2. Coverage

3. Monitoring

Devices

4. Seven Principles

of the

Guidelines

5. Code of

Conduct

1. Introduction

2. General Sales

Principles

3. Explanation

4. Disclosure of

Underwriting

Information

5. Accounts and

Financial

Aspects

1. Introduction

2. Claims

3. Proposal Forms

4. Policies and

Accompanying

Documents

5. Sales

Materials/Adver

tisements



1. Behaving with Complete Integrity and ethics in an

Insurance Agent's Professional Life.

• Business based on trust, honesty, responsibility,

professionalism

2. Complying with the Law and with the Best Principles

and Practice relating to Financial Advice.

198

A. Statement of Philosophy

Part I: Guidelines on the Code of Conduct



The management of a life insurance company shall establish the

following minimal procedures :

1.All employees and intermediaries to sign a declaration.

2.Heads of department to ensure compliance with the guidelines.

3.Breaches report to disciplinary committee & Board of Directors.

4.Submit quarterly reports to Bank Negara Malaysia on breaches.

5.Maintain centralized records of breaches.

6.Report immediately cases of fraud to the police and BNM.

199

B. Monitoring Devices




1. To avoid conflict of interest.

2. To avoid misuse of position.

3. To prevent misuse of information.

4. To ensure completeness and accuracy of relevant records.

5. To ensure confidentiality of communication and transactions

6. To ensure fair and equitable treatment of all who are associated

with the life insurance company.

7. To conduct business with the utmost good faith and integrity.

200

C. The Seven Principle




201

D. Code of Conduct only a Guide

1. Purpose of guidelines:

a) Promoting proper standards of conduct

b) Prudent business practices

2. When in doubt relating to code of conduct,

employees are to seek guidance from company’s

management or Bank Negara Malaysia




LIAM’s Guidelines on Code of Conduct

PART 1 –

Guidelines on the

Code of Conduct

Part II – Life

Insurance Selling

Part III- Statement

of Life Insurance

Practice

1. Statement of

Philosophy

2. Coverage

3. Monitoring

Devices

4. Seven Principles

of the

Guidelines

5. Code of

Conduct

1. Introduction

2. General Sales

Principles

3. Explanation

4. Disclosure of

Underwriting

Information

5. Accounts and

Financial

Aspects

1. Introduction

2. Claims

3. Proposal Forms

4. Policies and

Accompanying

Documents

5. Sales

Materials/Adver

tisements

202



• The term 'life insurance' used in the Code of Ethics and

Conduct covers all types of:

1. Ordinary life insurance

2. Annuities

3. Pension Contracts

4. Investment-linked insurance

5. Permanent Health Insurance

203

Part II: Life Insurance Selling

Introduction



• Intermediaries SHOULD:

Produce Registered Intermediary Authorization Card

Ensure the policy proposed is suitable to the needs

Give advice only

Treat all information as completely confidential

Make clear comparisons on characteristics with other

types of policies

Render continuous service to policyholders

204

A. General Sales Principles




• Intermediaries SHOULD NOT:

Make inaccurate or unfair criticism of any insurers

Attempt to persuade a prospective policyholder to

cancel any existing policies unless these are clearly

unsuited to the policyholder’s needs (twisting)

205





• Twisting is “to persuade clients in discontinuing a policy

or to have a policy made paid-up or to be replaced by a

new policy regardless in another company or the same

company”

206





• Detriments arising from twisting are:

1. Qualifying period will have to recommence.

2. Higher premium rates based on attained age.

3. Paying Initial costs twice.

4. Suicide clause, incontestable clause & other

clauses have to start all over again.

207





208

1. Intermediary shall:

• Explain provisions of contract

• Draw attention to restrictions applying to

policy

• Draw attention to long tern nature of policy

• Draw attention to whether the policy

qualifies for tax relief

2. Participation in profits depending on variable

factors

3. Projected benefits illustrated

B. Explanation of the Contract




209

C. Disclosure of Underwriting Information

Intermediary shall:

1. Avoid influencing proposer answers or statements

while filling up proposal form

2. Point out the consequences of non-disclosure and

inaccuracies to proposer

Intermediary shall:

1. Acknowledge insurer receipt and maintain a

proper account of all monies received in

connection with insurance policy.

D. Accounts and Financial Aspects




210

LIAM’s Guidelines on Code of Conduct

PART 1 –

Guidelines on the

Code of Conduct

Part II – Life

Insurance Selling

Part III- Statement

of Life Insurance

Practice

1. Statement of

Philosophy

2. Coverage

3. Monitoring

Devices

4. Seven Principles

of the

Guidelines

5. Code of

Conduct

1. Introduction

2. General Sales

Principles

3. Explanation

4. Disclosure of

Underwriting

Information

5. Accounts and

Financial

Aspects

1. Introduction

2. Claims

3. Proposal Forms

4. Policies and

Accompanying

Documents

5. Sales

Materials/Adver

tisements



211

Aim is to reduce formalities involved in the issue of new

policies and payment of a claim.

Audit/disciplinary committee of insurer monitors the

insurer’s compliance with guidelines.

Part III : Statement of Life Insurance Practice

Introduction



212

Guidelines:

a) Insurer may not reject claim unreasonably

b) Claims have to be settled without delay

c) Insurer shall not collect claim processing fees from

policy owner

A. Claims

Proposal forms based on Code of Good Practice for Life

Insurance business (Part III)

a) Proposal form – Disclosure of material facts should be

stated in the declaration

B. Proposal Forms




213

Proposal for whole-life or endowment insurance contract

features should be mentioned:

1. Long-term contracts

2. Surrender values – Policy will not have cash value on

termination unless premium paid for 3 years or more

C. Policies and Accompanying Documents




214

Guidelines on Minimum Standards for

Treating Customers Fairly

Agents Professional Approach and Guidelines

1. Issued by Life Insurance Association of Malaysia

2. Agents to take note:

a) Customers are fully informed about the key benefits,

key risks and exclusions.

b) Agents – well trained in investment and savings

products.

c) Products sold based on customer’s needs and

suitability.



I. Agents must utilise the sales materials and sales illustrations

provided by their respective principal in their sales process.

II. Agents must utilise the sales materials and sales illustrations

provided by their respective principal in their sales process.

However, they may have the discretion to supplement these

provided the facts do not deviate from those in the materials

and illustrations provided by the principal.

III. Only the signature of the intended new policy owner must be

obtained on an insurer’s Customer Fact-Find (CFF) form.

IV. The sales intermediary must also sign the CFF form as

witness after the intended new policy owner has signed.

A. I, II and IV

B. I and III

C. II and IV

D. II and III

•

215

Sample Questions


2. As soon as a policy contract has been issued by a life insurer,

I. the insurer is to mail (by registered mail) the policy contract to the

correspondence address of the new policy owner. The registered

mail slip should suffice as evidence that the contract has reached

the policy owner.

II. the agent should deliver the policy contract without delay.

III. the delivery process should entail the explanation of the

contractual provisions and re-explaining the benefits. The agent

then has to request the new policy owner to sign the delivery

acknowledgement slip. Finally, the agent must return the signed

acknowledgement slip to the insurer for recording and filing.

IV. if the new policy owner is unavailable at the first time of personal

delivery by the agent, acknowledgement of receipt of the policy

contract signed by a representative of the policy owner’s household

or office shall be deemed valid. The agent does not need to follow

up on this.

A. I and II

B. II and III


D. I, III and IV

•

216

Sample Questions


3. Agents who have sold investment-linked plans should conduct

reviews with their clients ideally once a year. The purposes are

I. to provide updates on the performance progress of fund/s

selected by the clients.

II. to discuss and ascertain whether the client’s financial

objectives might have changed due to certain circumstances.

III. to discuss and ascertain whether the original risk profile of

the client has changed due to certain circumstances.

IV. to discuss alternative next steps where necessary.

A. I, II and IV

B. II, III and IV


D. III and IV

217

Sample Questions


4. The Code of Conduct pertaining to life insurance

selling applies to

I. all agents.

II. all employees of life insurers.

III. insurance brokers.

IV. agents and insurance brokers.

A. I, II, III, and IV

B. I and III

C. I and II

D. I, II, and IV

218

Sample Questions



I. Agents may design their own financial planning form

to gather financial data and financial information of their

prospective clients for analysis. However, the format must

be approved by their principal.

II. The Customer Fact-Find form of a life insurer officially

documents important facts concerning the financial data

concerning a prospective policy owner and his family.

III. Cancellation of a policy is allowed if the request by a new

policy owner falls within the 15 days free- look period. The

period commences from the date the policy contract is

passed to the agent for delivery.

IV. The free-look period commences from the date the client

signs the acknowledgement slip upon receiving the policy.

A. I, II, and III

B. I, II, and IV

C. II and IV

D. I and IV

219

Sample Questions


6. The pertinent points highlighted by the Guidelines on

Minimum Standards for Treating Customers Fairly (TCF) for

agents’ attention are:

I. Agents should inform customers fully about the key benefits,

key risks and exclusions.

II. Agents must first be well-trained, especially involving the

sale of investment and savings products.

III. Agents must guide the customers as to what details are

necessary to declare and what are not necessary so that the

concise personal information captured in the application

documents will cater for a smooth underwriting process.

IV. The product being proposed to a customer should be based

on suitability, needs and risk appetite.

A. I, II, and IV

B. I, II, and III

C. II and III

D. I, II, III, and IV 220

Sample Questions


221

221


All rights reserved. No part of this publication may

be produced, translated, stored in a retrieval system

or transmitted in any form or by any means,

electronic, mechanical, photocopying and recording

without the prior written permission of the copyright

the developer and owner.

CEILLI Training, 7th Edition, 26th August 2015

Tokio Marine Training & Development Academy (TMTDA),

Tokio Marine Life Insurance Malaysia Berhad (457556-X)


223

Thank You