Investment-linked Life Insurance

Transcription

1 Investment-linked Life Insurance Summary Of MII Text Book And Question Bank 5 th Edition (as at July 2011) Financial Services Academy

2 Contents Chapter Topic Page 1 Introduction To Investment-linked Life Insurance 2 Key Considerations In Investment 3 3 Types Of Investment Assets 9 4 Investment-linked Life Insurance Products A World Scenario 5 Types Of Investment-linked Life Insurance Products 6 Structure Of Investment-linked Funds 40 7 How Investment-linked Life Insurance Products Work 8 Benefits And Risks Of Investing In Investment-linked Funds 9 Comparisons Between Investment-linked Life Insurance And Traditional With Profit Life Insurance Products 10 Taxation And Law Covering Investmentlinked Life Insurance Products 11 Identify And Establishing Customers Needs Marketing And After Sales Services, Ethics And Code Of Conduct Answers To Self-Assessment Questions

3 Chapter 1: Introduction To Investment-linked Life Insurance Important notes: An investment-linked insurance plan offers a policyowner or investor a policy that is directly connected to investment performance. It offers the policyowner a chosen amount of insurance coverage and also investment opportunities. A portion of the premiums paid is used to purchase funds in one or an array of investments offered by the insurance company. This plan was first introduced in the late 1990s and has seen very steady growth. The value of the policy is translated into units in a chosen fund or funds that is/are operated by the insurer. These funds are exposed to everyday fluctuations of market forces. This policy is designed to shift the uncertainty of investment gains or losses to policyowners and it does not provide any guarantee of either rates or minimum cash values. The investment funds are allowed to invest in equities or stocks, bonds, fixed interest, foreign funds, real estate, currency and others. These funds can either be external unit trusts or an internal unitized investment-linked fund. Investment-linked policy also known as Unit-linked and Variable Life that is being sold in Singapore and United States respectively. Page 1

4 Chapter 1: Introduction To Investment-linked Life Insurance Self-assessment questions: 1. What is an investment-linked policy? A. A participating whole life investment-linked policy B. A plan that offers policyholder guaranteed return and protection C. An endowment policy D. A plan that offers policyholder coverage and investment returns 2. Investment-linked policy also be known as the following except A. Multiple life insurance policy B. Variable life insurance policy C. Unit-linked insurance policy D. Takaful Investment-linked policy 3. The following are false statement about investment-linked policy except A. Policyholders are quite happy to buy investment-linked policies because insurer will choose the amount of coverage needed and insured will enjoy a sizeable return on their savings B. The policy is directly linked to investment performance. C. The policy is covered from any investment losses and will reap good rate of return in the future D. Insurer provide guarantee on interest rate and cash value 4. Policyholder of an investment-linked policy may choose to invest in the following investments I. Bond II. Share III. Foreign share IV. Currency A. I and II only B. I, II and III only C. I, III and IV only D. All of the above 5. An internal unitised investment-linked fund is A. part of the life insurance fund of a life insurance company B. an external unit trusts fund C. managed by foreign fund manager D. only invest in conservative investment and bond Page 2

5 Chapter 2: Key Considerations In Investment Important notes: Many investors are more risk adverse after the 1997 Asian Financial Crisis and suffered greater loss when the Global Financial Crisis took place recently. Clients over the years have become more proficient in investing and most of them learnt it the hard way after being burnt. Hence, there is an increasing need for sound and proper advice. The following key considerations must be made known to the client. Investment objective Availability of funds Risk or security Investment horizon Accessibility of funds Taxation treatment Performance of the investment Diversification Investment objective Every single investment vehicle has its unique characteristics and investor choose their investment based on their investment objective. It can be categorized to 3 fundamental characteristics, i.e. safety, income and growth. Other investment objectives: Ensuring a comfortable standard of living Providing funds for their dependents Providing funds for education and upbringing of their children Improving their financial position Hedging inflation Liability cancellation Retirement income Achieving financial freedom Achieving a state Beyond financial freedom Funds for paying necessary expenses and taxes when a person dies Page 3

6 Availability of funds A simple cash flow analysis and networth analysis are able to assist clients in making sure that they have enough money to put aside for investments and follow through with the investments financial obligation. Risk or security There is a trade-off between expected return and risk. The first thing about learning how to invest in the stock market is to know what kind of investor risk profile you have. Risk is volatility or how widely the price of stock or mutual fund fluctuates. The wider the fluctuations, the higher the risk. Besides age, strength of income, family situation, current financial picture, overall tendencies and investment disposition, one s investment experience and how sophisticated he/she in investment also affect the risk profile of a person. Investment horizon Investment horizon is the total length of time that an investor expects to hold a security or a portfolio. The shorter the investor s horizon, the less risk he/she should be willing to accept. Accessibility of funds The following are 3 components in accessibility of funds: I. When the client needs the money? II. III. What is the cost or penalty the client has to pay if he exits early? How much is the cost of setting up the investment? Taxation treatment Different types of investment portfolios attract or enjoy a wide range of tax treatment. Performance of the investment The performance of an investment depends on the following factors: I. Country s economic factors II. III. Regional and global economic factors The competencies and capabilities of the management team IV. The invested company s level of costs V. Performance also depends on the past experience VI. History of the invested company VII. Life cycle of the investment Page 4

7 Diversification Diversification in investment is the process of investing across different asset classes and across different market segments. It is a strategy used by professional fund manager to reduce risk without sacrificing returns. Page 5

8 Chapter 2: Key Considerations In Investment Self-assessment questions: 1. Important considerations of an individual s decision in investment include I. The individual s attitude towards risk II. The accessibility of fund III. The taxation liability IV. The individual s employer performance A. I, II and III B. II, III and IV C. I, II and IV D. I, III and IV 2. What are the key considerations in investment? I. Fund for education II. Improvement in their financial position III. Income for retirement IV. Deposits academic qualifications A. I B. I, II C. I,II,III D. All of the above 3. A person s investment horizon will greatly depend on A. The investment objectives, age of investor and the current financial condition of the investor B. The education background, sex and occupation background of investor C. The taxation treatment, moral characteristic of the age of the investor D. The process of investment, the fund for paying financial expenses and age of investor 4. What are the three components of accessibility of fund? I. if individual requires the fund in a short period of time II. cost or penalty of realizing the investment before maturity period III. individual s attitude towards risk IV. the initial cost in setting up or buying into the investment A. I, II and IV B. II, III and IV C. I, II and III D. I, III and IV Page 6

9 5. The performance of an investment depends on I. A country s economy factors and past performance of the investment II. The competencies and capability of the company management III. The number and spread of small-time investors choosing to invest IV. The invested company s level of cost and the life cycle of the investment A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 6. What if an investor has a small amount of free funds? A. Certain types of investment are not accessible to the investor B. Most types of investment are not accessible to the investor C. All types of investment are accessible to the investor D. Only variable life insurance is accessible to the investor 7. The public generally invest their money to provide I. funds for a company II. comfortable standard of living III. income in retirement IV. funds for the education and up-bringing of their children A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 8. Depending on the investment objective, a person would need to choose A. investing in asset that yields less regular income or those that have better for capital gain B. investing in asset that yields more regular income or those that have less for capital gain C. investing in asset that yields less regular income or those that have less for capital gain D. investing in asset that yields more regular income or those that have better for capital gain Page 7

10 9. Risk can be classified into 2 particular categories in relation to investments. They include I. the risk of not losing some or all of a person s initial investment II. the risk of rate of return on the investment not matching up to the individual s expectation III. the risk of rate of return on the investment matching up to the individual s expectation IV. the risk of losing some or all of a person s initial investment. A. I and II B. I and III C. II and IV D. III and IV 10. Diversification in investments involves A. reducing the risk of investment by putting the fund under management into several categories of investment B. reducing the risks of investment by putting all eggs into one basket. C. putting all the funds under management into one category of investment D. spreading the risks of investment by not putting the funds into several categories of investment. Page 8

11 Chapter 3: Types Of Investment Assets Important notes: The common instruments available include: Cash and Deposits Fixed Income Securities Shares Unit Trusts Investment Trusts Properties Derivatives Commodities Life Insurance Annuities Exchange Traded Funds Sukuk Bonds Real Estate Investment Trusts Capital Guaranteed Funds Cash and Deposits Refers to all liquid instruments that carry little or no risk. The possibility of losing the principal amount invested is very low. Short-term instruments include, treasury bills and bank account Treasury bills are short-term government funding vehicles issued on a regular basis with repayment normally within a year. It is issued by Bank Negara Malaysia to the discount market. They are the safest type of investments and are considered to be of no risk except if the country is politically unstable. Bank accounts are time or fixed deposits placed with banks for fixed periods with fixed interest rates for that period. The longer the deposit period, the higher will be the interest rate. Bank accounts include savings account, current account, fixed deposit, investment account, time deposit and offshore account. Page 9

12 Factors influence the choice of deposits are as follow: Funds available for investment The duration the funds can remain in the account Will there be emergency withdrawals Prevailing market conditions All banks in Malaysia are licensed and regulated by Bank Negara Malaysia. Perbadanan Insurans Deposit Malaysia (PIDM) was established under the Akta Perbadanan Insurans Deposit Malaysia 2005 to protect depositors against the loss of their deposits, placed with banks in the unlikely event of a bank failure. Fixed Income Securities It can be regarded as IOUs issued by companies or government to raise funds. 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. The types of fixed income securities include: Money market instrument (Similar to cash and deposits) Government bond It is issued by government and carries almost no default or credit risk, as the government guarantees interest payments and repayment of the principal. The term and interest rate are fixed and usually issued in multiples of RM1,000. There are short-, medium- and long-term bonds Government bonds are issued by the government to raise money to finance government projects that aimed to serve the people of the country. Government bonds are backed by the government, however, in times of high inflation, capital can be eroded if invest into this type of investment. Page 10

13 Corporate Bond Corporate bonds can be classified as debenture stocks, loan stocks and convertible stocks. Interest rates for corporate bonds tend to be higher than government bonds as the security is lower. Debenture stocks are secured loans to a company. It is either a fixed charge on the company s property or part of its assets such as trading stock. In the event of any default in payment, the investors can take over the said assets and sell them to get back money. A trustee is appointed to supervise the company s performance and its obligation in repaying the investors. Loan stocks are unsecured loans to company. The investor may or may not get back his capital depending on the company s performance. Therefore, it compensates investor with higher interest rate. Investor of a convertible stock is allowed to convert his investment from a fixed interest loan to a share. Decision to convert depends on whether dividend income and capital appreciation in share price are better than the fixed interest given. Generally, corporate bonds provide higher potential return than government bonds. However, it is more risky than government bonds. Preference Share (See below for more details) Shares A shareholder is a part owner of a company. He or she can then decide on major issues and has voting right. However, shareholders are not liable for the debts of the company. The value of a share fluctuates according to the market s view on the worth of the company, the country s economy situation as well as external market sentiments. It is a volatile investment. There are ordinary share and preference share. Ordinary shareholders entitled to share a company s profits in the form of dividends. He or she can also make capital gain when the share prices appreciate. The preference shareholders are given fixed dividend provided enough profit has been made. This right takes precedence over the right of ordinary shareholders to dividends. Shares provide good dividends and capital appreciation. Generally, they are very liquid. However, shares can be very risky as prices fluctuate due to internal and external factors. Page 11

14 Unit Trusts Unit trust is a useful investment vehicle for small private investors. A unit trust is a pool of funds contributed by many investors kept in trust by a trustee and managed by a professional fund manager. It is established by a trust deed and is authorized and supervised by the Securities Commission. The trust deed sets out: The fund manager s investment powers The price structure The registration of unitholders The remuneration to the fund managers The accounting and auditing rules The investment in unit trusts could generate income in the form of dividends, interest and capital gains. The professional fund manager helps unitholders to invest in a diversified portfolio. It has lower risk when compared to shares. Unitholders can reinvest income received for wealth accumulation. EPF members are allowed to withdraw part of their savings for unit trust investment. However, investors may confuse with the option of funds available in the market and paying extra costs or charges when purchasing the units. Investment Trusts Similar to unit trust. However, investor is purchasing shares in an investment trust company where the company itself invests in a wide range of equities and other investments. The unit prices are recalculated every day and quoted daily in at least one national Bahasa Malaysia newspaper and one national English newspaper. The price reflects the value of the underlying investments. Not to be taken as short-term investment and it is generally has a higher risk/reward profile than unit trust. Investment trust is more flexible as investors can borrow to finance their investment. Contrary, investors are open to greater risk exposures as prices of investment trust may fall. Page 12

15 Properties Properties can be referred as agricultural property, domestic property and commercial/industrial property both locally and overseas. The price of an agricultural property depends on the quality and location of the land as well as value of the builders on the land. The price of domestic and commercial/industrial properties generally depends on the location and types of buildings on the land. Real estate investment trusts (REITs) is a new form of real estate investment. REITs based companies will invest manage and distribute rental as dividend back to the investors. It is also being traded in Bursa Kuala Lumpur. Properties can provide good capital appreciation and a steady flow of income. However, there will be liquidity issue during recession as property could be difficult to be disposed off. Derivatives Derivatives are financial instruments whose values are linked to the price of underlying instruments in the cash market. For example, options, warrants and futures. Option is the right but not the obligation to buy or sell the underlying stock at a fixed price within a specified time period. A call option gives the holder the right to buy, hoping the share price will rise. A put option, however, gives the holder the right to sell, expecting the share price to fall. Option allowed investor to make money from share price movements. However, it is also risky as investor must be prepared to lose all his money. Warrants are also known as Transferable Subscription Right (TSR). It gives the holder the option to subscribe shares of a company at a pre-determined ratio, price and time period. It is often issued free and attached to rights or loan stocks. Investors find warrant attractive as it requires lesser initial outlay to own the underlying share. Investor can benefit from capital gain. However, warrants that is expired and not exercised is worthless. A future contract is formed between two parties (the buyer and the seller) based on an agreed price and future delivery date. Future is a hedging instrument. If it is used effectively, investor has opportunity to make higher return. However, speculative trading has made future a higher risk investment tool. Page 13

16 Exchange Traded Funds (ETF) It is an investment fund traded on stock exchanges. Institutional investors usually buy or sell ETF directly from/to the fund manager. Individuals trade ETF via retail broker in secondary market. Type of ETF: Index ETFs Commodity ETFs or ETCs Bond ETFs Currency ETF or ETCs Actively managed ETFs Exchange-traded grantor trusts Leveraged ETF Sukuk Bonds It is structured to comply with the Islamic law and its investment principles, prohibit the charging or paying of interest. Sukuk can be regarded as a commercial paper which gives the investor a share of ownership in the underlying asset. Characteristics of Sukuk: They are issued by pooled funds They are based on hard assets that generate steady income and expectation They may be guaranteed or not by their originators Investors receive a fee equal to the income of the underlying assets They are issued by Special Purpose Vehicles (SPVs) Most Sukuk are issued in Dollars It is differs from conventional bonds as they are based on tangible assets instead of debt There are about fourteen kinds of Sukuk but the most used today are Sukuk Al Ijara and Sukuk Al Mucharaka. Page 14

17 Capital Guaranteed Funds (CGF) It is an investment vehicle offered by certain institutions that guarantees the investor s initial capital investment from any losses. Features of capital guaranteed fund: High asset allocation in guaranteed investment instruments. Normally up to 80%- 90% of total fund size. Benchmark comparison with Fixed Deposit Rate because it is just slightly higher in risk than FD. Investment horizon is normally 3-5 years. Normally most CGF are offered during an offer period. After the closing date, there will be no more subscription accepted. Normally the value per unit starts at RM1.00 for ease of return calculation. Higher initial investment compared to other unit trust fund. The minimum amount normally starts at RM5,000. Not so high entry fee. The service charge is 1.5% practiced by the industry at this moment. There is a redemption fee before maturity, range from 0.3% to 1.5% of NAV. Capital preservation feature guaranteed. If you missed the offer period, you can t invest in the CGF. You just have to wait for another series to be launched. Page 15

18 Chapter 3: Types Of Investment Assets Self-assessment questions: 1. Factors which may influence the choice of depositing in a bank include: I. funds available for investment II. any penalty for withdrawal before maturity III. whether emergency withdrawals are likely IV. prevailing market conditions A. I II and III B. I, II and IV C. I, III and IV D. II, III and IV 2. The functions of investment trust include: I. making investment simpler to small-time investors II. making investment accessible to small-time investors III. making investment more cost effective to small-time investors IV. making investment a definite profitable transaction for small-time investors A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 3. Which of the following statements about investment trust is true? A. the unit price is recalculated once a week B. the unit price will be quoted every month in at least one national Bahasa Melayu newspaper and one national English language newspaper C. the price reflects the value of the underlying investment D. the unit price will not fluctuate in line with stock market prices 4. Investors purchasing put option will be hoping that A. the share price will rise when option is exercised; the premium and the fixed price will be less than the value of the share B. the share price will fall when option is exercised, the premium and the fixed price will be less than the value of the share C. share price will rise when option is exercised, the premium and the fixed price will be more than the values of the share D. share price will fall when option is exercised, the premium and the fixed price will be more than the value of the share Page 16

19 5. What are derivatives? A. they are real estate investment providing good capital appreciation and high flow of income B. they are pools of fund introduced to many investors kept by bank managed by a professional fund manager C. they are preference shares that give the holders the right to a fixed dividend provided that have been made D. they are financial instruments whose values are linked to the price of underlying instruments in the cash market 6. Warrants or TSR are: I. seldom issued on their own II. often issued free and attached to rights or loan stocks III. often issued as an added attraction or sweetener allowing a corporate issuer to obtain a lower financing costs IV. not permitted to be detached from the loan stock separately in the securities market A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 7. Hedging can be described as: A. assuming of present position opposite to future positions in an attempt to maximize financial gains from price stability B. assuming of future positions opposite to cash positions in an attempt to minimize the risk of financial loss from adverse price changes C. making money by selling a physical commodity immediately to a buyer for his immediate enjoyment D. shifting of the risk of price fluctuation from participations who are willing to assume risks to those who are not 8. Life insurance can be described as: I. a means of alleviating the financial distress that death may bring II. a means of spending and divesting when death occurs III. a pool of funds into which a large number of policyowners jointly contribute in relation to their risk exposures IV. a contract dependent on human life A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV Page 17

20 9. The 4 basic forms of insurance coverage include: A. whole life insurance, endowment insurance, mortgage insurance and key person insurance B. whole life insurance, endowment insurance, term insurance and annuities C. term insurance and annuities, medical insurance and health insurance D. whole life insurance, endowment insurance, term insurance and personal accident insurance 10. Whole life and endowment policies are known as because the benefits are generally guaranteed. A. Profit or participating policies B. Options C. Non-profits or non-participating policies D. Spot transaction. 11. Among the advantages in investing in shares are: I. Investors are able to participate directly in the future of the invested company II. Shares provide good dividends and capital appreciation III. Shares are very liquid and can be traded in open market IV. The value of the shares can never go beyond the price at which the shares are bought A. I, II and III B. II, III and IV C. I, II and IV D. I, III and IV 12. Investors purchasing call option will be hoping that: A. the share price will fall when option is exercised, the premium and the fixed price will be more than the values of the share B. the share price will rise when option is exercised, the premium and the fixed price will be more than the values of the share C. the share price will fall when option is exercised, the premium and the fixed price will be less than the values of the share D. the share price will rise when option is exercised, the premium and the fixed price will be less than the values of the share 13. An example of investment trust is : A. that of Amanah Saham National B. that of KL Mutual Fund C. the listed Seacorp Schroders D. that of Mayban Management Bhd Page 18

21 14. Unit trust is essentially for: A. two-way arrangements between the investors and the fund manager B. two-way arrangements between the investors and the trustee C. three-way arrangement among the investors, the trustee and the fund manager D. three-way arrangements among the investors, the trustee and the supervisory authority 15. The price of an agricultural property depends on the following factors:- I. the location II. the mortgage loan amount of the property III. the value of building IV. the quality and profitability of crops A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 16. What are the advantages of unit trust? I. It allows small private investors who do not have sufficient funds to receive the benefit of a diversified range and spread of investments II. It allows small private investors who do not have sufficient time to receive the benefit of professional investment management III. Extra cost or charges which must be paid for switching from one fund to another IV. It could generate income in the form of dividends, interest and capital gains A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 17. What is/are the characteristic(s) of warrants? I. warrants give the holders the option to subscribe for ordinary shares at a predetermined conversion ratio II. warrants give the holders the option to subscribe for ordinary shares at a predetermined exercise price III. warrants are usually detached from the loan stock and traded separately in securities market IV. warrants are issued on their own A. I B. I,II and III C. I,III and IV D. I,II,III and IV Page 19

22 18. The following characteristics of warrants are true, EXCEPT: A. Warrants give the holder the option to subscribe for ordinary at a predetermined conversion ratio B. Warrants give the holders the option to subscribe for ordinary shares at a predetermined exercise price C. The life span of a warrant can be varied at the direction of the holder D. The option attached to the warrants can be exercised by subscribing for ordinary shares in cash, by exchanging the loan stock or by a combination of both 19. The disadvantages of warrants or TSR is A. investor have to put in a large initial outlay to establish an expose the shares B. on expiry, warrants which are not exercised lose their value completely C. like ordinary shares, there is no chance for price recovery D. by selling the warrants given to an investor in the first instance; the investor cannot benefit from the capital gain 20. Rank the following investment vehicle in terms of their level of risks from the least to the most risky I. Cash and deposit II. Derivatives III. A well-diversified investment portfolio of a company IV. Stock option A. I, III, IV and II B. I, IV, III and II C. I, II, III and IV D. I, IV, II and III 21. Which of the following is NOT a type of fixed income securities? A. Money market instruments B. government bonds C. preference shares D. none of the above 22. What are the advantages of investing in preference shares? I. It gives shareholder the right to a fixed dividend II. Has priority over company assets during dissolution III. They enjoy benefit of capital appreciation A. I,II B. I,III C. II,III D. I,II and III Page 20

23 23. Which one of the following investment vehicles are for capital appreciation purpose? A. Corporate bonds and preference shares B. Preference shares and ordinary shares C. Corporate bonds and ordinary shares D. Ordinary shares and option 24. What are disadvantages in investing in ordinary shares? I. dividends repaid not more than the fixed rate II. Investor are exposed to market and specific risks III. Shares can become worthless if company becomes insolvent A. I B. I.II C. II,III D. I,II and III 25. The 3 basic types of corporate stocks include A. futures, investment trusts and options B. fixed income stocks, treasury bills and time deposits C. debenture stocks, loan stocks and convertible stocks D. preference stocks, unit trusts and derivatives 26. Investing in bonds offers the following advantages EXCEPT: A. It is a place of temporary refuge when the investor foresee that the market outlook is uncertain B. It offers protection to the principle and guaranteed steady stream of income C. It enables the investor an opportunity for capital appreciation D. It allows the investor a chance for capital preservation 27. Spot markets, a type of cash markets are A. Markets which quote prices referred to the current market price of an item available for immediate delivery B. Markets for deferred delivery of commodities C. Markets that are traceable only from the late 20 century D. Known to establish forward contract featuring the contract price and future delivery dates 28. Which of the following fixed income securities yield the higher return? A. government bonds B. corporate bonds C. convertible bonds D. unsecured non-convertible bonds Page 21