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

24 29. Which of the following statement about fixed income securities are FALSE? I. the interest rate is directly proportional to the price of the bonds II. the coupon rate is directly proportional to the price of the bonds III. the longer the maturity period, the more volatile the price of the bonds will be A. I and II B. I and III C. II and III D. I,II and III 30. Which of the following statements about investment objectives is FALSE? A. People invest money to enhance a comfortable standard of living B. People invest money in fixed deposits to produce high and guaranteed returns C. People invest money to provide funds for higher education for their children D. Investment in commodities is not for regular income 31. Which of the following investment options has all the advantages of capital appreciation, liquidity and inflation hedge? A. cash B. bond C. futures D. ordinary shares 32. Which one of the following statements about diversification in portfolio management is FALSE? A. diversification can completely eliminate the risk of investing in stocks in a portfolio B. diversification helps to spread the portfolio risk by investing in different categories of investment in a portfolio C. diversification can involve purchasing different types stocks and investing in stocks of different countries D. a different portfolio provides greater security to an investor having to sacrifice the return for the portfolio 33. Investing in properties can A. provide good capital appreciation cut a poor flow of income B. be high risk investment especially if good repayment methods are obtained C. result in easy disposal of the properties during economic recession D. result in free capital gain through proper mortgaging of the properties 34. Which of the statements is true? A. amount invested in cash depends on the size of cash flow requirement B. investment in cash decrease when interest rate rises C. investment in cash increase when there is a bull run in the stock market. D. it has high yield potential Page 22

25 35. The duties of the trustee of unit trust do not include A. ensuring that the fund manager adhere to the provision of the trusts deeds B. acting generally to protect the unit-holders C. holding the pool of money and assets in trust on behalf of the investors D. managing the portfolio of investments and administering the buying and selling of shares in the unit trust itself Page 23

26 Chapter 4: Investment-Linked Life Insurance Products A World Scenario Important notes: The investment-linked life insurance business has been transacted for more than 30 years. The investment-linked life insurance in the United Kingdom: The first investment-linked life insurance contract in the United Kingdom was individual retirement annuity. It was introduced by the London and Manchester Assurance Company Limited in The early investment-linked plans were constructed in a similar way to traditional endowment policies with the objective of providing a saving fund at the end of a specified period e.g. 10, 15, 20 or 25 years. Hambro Whole Life Plan was introduced in It was a new generation of investment-liked life insurance products whereby the sum insured was guaranteed for a given investment of premium for the first 10 years. The investment-linked life insurance in the United States of America: It is more commonly called Variable Life insurance. It was offered to the general public in The marketing of variable life was pioneered by the Equitable Life Assurance Society. The securities laws governing variable life insurance are the Investment Company Act 1940, the Securities Act 1933 and the Securities Exchange Act The Investment Company Act 1940 regulates the investment company s marriage merit and operation. The Securities Act 1933 requires that potential clients to be provided with a prospectus. Under the Securities Exchange Act, 1934, the insurance company or the sales company must register as a broker-dealer. The Act requires that agents and agency office employees pass an examination in securities business and register with the National Association of Securities Dealers (NASD) and pass the examination. Page 24

27 The investment-linked life insurance in Singapore: The first single premium investment-linked policy was introduced by NTUC Income in In 1992, Prudential joined the investment-linked life insurance market and introduced its single and regular premium products. One of the factors which contributed to the expansion of life insurance industry, including investment-linked life insurance business, was the introduction of the Enhanced Investment Scheme (EIS) by the Central Provident Fund (CPF) in In 1997, two existing investment schemes of the CPF, i.e. the EIS and the Basic Investment Scheme (BIS) merged to form a new scheme known as the Investment Scheme (IS). Among the life insurance policies, only endowment policies were approved by the CPF Board as eligible investment instrument. The investment-linked life insurance in Malaysia: Syarikat Takaful Malaysia Berhad first sold a simplified form of investment-linked life insurance product to the public in August The Takaful investment-linked life insurance products were developed as a response to the religious principles and practices of the Muslims. The premiums received from Takaful policies are invested in stocks and other assets that comply with the requirements of Islamic law. In July 1997, Berjaya Prudential Assurance Berhad became the first traditional insurance company to launch the investment-linked life insurance product. It was a single-premium whole life insurance product. Page 25

28 Chapter 4: Investment-Linked Life Insurance Products A World Scenario Self-assessment questions: 1. The first investment-linked life insurance contract in the United Kingdom transacted some 30 years ago was A. a group retirement annuity for the self-employed B. an individual retirement annuity for the self-employed C. introduced by the London and Manchester Association Company Limited in 1953 D. linked to an internal unit trust administered by the London and Manchester Association Company Limited 2. The first new generation investment-linked life insurance product was A. an individual retirement annuity for the self-employed by London and Manchester Assurance Company limited in 1957 B. Variable life insurance in the US in 1976 C. the Hambro Whole life Plan introduced in 1977 D. introduced by NUTC Income Singapore in The Investment Company Act 1940 of the United States. A. regards entities that invest assets of variable life insurance as investment companies and regulates the companies management and operations B. requires that potential clients be provided with a prospectus that among others discloses the identities and nature of the insurer s business C. requires that potential clients be provided with a prospectus that among others discloses the financial information of the insurer D. requires that insurance agents and agency office employees dealing with variable life insurer must pass an examination in securities business and be registered with the National Association of Securities Dealers 4. One of the factors that have contributed to the expansion of the investment-linked life insurance business in Singapore was. A. the requirement of the Securities Exchange Act 1934 that all insurance agents and agency office employees dealing in variable life insurance must pass an examination in securities business B. the regulations of investment company s management and operation including that of how the premiums are going to be invested, financial information of the insurer, chargeable fees and expenses and rights of policyowners C. the introduction of the Enhanced Investment Scheme (EIS) by the Central Provident Fund (CPF) in 1993 D. the introduction of the new generation of investment-linked life insurance products, the Hambro Whole Life in 1997 Page 26

29 5. Skandia Plan introduced by Skandia Life UK in 1979 A. allowed a guaranteed sum insured for a given investment of premium to the first 10 years B. allowed the policyowner to select whatever sum insured the policyowner required within a given range of cover C. allowed policyowner to cash in his/her investment at any time D. was an endowment plan provided cash value after 10 years 6. The Enhanced Investment Scheme (EIS) by the Central Provident Fund (CPF) in 1993 which contributed to the expansion in Singapore of the life insurance industry investmentlinked life insurance business enables A. All CPF member who retain at least the required minimum sum in their CPF accounts to invest in a new scheme known as the Investment Scheme (IS) B. All CPF members are provided with a prospectus that among others discloses the identity and nature of the insurer s business, how the premiums are going to be invested, financial information of the insurer s business, chargeable fees and expenses and rights of policyowners C. CPF members who have cash of at least S$50,000, to invest 80% of the excess in one or more of the eligible investment instruments D. All CPF members to invest in all types of life insurance policies except for endowment policies 7. The Securities Act 1933 required that A. regulates the investment company s management and operation B. potential client be provided with a prospectus that among others discloses identify and nature of insurer s business, how the premium are going to be invested, financial information of the insurer, chargeable fees and expenses and rights of policyowners C. agents and agency office employees pass an examination in securities business D. Register with the National Association of Securities Dealers (NASD) and pass the examination 8. The term investment-linked in Malaysia shall be similar to the term in the United Kingdom and to the term in the United States. A. Unit-linked and Unit Trust B. Unit-linked and Variable Life C. Unit trust and Variable Investment D. Investment Trust and Variable-linked Page 27

30 9. The introduction of the is one of the factors which contributed to the expansion of the investment-linked insurance in Singapore. A. investment scheme by the Central Provident fund in 1997 B. requirement of the Securities Exchange act 1934 that all insurance agents and agency office employees dealing in variable life insurance must pass an examination in securities business C. Enhanced Investment Scheme by the Central Provident fund in 1993 D. regulation of investment companies management and operation including that of insurance companies underwriting variable life 10. Under the Securities Exchange Act 1934 of US I. Insurance agents and agency office employees dealing in variable life insurance must register with the National Association of Securities Dealers II. Insurance companies or the sales company dealing in variable life insurance must register as a broker-dealer III. Insurance agents and agency office employees dealing in variable life insurance must pass an examination in securities business IV. A prospectus disclosing the identity and nature of the insurer s business. A. I,II and III B. I,II and IV C. I,III and IV D. II,III and IV Page 28

31 Chapter 5: Types Of Investment-Linked Life Insurance Products Important notes: Premiums are used to purchase units in the investment-linked fund. Part of the premiums will be allocated for the mortality protection. The investment returns are not guaranteed. They are linked to the performance of an investment fund managed by the life office. Units are allocated on each investment date. Units are allocated at the life office s selling price (Offer price) and are cashed at life office s buying price (bid price), to meet death, maturity, surrender claims or expenses. The spread (Bid-offer spread) between the offer and bid prices in normal market condition is 5%-6% of the offer price. Traditional with-profit life policy vs investment-linked life policy: Traditional with-profit life policy Investment-linked life policy Return Produces steady return by smoothing out market fluctuations Offers the potential for higher returns but subject to market volatility and risk Type of investments Based on insurer s investment decision Policyowner has the option to choose from the variety of investment funds Investment element and risk Not as transparent as investment-linked life policy Insurer invests life funds and produce steady return by smoothing out market fluctuations Transparent and is made known to policyholder at the outset Invested in a separate identifiable fund Net benefits and risks of investment returns are passed to policyholder. Policy charges and investment content Not specifically detailed in the policy terms Charges are stipulated openly and investment content are specified in the policy document Page 29

32 Type of charges: Policy fee Annual fund management fee Offer price Bid price Bid-Offer spread Reduction in allocation of units-- unallocated premiums Initial units Mortality charges It covers the administrative expenses of setting up the policy A deduction of a percentage (0.5% to 2% of the fund each year) of the investment-linked fund accumulated within a policy s holding of investment units to cover investment management charges will be made The price at which units under an investmentlinked life insurance policy are offered for sale by the life office The price at which the units under an investmentlinked life insurance policy are cashed when the policy matures, surrendered, or cashed to pay for charges under the policy. It is always lower than the offer price. Difference between offer price and bid price, usually falling from 5%-6% of the offer price. It is to cover expenses in setting up the policy. Life office does not use all of the policyowner s premium to buy investment units. The difference representing the life office s charge to meet marketing and setting-up expenses of the policy. A life office may allocate all of the policyowner s premium to units. The units allocated in the early years will be known as initial units and will have higher annual management charges throughout the term of the policy contract. It is an effective initial charge by the life office to the policyowner on every premium made to cover expenses in setting up the policy. This cover the mortality costs of the policy and is, therefore, dependent on age. Surrender charges This is a charge deducted from the value of units at surrender and is applicable with uniform allocation. Page 30

33 Characteristics of investment-linked life insurance policy: Investment-linked life insurance policies can be used for investments, regular savings and protection. Generally, it has larger exposure to equity investments than traditional with-profit and other life insurance policies. The cash value and protection benefits are determined by the investment performance of the underlying assets and this performance is reflected by the prices of the units in the investment-linked fund. The protection cost may vary with age and level of cover, and are covered by cancellation of units in the fund except for single premium plans where they may be met by a flat initial charge. Commissions and office expenses are also met by a variety of explicit charges, some of which will normally be variable but the life office must normally give a six months notice prior to any change. The cash value is normally the value of units allocated to the policyowner, calculated at bid price. The following are some of the major investment-linked life insurance policies: a. Single Premium Investment-linked Whole Life Plan b. Regular Premium Investment-linked Whole Life Plan c. Investment-linked Individual Pension Plan d. Investment-linked Permanent Health Insurance Plan e. Investment-linked Dread Disease Insurance Plan f. Investment-linked Education Plan a. Single premium investment-linked whole life plan One of the first types of investment-linked life insurance policies available. The amount of insurance protection is a percentage (usually 125%) of the single premium paid. Subject to a minimum amount (in Malaysia is RM5,000). Emphasize on long-term savings and investment. Offers only nominal life protection. Administration and insurance charges or costs are recovered by imposing policy fees, other administrative charges and mortality charges. Normally incur an investment management fee of 0.5% to 2% per annum. Top-ups or single premium injections are usually allowed. The policyowner has the right to surrender part or whole of the units allocated to him. Page 31

34 b. Regular premium investment-linked whole life insurance plan The premiums under this plan are paid at regular intervals, either monthly, quarterly, half yearly or annually. The plan serves two distinct purposes - investment and life protection, with life protection as the main objective of the plan. Premium holidays and top-ups, subject to the life office s administrative rules are usually allowed. Withdrawals and surrenders are allowed, usually after a few years premiums have been paid. c. Investment-linked individual pension plan High allocation of the premium for investments through simply accumulating the fund to retirement. The fund is used to purchase either a traditional annuity or an investment-linked annuity. There is no life insurance cover in the basic plan other than a return of investment funds on death. Life cover can be provided by taking up a separate term insurance policy. It is popular in overseas as there are tax advantages for employees own contributions to these plans. d. Investment-linked permanent health insurance plan Provides health coverage such as disability income. Contains cash value unlike traditional health products that does not have cash value. e. Investment-linked dread disease insurance plan It is a life insurance policy which advances the whole of the face amount in the event of the diagnosis of a heart attack, stroke, coronary artery bypass, end stage renal failure or total permanent disablement. The risk cost of the dread diseases cover is reviewed on a regular basis and improved product benefits or premium are passed to the policyowner in the event of better-than-expected claims or investment. f. Investment-linked education plan Savings for children education. Parents can also capitalize on the tax relief of RM3,000 Page 32

35 Investment-linked takaful policies It is a family takaful plan that combines investment and takaful cover. Part of your contribution will provide takaful fund in the form of participative contribution (tabarru ). The balance of the contributions will be used to purchase the investment-linked units. By undertaking the contract(aqad), participant agreed to mutually help each other, should any of the participants suffer a misfortune arising from death or disability. The surplus will be shared by participants and takaful operator based on a preagreed ratio. The investment fund is divided into units of equal value to derive at the investment-linked unit price. The takaful operator acts as a manager to oversee the management of the investment fund. In return, the takaful operator receives a fee (Ujrah) for its services. Unique features: Flexibility to choose your own level of protection and investment Flexibility to vary the amount of your contribution Flexibility to switch your current investment fund to other types of investment funds Flexibility to redeem part of your investment-linked units anytime Option to choose from a variety of investment funds Important considerations to choose the right plan Takaful cover Selection of investment fund Fees and charges Fund switching Cash value accumulation Bid and offer prices Cooling period Annual statement Some investment-linked life insurance policies grant loans to policyowners. It is sometimes limited to some percentage of the cash value. Policyowners may request for a partial surrender of the policy and the withdrawal amount will be met by cashing the sufficient units at the bid price to meet the policyowner s requests. Page 33

36 Chapter 5: Types Of Investment-Linked Life Insurance Products Self-assessment questions: 1. Each premium that an investment-linked life insurance policyowner makes is A. allocated to the units at the life office s selling price called offer price prevailing on each investment date B. allocated to the units at the life office s selling price called offer price prevailing on each cash-in-date C. allocated to the units at the life office s selling price called bid price prevailing on each investment date D. allocated to the units at the life office s selling price called bid price prevailing on each cash-in-date 2. One of the fundamental differences between traditional with-profit life insurance policies and investment-linked life policies is A. investment-linked life insurance policies aim to produce a steady return by smoothening out market fluctuations B. traditional with-profit life insurance policies aim to produce a steady return by smoothening out market fluctuations C. investment-linked life insurance policies do not offer the potential for higher returns D. traditional with-profit life insurance policies offer the potential for higher returns 3. The expenses of running a life office and acquiring investment-linked life insurance business A. are covered by making certain charges on the policies issued, both up-front and regular policy charges not specifically detailed in the policy terms B. are borne in part by the policyowners directly in relation to the particular policies and in part taken out of the life fund as a whole C. are levied on the policies through open stipulation in the policies including the types and level of charges imposed D. cannot be determined by a careful study of the policies document and policies statement 4. Investment-linked Permanent Health Insurance I. provide disability income II. contain cash value III. no cash value IV. price is more competitive when compared to traditional with-profit life insurance product A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV Page 34

37 5. Policy fee payable by an investment-linked life insurance policy is A. the mortality costs of the investment-linked insurance policy. B. the administrative expenses of setting up the investment-linked life insurance policy C. the handling charges by professional investment managers D. the price for each unit bought under the investment-linked life insurance policy. 6. In respect of investment-linked life insurance funds, the difference between the offer and bid prices in normal market condition is. A. 10% - 20% of offer price, and this difference is known as the bid-offer spread B. 10% - 20% of bid price, and this difference is known as the bid-offer spread C. 5% - 6% of offer price, and this difference is known as the bid-offer spread D. 5% - 6% of bid price, and this difference is known as the bid-offer spread 7. Apart from the investment management charges, what other kind of charges do single premium investment-linked policy charge? I. Policy fees II. Administrative and mortality charges III. Assurance charges A. I and II B. I and III C. II and III D. I,II and III 8. The investment returns under an investment-linked life insurance policy I. are not guaranteed II. are assured III. are linked to the performance of the investment fund managed by the life office IV. fluctuate according to the rise and fall of market prices A. I,II and III B. I,II and IV C. I,III and IV D. II,III andiv 9. How are the premiums under investment-linked life insurance policies apportioned? A. major portion of the investment-linked life insurance policies premium are allocated for the mortality protection aspects under the policy, and a lesser part of the premium are used to purchase units in the investment-linked fund managed by the life offices B. investment-linked life insurance policies premium will be divided equally in both mortality protection aspects and to purchase units in the investment-linked fund managed by the life offices C. a major portion of the investment-linked life insurance policies premiums are used to purchase units in the investment-linked fund, and a lesser portion for the mortality protection aspects under the policy D. the whole investment-linked life insurance policy premiums are used to purchase units in the investment-linked fund, and the mortality aspects is given free Page 35

38 10. Under a regular premium investment-linked whole life insurance plan I. premium top-ups and holidays, subject to the life office s administrative rules are usually allowed II. life protection is the main objective of the plan with investment as a nominal purpose III. withdrawals and surrenders, usually after the payment of a few years premium are allowed IV. a one-off premium contribution is made to purchase units in an investment-linked fund to provide certain level of life cover A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 11. The characteristics of an investment-linked life insurance policy include I. its cash value and protection benefits are determined by the investment performance of the underlying assets II. its protection costs are generally met by implicit charges III. its commissions and office expenses are met by a variety of explicit charges with normally 6 months notice given by the life offices prior to any change IV. its cash value is normally the value of units allocated to the policyowner calculated at the bid price. A. I, II and III B. I, II and IV C. I, III and IV D. All of the above 12. Which of the following statements about the characteristics of investment-linked policies are TRUE? I. Investment-linked policies generally have a larger exposure to equity investment than with profits and other conventional policies II. The protection costs are generally met by implicit charges, which vary with age and level of cover III. Commissions and office expenses are met by a variety of explicit charges, some of which are variable A. I and II B. I and III C. II and III D. I, II and III 13. The offer price under an investment-linked life insurance policy is A. a fixed amount throughout the life of the policy B. also known as the bid price C. the price at which units under the policy are brought back by the life office D. the price at which units under the policy is offered for sale by the life office Page 36

39 14. Surrender charges under the investment-linked life insurance policies A. are deducted from the value of units at surrender B. are deducted from the value of units at the commencement of the policies C. are applicable to policies with not uniform allocation D. represent initial expenses which have already been incurred and recovered 15. Which of the following is/are the main characteristic(s) of investment-linked life policies? I. The policies can be used for investment, as source of regular savings and protection II. The cash value and protection benefits are determined by the investment performance of the underlying assets III. The net cash values of the policies are the gross cash values shown in the policy that includes reversionary bonus up to the date of surrender, less all indebtness include interest A. I B. II C. I and II D. I, II and III 16. The fundamental differences between traditional with-profit life insurance policies and investment-linked life insurance policies include I. investment-linked life insurance policies are less likely to offer more choice in terms of the types of investment funds II. the investment element of investment-linked life insurance policies is made known to the policyowner at the outset and is invested in a separately identifiable fund which is made up units of investment III. investment-linked life insurance policies offer the potential for higher returns IV. traditional with profits life insurance policies aim to produce a steady return by smoothing out market fluctuation A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 17. Under an investment-linked life insurance policy, if a policyowner pays a regular payment to the insurance company; this is normally for A. Regular premium plans B. Annual policy plans with renewals C. Top-up policy plans D. Single premium plans 18. Single premium investment-linked life insurance policy A. has no death benefit B. has cash value C. must be issued with a minimum premium of RM3000 D. must be issued with a minimum premium of RM5000 Page 37

40 19. Under investment-linked life insurance policies I. there is no guaranteed minimum sum assured for the purpose of declaring bonuses II. there is no guaranteed minimum sum assured as a level of life insurance protection III. each of the policyowner s premium paid will be used to purchase units, the number of which is dependent on the offer price of each unit IV. purchases of units can only be made from the investment-linked fund itself, which will then create new units and add the investment monies to the value of the fund A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 20. The protection costs under an investment-linked life insurance policy I. are met by a flat initial charge for regular premium plans II. are generally covered by cancellation of units in the fund III. are generally met by explicit charges stipulated openly in the policy terms IV. vary with age of policyowner and level of cover A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 21. Which of the following statements about single premium investment-linked policies are TRUE? I. The emphasis for single premium investment-linked plan is normally on long-term savings and investment. Thus, the plan only offers nominal life protection. II. Top-ups or single premium injections are allowed III. Policyowner have the flexibility of varying the level cover A. I and II B. I and III C. II and III D. I, II and III 22. What are the risks involved in investment-linked products? I. the risk of insolvency of the life insurance company due to the depletion of the life funds II. the risk of fluctuations of the unit price of the policy that may rise and fall, depending on the current market situation III. the risk of the cash and maturity values of the policy being adversely affected if the bid price of the units falls A. I and II B. I and III C. II and III D. I, II and III Page 38

41 23. Which one of the following BEST describes the policy benefits of investment-linked policies? A. the policy benefits are guaranteed B. the policy benefits are payable only on death or disability C. the policy benefits will depend on the long-term of the life office D. the policy benefits are directly linked to the performance of the underlying assets Page 39

42 Chapter 6: Structure Of Investment-Linked Funds Important notes: Investment-linked funds can be structured into 2 ways: a. Accumulation units - The Investment income of these funds is ploughed back into the fund. Therefore, the unit prices will increase over the long term. b. Distribution units - It is used to purchase additional units to be distributed to the policyowner. The price of the units remains unchanged but the policyowner gets more units. Types of investment-linked funds a. Cash funds b. Equity funds c. Bond funds d. Property funds e. Specialised funds f. Managed funds g. Balanced funds a. Cash funds Cash funds invest mainly in cash and other forms of bank deposits. Low risk and relatively safe. b. Equity funds Equity funds invest in equity assets such as stocks, shares, etc. Higher risk in nature. c. Bond funds Bond funds invest in government and corporate bonds, and in other forms of fixed income instruments. Also known as income or fixed income funds. d. Property funds These funds invest in properties, such as real estates and property shares. Normally only large property funds invest directly in real estates. Safer than equity funds, but have lower liquidity. Usually have a provision which allows the fund manager to defer redemption of units (except for death and disability claims) for typically up to 12 months. Page 40

43 e. Specialised funds These funds are normally segmented based on geographical regions or particular industries. Geographical region, such as the ASEAN Fund, the Emerging Markets Fund and the International Bond Fund. Specialised funds, restricted to investment in a particular country only include such as China Fund and the US Fund. Industry specialised fund, investment are put in specialised sectors such as commodities, mining, plantation, public utilities, etc. f. Managed fund Invest in a wide variety of assets such as equities, bonds, properties, cash, etc. g. Balanced funds The funds invest in fixed proportion of specified assets. For example, 70% of the funds are in equities and 30% in bonds. Risk-return profile The risk-return graph above shows that higher return normally comes with higher risk. Switching The life insurance company sells more than one investment-linked fund to its policyowners. Policyowner can switch part or all of his investment from one fund to another fund. Switching between funds may: a. be offered free of charge, or b. be offered free of charge for a limited number of switches within a given period (normally a year) and charges imposed for subsequent switches, or c. incur a specific charge for each and every switch. Page 41

44 Chapter 6: Structure Of Investment-Linked Funds Self-assessment questions: 1. Investment-linked fund invest in financial instruments such as I. Cash Fund II. Equity Fund III. Property Fund IV. Diversified Fund A. I B. I and II C. I, II and III D. I, II, III and IV 2. Accumulation units refer to? A. income is ploughed back into the fund and the unit price will increase over the long term B. income is distributed to policyowner as additional units, the number of units will increase over long term when unit price remains unchanged C. income is ploughed back into the fund and the number of units increase over the long term D. income is distributed to the policyowner, both unit price and number of units increase over the long term 3. As the value of investment-linked policy depends on the performance of financial instrument in which the investment is invested, A. fund manager bears the risk and policyowner bears the benefit of the policy B. the life office bears the risk and policyowner bears the benefit of the policy C. the invested company bears the risk and life office bears the benefit of the policy D. policyowner bears both the risk and benefit of the policy 4. The switching facility in Investment-linked fund allows A. a life office to switch an investment-linked life insurance policy to a traditional with profit endowment policy B. a life office to switch a single premium investment-linked whole life insurance plan to a regular premium investment-linked whole life insurance plan C. a policyowner to switch part or all of his investment from one investment-linked fund to another D. a policyowner to switch part or all of his investment from one life office s policy to another life office s policy at the same time Page 42

45 5. Switches between funds may:- I. be offered free of charge II. be offered free of charge for a limited number of switches within a given period and charges imposed for subsequent switches III. incur a specific charge for each and every switch IV. incur a specific charge by monthly basis A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 6. Investment-linked funds can be invested in any financial instruments including cash funds, bond funds, property funds and specialised funds. Equity funds A. invest in stocks and shares and the magnitude of the change in unit prices will depend on the quantity only of the equities held B. invest in stocks and shares and are inherently of lower risk in nature and the prices of the stocks and shares are stable C. invest in stocks and shares and investor who buy such assets usually aim for capital appreciation D. invest in stocks and shares and during market recession, such assets are usually the last to depreciate 7. Investment-linked funds can be structured into two ways, namely accumulation units and distribution units. In distribution units, the investment income of the funds is A. ploughed back into the fund, thus the unit prices will increase over the long term B. ploughed back into the fund, thus the unit prices will decrease over the long term C. used to purchase additional units to be distributed to the policyowner, thus the unit price remains unchanged but the policyowner get more units D. used to purchase additional units to be distributed to the policyowners, thus the unit price decreases and the policyowners get more units 8. Investment-linked funds can be invested in any financial instruments including cash funds, equity funds, bond funds and specialized funds. Property funds A. invest in real estates and property shares and normally only small property funds invest directly in real estates B. invest in real estates and property shares and such funds are generally considered to be safer than equity funds, and have higher liquidity C. invest in real estates and property shares and it is always possible to quickly sell a property when policyowners redeem their units D. invest in real estates and property shares and such funds usually have a provision which allows the fund manager to defer redemption of units for up to 12 months Page 43

46 9. Investment-linked funds can be invested in any financial instruments including cash funds, equity funds, bond funds, property funds and specialized funds. Specialized funds I. offer a policyowner exposure to different markets in different regions of the world and in different currencies II. that are restricted to investment in particular geographical regions include examples like China Fund and US Fund III. invested overseas are most susceptible to currency risk particularly in times of volatile currency and financial markets IV. invested in industry are put in specialized sectors such as commodities, mining, plantation, and public utilities A. I, II and III B. I, II and IV C. I, III and IV D. All of the above 10. The switching facility under investment-linked life insurance policies is very useful A. for the purpose of assets planning by the trustee B. for the purpose of profit planning by the insurer C. for the purpose of financial planning by the policyowners D. for the purpose of sales planning by the fund managers 11. Which one of the following fund comprises a higher proportion of equity and a lower proportion of fixed income instruments? A. Bond funds B. Balanced funds C. Property funds D. Managed funds 12. Investment-linked funds can be invested in any financial instruments including cash funds, bond funds, equity funds, property funds and managed funds. Managed funds I. include funds invested in a wide variety of assets such as equities, bonds, properties, cash, etc. II. include funds invested in fixed proportion of specialised assets, e.g. 70% of the funds are in equities and 30% in bonds III. include funds that are restricted to investment in a particular country only such as the ASEAN Fund, the Emerging Markets Fund and the International Bond Fund IV. invest in a wide variety of assets, their allocation of funds will depend on the fund managers views of the future prospects of the financial markets involved A. I, II and III B. I and IV C. III and IV D. II, III and IV Page 44

47 13. Which of the following statement(s) about switching is/are TRUE? I. Switching facility allows a policyowner the liberty to move part or all of his money from one fund to another II. Switching facility can be useful for retirement and education plan III. If the company offers only one fund to its policyowner, it will normally include a switching facility IV. It is advisable for policyowner to switch assets in the bond type funds (which are more variable in returns) A. I and II B. II C. III D. III and IV 14. In risk-return profile of cash funds, bond funds, balanced funds, managed funds and equity funds, a risk-return graph will show that I. higher return normally comes with lower risk II. higher return normally comes with higher risk III. at the top end of the graph are the equity funds IV. the relatively risk less cash funds sit at the bottom end of the graph A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 15. Which of the following funds normally include a provision for the deferment of unit redemption by the manager, for up to 12 month, except for death? A. Property funds B. Managed funds C. Equity funds D. Government bond funds 16. Investment-linked funds can be structured into 2 ways: A. Warrant units and right units B. Investment units and mortality units C. Accumulation units and distribution units D. Term units and annuity units Page 45

48 Chapter 7: How Investment-Linked Insurance Products Work Important notes: The working of investment-linked life insurance Investment-linked The value of fund is nominally divided into a number of units. No such reserve is held, and so the policyowner take the full impact of the changes in investment conditions. The value of the policy will fluctuate depending on the value of the units the policy holds. The investors can choose a particular investment area which he believes can offer good value at that time. No guaranteed minimum sum assured for the purposes of declaring bonuses. Traditional with profit life insurance policy Looking at the fund as a whole when considering how a policy owner might benefit from that investment. The life fund maintains a reserve to help level out the short-term fluctuations in the value of the life fund s investments. Can never reduce in value. The investors will have their investments held usually in a wide spread of assets chosen by the insurer. Guaranteed minimum sum assured for the purposes of declaring bonuses. The premium will be used to purchase units, the number of units purchased being calculated as the amount of the premium divided by the price of each unit. The value of the policy will therefore depend on two factors: The value of each of the units The number of units the policy has accumulated to date. Top-ups Policyowners are allowed to top-up the policies at any time, subject to a minimum amount. Policyowner pays further single premium then the premium will be used in full to purchase additional units which will be added to the existing units in the policyowner s account. Page 46

49 Methods of calculating benefits: For the single pricing method of single premium policies, there is only one price quoted whether the policyowner is buying or selling his units. The dual pricing method of single premium policies, the policyowner buys the units at the offer price and sells the units at the bid price. Number of units Single Pricing Method Assuming a total of RM4,000 premium received from the policyowner. Given 5% policy charges and unit price is RM1.00. How many units the policyowner will receive? Workings: Policy charges: RM4000 x 5% = RM200 Balance amount of premium: RM RM200 = RM3800 Number of unit received: RM3800/RM1 = 3800 units Dual Pricing Method Assuming a total of RM4,000 premium received from the policyowner. The bid-offer spread is 5% and offer price is RM1.00. How many units the policyowner will receive? Workings: Number of unit received: RM4,000 / RM1 = 4,000 units Assuming no change in the value of the unit price. How much would the policyowner receive if he cashes in or claims under the policy? Workings: The bid price: RM1.00 x (100% - 5%) = RM 0.95 Amount received: 4,000 units x RM0.95 = RM3800 If offer price increased to RM1.20, how much would the policyowner receive if he cashes in or claims under the policy? Workings: The bid price: RM1.20 x (100% - 5%) = RM1.14 Cash in or claim: 4,000 units x RM1.14 = RM4,560 Page 47

50 Cash value For example: Single Pricing Method Number of units = 3,800 units Unit price = RM1 Mortality charge = 1% Policy fee = RM100 Workings: Cash value = (Number of units x Unit price ) - (Mortality charge + Policy fee ) = (3800 x RM1) - ([3800 x RM1 x 1% ] + RM100) = RM (RM38 + RM100 ) = RM RM138 = RM3662 For example: Dual Pricing Method Number of units = 4,000 units Bid price = RM0.95 Mortality charge = 1% Policy fee = RM100 Workings: Cash value = (Number of units x Bid price ) - (Mortality charge + Policy fee ) = (4000 x RM0.95) - ([4000 x RM0.95 x 1%] + RM100) = RM (RM38 + RM100) = RM RM138 = RM3662 Page 48

51 Annual yield on gross premium i. Single pricing method The number of units = 3,800 units The unit price after 10 years = RM1.97 The mortality charge (%) = 1% The policy fee = RM100 The Ending value of investment: (Number of units x Unit price) - (Mortality charge + Policy fee) = (3800 x RM1.97) - ([3800 x RM1.97 x 1%] + RM100) = RM (RM RM100) = RM RM = RM7, The Beginning value of investment: = 4,000 units x RM1 = RM4,000 The return on gross premium: Ending Value of Investment Beginning Value of Investment = RM7, RM4,000 = RM The annual yield on gross premium: (the return on gross premium) 1/n - 1 = (RM1.828) 1/10-1 = = or 6.2% Page 49

52 ii. Dual pricing method The number of units = 4,000 units The offer price after 10 years = RM1.97 The mortality charge = 1% The policy fee = RM100 The bid price: = RM1.97 x (100% - 5%) = RM1.97 x 95% = RM The Ending value of investment: = (Number of units x bid price) - (Mortality charge + Policy fee) = (4,000 x RM1.8715) - ([4,000 x RM x 1%] + RM100) = RM (RM RM100) = RM RM = RM7, The Beginning value of investment: = 4,000 units x RM1 = RM4,000 The return on gross premium: Ending Value of Investment Beginning Value of Investment = RM7, RM4,000 = RM The annual yield on gross premium: (the return on gross premium) 1/n - 1 = (RM1.828) 1/10-1 = = or 6.2% Page 50

53 Withdrawal benefits Policy owner may make withdrawals in term of number of units or fixed monetary amount through cancellation of units. a. Number Of Units The unit price or bid price = RM2 Policyowner withdraws 500 units 500 units x RM2 = RM1,000 b. Fixed Monetary Amount The unit price or bid price = RM2 Policyowner withdraws RM3,000 RM3,000 RM2 = 1,500 units cancelled Surrender value Policyowner can surrender their policy units at any time. The calculation is similar to the calculation for withdrawal benefit. Death benefit Two types of death benefits: a. Unit value plus sum assured Single pricing method = (number of units x unit price) + sum assured covered. Dual pricing method = (number of units x bid price) + sum assured covered. b. Unit value or death cover The second type of death benefit relates to either the value of the units or the death cover, whichever is higher. Page 51

54 What are the differences between single premium and regular premium? a. The regular premium investment-linked life insurance policyowner is required to pay premiums regularly but enjoy the flexibility of being able to vary the level of regular premiums payments, making single premium top-ups or taking premium holidays. If the account has sufficient funds, the policyowner may stop paying premiums, in which case the account will continue to fund for the mortality charges until the policy is cashed or the life assured dies and a claim is made. b. The policyowner may surrender all his units or partially surrender his units. A partial surrender is known as a withdrawal. c. The policyowner may vary the sum assured of his policy without changing the level of his regular premiums. Increasing in sum assured would normally require further medical underwriting. The higher the level of coverage, the higher the mortality charges, and the lower the cash values. d. The policyowner may also increase or reduce the level of his regular premium subject to certain constraints. Page 52

55 Chapter 7: How Investment-Linked Insurance Products Work Self-assessment questions: 1. A major difference between traditional with-profit life insurance product and Investmentlinked life insurance policy is A. traditional with-profit life insurance policy can reduce in value particularly when the life fund is being transferred to policy reserve B. traditional with-profit life insurance policy can never reduce in value, provided that the life office is solvent C. the value of traditional with-profit life insurance policy will fluctuate greatly depending on the investment performance of the life office D. the value of investment-linked life insurance policy can never fluctuate once the units are added to the policyowner s policy 2. Under traditional with-profit life insurance policy, I. the life fund maintains a reserve to help level out the short-term fluctuation in value of the life fund s investment II. not maintaining a reserve could mean that the policyowner receive the full value in a year of high investment gains III. not maintaining a reserve could mean that the policyowner suffer in a year of poor investment conditions IV. not maintaining a reserve could mean that the full impact of the changes in investment conditions will be directly borne by the policyowner A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 3. The value of investment depend on 2 factors: A. the offer price and bid price B. disability income and cash value C. cash value plus protection cost D. the value of each of the units plus number of unit the policy has accumulated to date 4. Why a term assurance policy not suitable for investment purpose? A. it is short term policy B. there is no investment element in a term policy C. term policies are meant solely for protection needs D. the cash value in a term is not enough to cover the investment returns from other investment vehicles Page 53

56 5. Investment-linked life insurance policyowners may make withdrawals in term of A. no. of units through cancellation of units B. fixed monetary amount only through reduction of the life cover sum assured C. no. of units or fixed monetary amount through reduction of the life cover sum assured D. no. of units or fixed monetary amount through cancellation of units 6. The phrase Top-Up in an investment-linked life Insurance means: A. the policyowner pay further premium to purchase additional units of the investment-linked fund which will be added to the existing units in the policyowner s account B. the life office maintain reserves to level out short term fluctuation in the value of investment-linked fund C. when the investment-linked fund value increases, the value of the fund will also increase D. the policyowner can change his investment fund to another fund which he believes to have greater opportunities for higher return 7. With dual pricing method, Ahmad paid RM4,000 premium to buy his single premium investment-linked policy. The offer price is RM1 and bid offer spread is 5%. Assuming the unit price never change, what is the bid price and the amount that Ahmad will get if he cash in or claim the policy A and RM3,800 respectively B and RM3,800 respectively C and RM2,000 respectively D and RM2,000 respectively 8. Under single premium pricing method, Joo Hin bought a single-premium investment-linked policy. He holds 3,800 units at RM1.00 unit price. With 1% mortality charge and policy fee of RM100, what is the cash value of his policy? A. RM3,938 B. RM3,800 C. RM3,700 D. RM3, The following statements about investment-linked policies are true EXCEPT: A. some investment-linked policies grant loans to policyowners and it is limited to a percentage of cash value B. the structure of charges and the investment content of investment-linked policy are specified in an investment-linked policy C. policyowners may request for a partial surrender of the policy and the withdrawal amount will be met by cashing the units at the offer price D. all or part of the premiums of an investment-linked policy will be applied to purchase units in the fund Page 54

57 10. Under the single pricing method of single premium investment-linked insurance policy, the amount of money an investment-linked life insurance s policyowner will get when withdrawals are made is A. the no. of units withdrawn multiplied by the unit price or in the case of a fixed monetary amount, the no. of units that will be cancelled will equal to the amount withdrawn divided by the unit price B. the no. of units withdrawn divided by the unit price or in the case of a fixed monetary amount, the no. of units that will be cancelled will equal to the amount withdrawn multiplied by the unit price C. the no. of units withdrawn divided by the unit price and deduct mortality charge and policy fee or in the case of a fixed monetary amount, the no. of units that will be cancelled will equal to the amount withdrawn divided by the unit price D. the no. of units withdrawn divided by the unit price and deduct mortality charge and policy fee or in the case of a fixed monetary amount, the no. of units that will be cancelled will equal to the amount withdrawn multiplied by the unit price 11. Under the single pricing method of a single premium investment-linked life insurance policy, John allocated RM4,000 to buy units. The number of units that John held was 3,800. After 10 years, the unit price was RM1.97. The mortality charge was 1% and the policy fee was RM100. The Ending Value of the investment, Return on Gross Premium and Annual Yield is A. RM7,311,14 / and or 6.2% B. RM7, / and or 11.8% C. RM7, / and or 8.7% D. RM7, / and or 11.8% 12. Under the dual pricing method of single premium policies, the number of units that can be bought is equivalent to A. the premium paid divided by the offer price B. the premium paid less policy charges divided by the offer price C. the premium paid divided by the bid price D. the premium paid less policy charges divided by the bid price 13. Under the dual pricing method of a single premium investment-linked life insurance policy, Agnes had allocated an amount of RM4,000 premium to buy units. The no. of units that Agnes holds is 4,000. After 10 years, the offer price is now RM1.97. The bid-offer spread is 5%. The mortality charge is 1% and the policy fee is RM100. The ending value of investment, the return on gross premium and the annual yield under Agnes s policy are A. RM7,311.14, RM1.828 and or 6.2% B. RM7,701.20, RM1.925 and or 11.8% C. RM7,486, RM1.871 and or 8.7% D. RM7,311.14, RM1.924 and or 11.8% Page 55

58 14. Under the dual pricing method of single premium investment-linked life insurance policy, the unit value plus sum assured type of death benefit is equal to A. (no. of units x life office s selling price) plus sum assured covered B. (no. of units x offer price) plus sum assured covered C. (no. of units x bid price) plus sum assured covered D. (no. of units x bid-offer spread) plus sum assured covered 15. The formula for Annual Yield of a single premium policy is A. (RGP) 1/n + 1, n = number of units B. (RGP) 1/n + 1, n = number of years C. (RGP) 1/n - 1, n = number of units D. (RGP) 1/n - 1, n = number of years 16. If the number of unit in an Investment-linked Fund is 100,000 and the value of the total value of the fund at x point in time is RM1 million, the value of each unit can be calculated by A. multiplying number of unit in existence with value of the total fund B. subtracting the number of unit existing before x point from the 100,000 unit multiply the number with the value of total fund C. dividing the value of the total fund by the sum of the number of units in existence D. dividing the value of the total fund by the sum of the number of units existing before x point in time 17. Under the dual pricing method, Mei Lin pays a premium of RM4,000 for her single premium investment-linked life insurance policy. The offer price is RM1.00 per unit. The bid-offer spread was 5%. There was an increase in the value of the offer price to RM1.20 per unit. The bid price and amount that Mei Lin will receive if she cash the policy will be A. RM0.05 and RM2.40 B. RM0.50 and RM2,400 C. RM0.114 and RM4,560 D. RM1.14 and RM4, The no. of units under a single pricing method single premium investment-linked life insurance policy is 3,800 with a sum assured of RM5,000. The offer price when the policyowner first pays his premium is RM1.00. The unit price at the time of the policyowner s death is RM1.22. Under the unit value plus sum assured type of death benefits, this will result in a death benefit of. A. RM9,636 B. RM8,800 C. RM5,000 D. RM4,636 Page 56

59 19. The number of units under a single pricing method of single premium investment-linked life insurance policy is 3,800 with a sum assured of RM5,000. The offer price when the policyowner first pays his premium is RM1. The unit price at the time of the policyowner s death is RM1.22. Under the unit value or death cover type of death benefit, this will result in a death benefit of A. RM9,636 B. RM5,000 C. RM4,636 D. RM3, The formula for the circulation of Return on Gross Premium (RGP) is : A. Ending Value of Investment Beginning Value of Investment B. Beginning Value of Investment Ending Value of Investment C. Offer price Bid price D. Dual price Single price 21. The policyowner may cash out all his units or partially from his units. These two processes are known as respectively. A. withdrawal or surrender B. surrender or withdrawal C. surrender D. withdrawal 22. Under the dual pricing method of single premium policies, A. the policyowner buys the units at the life office s buying price and sells the units at the life office s selling price B. the policyowner buys the units at the offer price and sells the units at the bid price C. there is only one price quoted whether the policyowner is buying or selling his units D. the bid price is always higher than the offer price Page 57

60 Chapter 8: Benefits And Risks Of Investing Investment-Linked Funds Important notes: Benefits Pooling or diversification Investment-linked funds offer the policyowner an access to pooled or diversified portfolio of investments. The funds 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. Flexibility A policyowner can easily change the level of his premium payment, take premium holidays, add single premium top-ups, make withdrawals, change the level of sum assured and switch his investment between funds. Access A policyowner can gain access to well diversified investment-linked funds, simply by buying an investment-linked life insurance policy with an initial investment, at as low as RM4,000. Expertise Investment-linked funds are managed by professional fund managers. Administration The policyholder is relieved from the day-to-day administration of his investment. He just has to keep track of his investment through the unit statements provided regularly by the insurance company and the unit price published in financial pages of major newspaper. Page 58

61 Risks Investment risks The cash and maturity date are equal to the value of units only. The sum assured is always guaranteed but the value of units is not guaranteed. The cash and maturity values of an investment-linked life insurance policy will rise and fall drastically (Equity fund). The policy is only suitable for a policyowner who can tolerate the risks of short-term fluctuations in his cash value (If fully invest in equity fund). The policy (high equity investment) is not suitable for a policyowner who are risk averse and wants to have life insurance policy with high protection together with guaranteed cash and maturity values. Charges The administration fee, insurance charge, fund management fee are usually not guaranteed. Subject to regular review and they can be changed by the insurance company after giving a written notice over a specific period. Page 59

62 4. The following statements about investment expertise in investment-linked is FALSE A. Investment-linked funds have professional fund managers who have the investment expertise to invest the fund to achieve high return over the long term B. Investment-linked funds have professional fund managers who have the investment expertise to invest the fund to always achieve high return over the short term C. An ordinary policyowner does not normally has good knowledge of financial market to invest his money effectively D. Investment-linked fund have professional fund manager to manage the fund 5. The following statements about expertise in investment is false: A. professional fund managers have the investment expertise to achieve higher return over long term B. professional fund managers have the investment expertise to always achieve high return over a short term C. an ordinary policyowner does not normally have good knowledge of financial markets to invest his money effectively D. investment-linked funds are managed by fund managers who have investment expertise 6. A well-diversified investment-linked fund has. A. many professional fund managers who take care of many funds B. a better risk characteristic than a less-diversified fund C. a simple designed product which cater separately for investment and insurance protection D. provision of flexibility to change the level of premium payment and take premium holidays 7. The benefits of investing in investment-linked life insurance include: I. Policyowners are relieved of the day to day administration of their investment II. The funds invested are managed by professional fund managers III. Investment-linked funds do not offer the policyowner access to diversified portfolio of investments IV. Policyowners cannot easily change the level of his premium payment, take premium holidays, add single premium top-ups, make withdrawals, and switch his investment between funds A. I, II B. I, IV C. II, III D. III, IV 8. Which one of the following statements about the benefits in investment-linked fund is FALSE? A. the fund provides a higher diversified portfolio, thus, lowering the risk of investment B. the fund relieves the investor from the hassle of administering his/her investment C. the fund ensures definite high yield for an investor since it is managed by professionals who are well-versed in the management of risks of investment portfolio D. the fund enables small investor to participate in a pool of diversified portfolio in which he/she, with low investment capital is unlike to have acceded to Page 61

63 4. The following statements about investment expertise in investment-linked is FALSE A. Investment-linked funds have professional fund managers who have the investment expertise to invest the fund to achieve high return over the long term B. Investment-linked funds have professional fund managers who have the investment expertise to invest the fund to always achieve high return over the short term C. An ordinary policyowner does not normally has good knowledge of financial market to invest his money effectively D. Investment-linked fund have professional fund manager to manage the fund 5. The following statements about expertise in investment is false: A. professional fund managers have the investment expertise to achieve higher return over long term B. professional fund managers have the investment expertise to always achieve high return over a short term C. an ordinary policyowner does not normally have good knowledge of financial markets to invest his money effectively D. investment-linked funds are managed by fund managers who have investment expertise 6. A well-diversified investment-linked fund has. A. many professional fund managers who take care of many funds B. a better risk characteristic than a less-diversified fund C. a simple designed product which cater separately for investment and insurance protection D. provision of flexibility to change the level of premium payment and take premium holidays 7. The benefits of investing in investment-linked life insurance include: I. Policyowners are relieved of the day to day administration of their investment II. The funds invested are managed by professional fund managers III. Investment-linked funds do not offer the policyowner access to diversified portfolio of investments IV. Policyowners cannot easily change the level of his premium payment, take premium holidays, add single premium top-ups, make withdrawals, and switch his investment between funds A. I, II B. I, IV C. II, III D. III, IV 8. Which one of the following statements about the benefits in investment-linked fund is FALSE? A. the fund provides a higher diversified portfolio, thus, lowering the risk of investment B. the fund relieves the investor from the hassle of administering his/her investment C. the fund ensures definite high yield for an investor since it is managed by professionals who are well-versed in the management of risks of investment portfolio D. the fund enables small investor to participate in a pool of diversified portfolio in which he/she, with low investment capital is unlike to have acceded to Page 61

64 9. Which of the following statements about risks of investing in investment-linked funds is TRUE? A. policyowners who are risk averse should not purchase life insurance policies with high protection and guaranteed cash and maturity values B. policyowners who invest in unitised funds with high equity investment face greater risk but can expect to achieve higher return than the traditional life insurance product over the long term C. Investment in unitised funds which are fully invested in units of equity funds are not suitable for policyowners who can tolerate short-term fluctuation in their cash value D. Policyowners who are risk averse should buy investment-linked life insurance policies with high equity investment. 10. Which of the following statements about the flexibility features of investment-linked policies is FALSE? A. policyowners have the flexibility of switching from one fund to another provided it satisfies the companies switching criteria B. policyowners may request for a partial surrender of the policy and the withdrawal amount will met by chasing the units at bid price C. policyowners can take loans against their investment-linked policies up to the entire cash value of their policies D. policyowners have the flexibility of increasing or decreasing their premiums for regular premium investment-linked policies. 11. The administrative fee, insurance charge, fund management fee and the like under an investment-linked life insurance policy are A. usually guaranteed B. not subject to review C. subject to change by the life office after written notice is given D. always up-front charges 12. The risk of investing in investment-linked life insurance product includes the following except: A. the value of the investment is not guaranteed B. the value of the investment is linked to the underlying asset C. in equity fund the value will move drastically D. the professional fund manager not able to invest professionally 13. Policyowners of investment-linked insurance policies are relieved of the day-to-day administration of their investment. They just have to I. engage independent professional fund managers personally to manage the complicated transactions II. construct their own diversified portfolio and passing them on to the life officers III. keep track of their investment through the unit statements provided regularly by their life offices IV. keep track of the unit price published in financial pages of major newspapers A. I and II B. I, II and III C. I, II and IV D. III and IV Page 62

65 Chapter 9: Comparison Between Investment-Linked Life Insurance And Traditional With Profit Life Insurance Products Important notes: Traditional life insurance vs investment-linked insurance Criteria Traditional guaranteed without-profit life insurance (i.e. term and nonparticipating whole life and endowment) Traditional with-profit life insurance (i.e. with-profit whole life and with-profit endowment insurance) Investment-linked insurance Investment returns and risks Amount payable does not depend on the investment performance of the company, as it is fixed at the inception of the policy No investment risk, except the risk of insolvency of the life insurance company The life office smoothes investment returns by contributing into reserves in good investment year, and drawing from reserves in bad investment years E.g. cash bonus, reversionary bonus and terminal bonus Policy values vary according to the values of the underlying assets Investment returns and risks are directly transferred to the policyowner Premium computation Determined and fixed at inception and is stated in the policy Determined and fixed at inception and is stated in the policy Based on sum assured and the expected bonuses payable Account driven and has the flexibility to change the premium payments, take premium holidays and add single premium top-ups Insurer retain the right to vary some charges Death benefit Determined and fixed at inception and is stated in the policy Fixed sum assured plus whatever bonuses accumulated up to the date of death and less whatever outstanding policy loan and automatic premium loan Only the sum assured is guaranteed at the outset Level cover: The minimum sum assured or the value of the units in the fund at the bid price whichever is higher or Increasing cover: The minimum sum assured plus the value of the units in the fund at the bid price Page 63

66 Criteria Traditional guaranteed without-profit life insurance (i.e. term and nonparticipating whole life and endowment) Traditional with-profit life insurance (i.e. with-profit whole life and with-profit endowment insurance) Investment-linked insurance Surrender value Payable when policy is surrendered (Except term insurance <20 years) Net cash surrender value includes the surrender value reversionary bonus up to the date of surrender Single pricing policy: Market price x number of units Dual pricing policy: Bid price x number of units Option top-up to Subject to company policy May increase sum assured or renew at the end of the term for a higher amount Very few allow the option to top-up Similar to withoutprofit policy Allow policyowners to buy additional number of units without taking up a new policy Page 64

67 Chapter 9: Comparison Between Investment-Linked Life Insurance And Traditional With Profit Life Insurance Products Self-Assessment Questions: 1. The criteria used to compare traditional life insurance products with investment-linked life insurance products include I. investment returns and risks II. premium computation III. death benefit IV. life offices management expertise A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 2. Under traditional without-profit life insurance products, the amount payable to policyowners A. does not depend on the investment performance of the life office as it is fixed at the inception of the policy, thus there are no investment risk B. includes bonuses which are allocated to the policyowner in the form of additions to the sum assured but these allocations are not directly linked to the life offices investment performance C. vary according to the performance and values of the underlying assets of the life offices investment D. vary according to the performance and values of the underlying assets that the policies are tied to 3. Investment-linked life insurance policies are said to be account driven. This means that I. the premiums charged and the benefits under the policy are fixed based at specific sum assured and stated in the policies at their inception II. policyowner have the flexibility in changing their premium payments III. life offices may retain the right to vary some of the charges made under the policies IV. if the future experience differs from what is assumed when the policies are priced, the life offices may depart from their intended policies and change the offer and bid prices A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV Page 65

68 4. For single premium investment-linked life insurance policy, the death benefit is either one of the following, depending on the company s policy: I. the minimum sum assured or the value of the units, whichever is higher II. the minimum sum assured plus the value of the units III. the sum assured (chosen by the life assured) or the value of the units whichever is higher IV. the sum assured (chosen by the life assured) plus the value of the units A. I and II B. I and III C. I and IV D. II and IV 5. In times of volatile stock market the policyowner may want to switch all or part of his investment A. from cash fund to equity fund B. from managed fund to property fund C. from equity fund to cash fund in order to protect the capital value if he thinks the stock market will crash D. from balanced fund to equity fund 6. Under traditional with profit life insurance policies, the following statement is NOT true about the death benefit. A. It is a fixed sum assured plus whatever bonuses accumulated up to the date of death and whatever outstanding policy loans inclusive of interests B. It may be altered with the agreement of the policyowner C. It is guaranteed at the outset only as far as the sum assured is concerned D. It is subject to change if future experience differs from what the policy had assumed when it was priced 7. With investment-linked life insurance products, the amount payable to the policyowner A. includes bonuses which are allocated to the policyowners in the form of additions to the sum assured, and these allocations are directly linked to the life offices investment performance B. does not depend on the investment performance of the life office as it is fixed at the inception of the policy, thus there are no investment risks except the risk of insolvency of the life offices C. varies according to the values of the underlying assets that the policies are tied to at the same time, and the policyowners enjoy the entire investment awards net of charges as well as bear all the investment risks D. includes bonuses which are part of the surplus which is revealed when the life offices carry out the valuation of their assets and liabilities of their life fund Page 66

69 8. Which of the following statements are TRUE? I. the policy values of investment-linked policies is determined by the offer price at the time of valuation II. the policy value of endowment policies is the cash value plus any reversionary bonus less any outstanding automatic premium loans and any interest due at time of surrender III. the life office needs to maintain a separate fund for investment-linked policies distinct from the life fund as in the case for conventional policies A. I and II B. I and III C. II and III D. I, II and III 9. Recent new business statistics revealed that investment-linked life insurance products account for one third of the total individual life new business in UK. The popularity of investment-linked life insurance business will continue to grow because I. the performance of the contracts can be monitored by reference to the unit prices published in the daily newspapers II. the risk exposure to the policyowners are lesser III. the charges for the product are more transparent IV. the plans are much more flexible A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 10. The following statement about option to top-up under investment-linked life insurance products is FALSE: A. policyowners are normally allowed to top-up their policies at any time, subject to a minimum amount B. to top-up a policy, the policyowner pays further single premium at the time to top-up C. policyowner may buy additional units of the investment-linked fund and these units will be allocated to new investment-linked life insurance policies D. further premiums at time of top-up will be used in full, after deducting charges for top-ups, to purchase additional units of the investment-linked fund 11. The benefits of investment-linked life insurance products A. are solely dependent on fixed income securities in which the funds invest B. comprise the investment returns only C. wholly or partly determined by referring to the value of or income from property of any description or by referring to the fluctuation in, or in an index of, the value of property of any description D. are determined and fixed at the inception of the policy contract Page 67

70 12. Which of the following statements describe the differences between investment-linked products and with-profits products? I. investment-linked products allow policyowners to vary the premium payments unlike with profits products II. investment-linked products can take the form of whole life endowment policies with profits products. III. investment-linked products allow policyowner to pay future single premium from time to time to add more units in his account unlike with-profit product. A. I B. I and III C. II and III D. I, II and III 13. With traditional with-profit life insurance products, the allocations to policyowners in the form of bonuses I. are not directly linked to the life officers investment performance II. have already been smoothened by the life officers III. do not have the peaks and troughs of investment return as in good investment years of life offices, contributions have been made to reserves and vice versa IV. are not fixed at the inception of the policy, but are greatly dependent on the investment performance of the life officers A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 14. Which of the following statements is FALSE? A. life office will carry out a valuation of its funds yearly and any surplus may be allocated to with-profits policyholder as reversionary bonus B. investment-linked life insurance policies offer investors policies with values indirectly linked to the investment performance of the life office C. the investment element of investment-linked policies varies according to underlying assets of the portfolio D. both Whole Life and Endowment policies can be used as an investment media with benefits than become payable at future date 15. Which one of the following statements about the difference between investment-linked policies and endowment policies are FALSE? I. the policy values of investment-linked and endowment policies directly reflect the performance of the fund of the life office II. the premiums and benefits of the endowment policies are flexible as they are account driven III. the benefits and risks of investment-linked and endowment policies directly accrued to the policyholders A. I and II B. I and III C. II and III D. I, II and III Page 68

71 16. Which of the following statements describe the differences between investment-linked products and with-profits products? I. Investment-linked products allow policyholders to pay top-up premiums from time to time to buy more units to his account unlike with-profits products. II. Investment-linked products allow policyholders to take premium holiday unlike withprofits products. III. Investment-linked products can take the form of whole life or endowment policies unlike with-profits products. A. I B. I and II C. I and III D. I, II and III 17. The criteria for comparing traditional life insurance product with investment-linked life insurance product include I. the life office s management expertise II. the products with investment return and risks III. the policies premium computation IV. death benefit provided under the policies A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 18. Reversionary bonus under traditional with-profit life insurance policies A. is paid at the time of death under the life policies or on maturity of the policies B. can either be simple (based purely on the original sum assured) or compound (based on the sum insured less previous bonuses) C. once allocated can, however, be removed or reduced when the life office cannot afford to sustain it D. is usually expressed as a percentage as the sum assured and will vary in accordance with the performance of the underlying assets of the unitised fund. 19. The death benefit under regular premium investment-linked life insurance policies is either I. the sum assured chosen by the life assured or the value of the units in the fund at the bid price, whenever is higher II. the sum assured chosen by the life assured plus the value of the units in the fund at the bid price III. the minimum sum assured or the value of the units in the fund at the bid price, whichever is higher IV. the minimum sum assured plus the value of the units in the fund at the bid price. A. I and II B. II and III C. III and IV D. I and IV Page 69

72 20. The following statement about surrender value under traditional with-profit life insurance products is TRUE: A. the amount of surrender value is usually higher than the amount under without-profit policies and it varies with the age of the life assured, being lower at older age B. in the case of with-profit policies, the net cash surrender value includes the surrender value of the reversionary bonus up to the date of surrender C. other than term insurance of more than 20 years, limited payment is made when such insurance policies are surrender D. When a with-profit insurance policy is surrendered, the surrender value is calculated by multiplying the bid price with number of units. 21. The following statement about surrender value under investment-linked life insurance is TRUE: A. the amount of surrender value is always higher than the amount under with-profit policies B. for dual pricing policies, the surrender value is the offer price multiplied by the number of units C. for single pricing policies, the surrender value is the market price multiplied by the number of units D. the amount of surrender value varies with the age of the policyowner, being higher at older higher age Page 70

73 Chapter 10: Taxation And Law Covering Investment-Linked Life Insurance Products Important notes: The tax aspects are treated in the same manner as other forms of life insurance policies. Regulated by the laws that govern the others forms of life insurance business such as the Insurance Act, 1996 and its Regulation, the Companies Act, 1995, the Contract Act, 1950 and legal provisions governing the common law of agency. The law of the country may require insurance companies to adopt a particular investment strategy so that the companies solvency and their ability to meet policyowner s claims are not affected. The principal legal document regulating income tax in Malaysia is the Income Tax Act, The premium relief is allowable when the life insurance or deferred annuity is: a. on the individual s life b. on the life of the spouse of the individual c. on the joint lives of the individual and his/her spouse. The total relief allowable for all insurance premiums on the life of an individual or his/her spouse and on contribution to approved provident funds (e.g. to EPF) in a basis year is RM6,000 An extra tax deduction of RM3,000 under Section 49(1B) of the Income Tax Act,1967 which can be used for education and medical insurance premiums. Gains of a unit from the realisation of an investment in a unit trust is exempted from tax, insurance companies do not have the same exemptions. Insurance companies are taxed at lower rates. The chargeable income and realised capital gains of a life fund is taxed at 8%. The proceeds distributed to policyowner of investment-linked life insurance policies are tax-free in the hands of the policyowner. Disposal of units in an investment-linked life insurance should not attract tax as they are capital receipts. Page 71

74 The main purposes of regulation include: a. The protection of public interest b. The promotion of fairness and equity c. The fostering of competence d. The developmental role Definition of investment-linked insurance business: Section 7(2) (b) of the Insurance Act, 1996 defines Investment-linked insurance business to mean the effecting and carrying out of a contract of insurance on human life or annuity where the benefits are, wholly or partly, to be determined by reference to the value of, or the income from, property of any description or by reference to fluctuations in, or in an index of, the value of property of any description. Section 7(1) (b) of the Insurance Act, provides that except with the prior written approval of Bank Negara Malaysia (BNM) and subject to such conditions as the authority may specify, no licensed insurer shall carry on investment-linked life insurance business. Insurers are required to maintain separate funds in respect of each investment-linked fund. Investments in securities in any one investee should not exceed 5% of the paid up capital of the investee company or not more than 5% of the total value of the assets of the fund whichever is lower. Investments in loans or debentures to any one borrower or group of borrowers should not exceed 5% of the total value of the assets of the fund. The assets of an investment-linked fund must be valued frequently to provide policyowner with more accurate unit prices and benefits. An annual actuarial valuation certifying the level of reserves for cash values, death claims, administrative expenses and other benefit payments of the investment-linked fund must be done by the insurer s appointed actuary and submitted to BNM within three (3) months of the end of the financial year. The policyowner of an investment-linked life insurance policy must be at least 18 years old. There is no restriction on the age of the life assured. A policyowner within 15 days after delivery of the investment-linked life insurance policy may return the policy to the insurer and shall be immediately refunded any premium paid in respect of the policy. Minimum death benefit of RM5,000 or 125% of the single premium whichever is higher. Single premium policies must at least have a minimum premium of RM3,000. The products should only be marketed by agents specifically trained and equipped with the product knowledge. The basic qualification would be the MII Certificate Examination in Investment-linked Life Insurance. Page 72

75 Insurer is required to disclosure information (i) (ii) (iii) Sales materials/illustrations Statement to policyowner Fund performance report to policyowner Other legal requirements: Insurable interest Utmost good faith Indemnity Proximate cause Any laws pertaining to the formation of contracts, to agencies and to companies. Page 73

76 Chapter 10: Taxation And Law Covering Investment-Linked Life Insurance Products Self-assessment questions: 1. The following statements concerning taxation in respect of investment-linked life insurance policies are true. I. Surpluses generate from writing investment-linked life insurance products are already taxed at the level of the life insurance companies II. Proceeds distributed to policyowners of investment-linked life insurance policy are tax free in the hands of policyowner III. Disposal of units in investment-linked life insurance should attract tax as they are capital receipts IV. The tax laws currently governing other forms of life insurance apply to investmentlinked life insurance A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 2. Section 7(2)(b) of the Insurance Act, 1996 defines Investment-linked insurance business A. To mean the effecting and carrying out of a contract of insurance on human life only where the benefits are, wholly or partly, to be determined by reference to the value of, or the income from, human life of any description or by reference to fluctuations in, or in an index of, the value of property of any description. B. To mean the effecting and carrying out of a contract of insurance on annuity only where the benefits are, wholly or partly, to be determined by reference to the value of, or by reference to fluctuations in, or in an index of, the value of property of any description. C. To mean the effecting and carrying out of a contract of insurance on human life or annuity where the benefits are, wholly or partly, to be determined by reference to the value of, or the income from, property of any description or by reference to fluctuations in, or in an index of, the value of property of any description. D. To mean the effecting and carrying out of a contract of insurance on human life or annuity where the benefits are, wholly or partly, to be determined by reference to the value of, or the income from, human life of any description or by reference to fluctuations in, or in an index of, the value of property of any description. 3. In order to encourage national thrift and promote individual financial independence particularly in old age, tax relief is allowed in respect of premiums paid on life insurance and deferred annuities which is on the I. individual s life II. the life of the spouse of the individual III. the joint lives of the individual and his/her spouse IV. the lives of the individual and his/her immediate family members A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV Page 74

77 4. The total relief allowable for all insurance premium on the life of individual on his / her spouse and on contribution to approved provident funds (e.g. to EPF) in a basis year is A. RM3,000 B. RM3,500 plus RM2,000 for children education and medical policies C. RM5,000 D. RM6, The following statement about taxation are true, EXCEPT A. capital gain is not taxable B. capital losses is not tax deductible C. dividend income is not subjected to withholding tax according to the prevailing corporate tax rate D. if personal tax rate is less than corporate tax rate, shareholder is entitle to rebate on the portion of the dividend paid as tax 6. The principle legal document regulating income tax in Malaysia is the A. Income Tax Act, 1967 B. Insurance Act, 1996 C. Contracts Act, 1950 D. Companies Act, An insurer must provide each investment-linked policyowner with A. an advise of daily investment of funds B. a policy statement and the fund performance report C. the common annual financial reports D. the fund manager s entertainment expenses. 8. Which one of the following statements describing the rates of tax and relief for investmentlinked insurance is true? A. reviewed biannually by Finance Minister and proposed for that year B. reviewed every quarterly by Bank Negara C. disposal of units in an investment-linked life insurance should attract tax as they are capital receipts D. proposed by Finance Minister in the budget for the year and then incorporated in the Finance Act for that year 9. Under the free-look provision A. there is no free-look provision in an investment linked policy as there is no life insurance B. the agent can decide when he wants to deliver the policy C. the agent can decide within 15 days of the issuance of the policy to demand a full refund of all his units at offer price. D. A policyholder has only 15 days from the date he receives the policy document to examine and decide the suitability of the policy and demands a full refund. Page 75

78 10. Which of the following statements about investment linked policy are TRUE? I. the cash value is not guaranteed II. the volatility of the returns depends on the investment strategy of the fund III. the investment-linked policyholders has direct control over the investment decisions of the unitised fund A. I and II B. I and III C. II and III D. I, II and III 11. The laws that govern the other forms of life insurance is regulated by the laws that govern the life insurance business such as: I. The Insurance Act 1996, and its regulation II. The Companies Act 1965 III. The Contracts Act 1950 IV. The Transport Act 1985 A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 12. Which of the following statements are true about investment-linked policies? I. the owner of an investment-linked policy must be at least 18 years old II. there is no requirement of insurable interest for investment-linked policy III. there is no restriction on the age of the life assured A. I and II B. I and III C. II and III D. I, II and III 13. BNM s circular JPI:1/1997 on Specification of assets for the purpose of a Licensed Insurers Margin of Solvency I. is not applicable to the investment-linked funds, in view of the nature of the business that investment-linked funds could be invested 100% in equities II. specifies the extent of a class of assets or description of assets that may be taken into account for the purpose of a licenses insurer s margin of solvency III. is applicable to the investment-linked funds as all laws to investment-linked life insurance policies. IV. specifies the class or description of assets of a licensed insurer that may be taken into account for the purpose of a licensed insurer s margin of solvency A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV Page 76

79 Chapter 11: Identifying And Establishing Customer Needs Important notes: The process of providing advice involves the following steps: Establishing relationship with the client Gathering all relevant financial data Establishing current financial position and goals Developing plans and strategies to meet the goals Discuss possible recommendations Implementation of the agreed recommendations Monitoring the portfolio The Customer Fact Find Form addresses the following areas: Customer s personal and dependents details Life and financial priorities and goals Risk profile Net worth analysis Cash flow analysis Recommendations and record of advice Client s needs include: Adequate insurance coverage for liability cancellation, basic protection, on medical cover, disability cover, dread diseases cover etc. Planning for children s education Retirement planning Asset accumulation Estate planning Page 77

80 Chapter 11: Identifying And Establishing Customer Needs Self-assessment questions: 1. The objective of satisfying customers needs profitably can be achieve by an agent through I. the giving of freebies to the customers II. extensive investment training by the company III. the use of sales plan, where sales goals, strategies and objectives are coordinated with market analysis, segmentation and targeting. IV. the giving of monetary assistance and discount to the customers A. I, II and IV B. II, III and IV C. I and III D. II and III 2. After the financial needs of a customer are assessed, what must an investment-linked life insurance agent do? I. consider the most appropriate means to satisfy those needs offered within the investment-linked insurance II. consider the most appropriate means of satisfying those needs which may involve financial products other than investment-linked life insurance III. refer the customer to another person with better expertise in certain areas of financial services, should the need arise IV. if the financial needs fall outside the scope of the insurer s portfolio the agent must discontinue his finding A. I and IV B. II and III C. II and IV D. II 3. What do you understand by the phrase conducting the fact-finding which is conducted by an investment-linked insurance agent? A. Gathering all information of the investment available by the insurer B. Gathering all relevant information about the customer before making recommendation C. Gathering all information about the various plans offered by other insurers in the market D. Gathering as far as possible all element that will affect the customer s investment 4. What is the second stage in the process of providing advice to customer? A. conducting the fact-find B. assessing and satisfying customer s needs C. after sales services D. making recommendations to the customer Page 78

81 5. Fact find by an investment-linked life insurance agent should provide answers to which of the following questions? A. What are the customer s habits? B. What are the customer s personal details? C. What is the reputation of the customer? D. What are the landed properties that the customer has? 6. Owing to changes in the market environment, many insurance companies now sell their product on a A. Sales-oriented basis B. Hard sales basic C. Market oriented basis D. Varied product basis 7. What are the stages involved in providing effective advice to investment-linked life insurance customers? I. conducting the fact-finding II. marketing qualification III. assessing and satisfying customers IV. making recommendation to customers A. I, II and III B. I, III and IV C. II, III and IV D. I, II, III and IV Page 79

82 Chapter 12: Marketing And After-Sales Services, Ethics And Code Of Conduct Important notes: Marketing is defined by the Institute of Marketing as the management process responsible for identifying, anticipating, satisfying customers requirements profitably. In the past, insurance companies tended to be sales orientated and focusing on product selling. A market oriented insurance company determines the needs of customers and satisfying these needs by developing a distributing appropriate policy. A market-oriented insurance company should undertake the following functions: a. Planning and control b. Market identification c. Product development e. Selection of distribution channel f. Promotion A sales plan is important because it allows an insurance agent to perform the function of planning and controlling. A sales plan includes the following: a. Sales goal b. Objectives (target market) c. Sales strategy d. Implementation and control An agent who engages in personal selling requires: a. Product knowledge b. Market knowledge c. Selling techniques d. Knowledge of buying process e. Knowledge of selling process Page 80

83 There are five stages in consumer buying decision process a. Problem recognition Consumer become aware of the threat of risks or a potential opportunity and feels the need for product to protect him from financial difficulties or to satisfy his needs. b. Information search Consumer searches for information. The intensity of these efforts depends on factors such as the consumer s experience in purchasing the product, the importance of the purchase and the value involved. c. Evaluation of alternative policies Consumer will evaluate product based on a set of criteria. Studies conducted in the U.S.A. indicated that the most important factors for the selection of an insurer are reputation of the insurer, quality of coverage and services provided and policy benefits. Other factors include agent s personality and friendliness, professional capability, premium and others. d. Purchase After evaluation, the consumer makes the decision to purchase one of the alternative products. e. Post-purchase evaluation The buyer conduct post purchase evaluation. For example, the agent who delivers a policy promptly keeps in contact with his customers, and provides important information of risk evaluation will have a better chance of securing the loyalty of his customer at the time of renewal. The selling process in personal selling involves five basic steps: a. Locating the prospective customer b. Creating a sales presentation c. Conducting the sales interview e. Closing the sales Most insurance companies have rules and regulations covering activities that must be completed between the time a policy is sold and time the policy is issued. These activities are as follow: a. Making sure that the application is complete and that all the proposal s answers have been recorded accurately and clearly. b. Providing timely response to any applicant or company questions or requests. The delivery of a policy is an important aspects of providing after-sales service which can gives the agent an opportunity to perform the following: Reassuring the policyowner and other family members about their decision to buy the policy Provide a basis for future sales Re-emphasize the insurance agent s commitment Encourage the policyowner to call the agent if there is any problem or question Explain the policy s provision, terms and conditions Obtain names of referred leads and other prospects Strengthen the customer relationship and help encourage persistency Page 81

84 Ethics should include: a. Behaving with complete integrity in an insurance agent s professional life. b. Complying with the Law and with the best principles and practice relating to financial advice. c. Behaving in a professional and honorable Manner toward those with whom the insurance agent is in contact of business d. Observing and applying the Relevant Codes of Good Practices. LIAM S guidelines on the codes of conduct Part I - Guidelines on the Code of Conduct - Statement of Philosophy - Coverage - Monitoring Devices - Seven Principles of the Guidelines - Code of Conduct Part II - Life Insurance Selling - Introduction - General Sales Principles - Explanation of the Contract - Disclosure of Underwriting Information - Accounts and Financial Aspects Part III - Statement of Life Insurance Practice - Introduction - Claims - Proposal Forms - Policies and Accompanying Documents - Sales Materials / Advertisements Page 82

85 Chapter 12: Marketing And After-Sales Services, Ethics And Code Of Conduct Self-assessment questions: 1. In sales-oriented environment, what technique is frequently used? A. Product sales technique B. Market sales technique C. Hard sales technique D. Forced sales technique 2. What is defined as the management process responsible for identifying, anticipating and satisfying customers requirement profitably? A. investment B. investment-linked C. marketing D. marketing investment 3. Why is the sales plan regarded as important to an agent for the successful selling of a new insurance product? I. It allows an insurance agent to establish his goal during planning II. It allows an insurance agent to participate in the function of controlling III. It makes the customer buy according to what the sales plan offers IV. It allows an insurance agent to establish ways to achieve goals for the agency A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 4. Ethics should include: I. behaving with complete integrity in an insurance agent s professional life II. complying with law and with the best principles and practices relating to financial advice III. conducting in a professional and honorable manner towards those with whom insurance agent is in contact of business life IV. observing and applying the relevant codes of good practice A. I, II B. I, II, III C. I, III, IV D. All of the above 5. When a consumer becomes aware of a potential opportunity and feels the need for a product to satisfy his needs, the term used under the Consumer Buying Decision Process is known as A. information search B. problem recognition C. problem solution D. evaluation of problem Page 83

86 6. To be a successful company in selling, the most important thing to have is: A. market-oriented agency force B. competitive products C. dedicated staff D. good working environment 7. What are the important ingredients in a successful sales interview? A. The agent s skill in handling objections from a prospect B. The reduction of the product price C. Change in sales plan D. The agent making objections and drawing the prospect s attention to the advantages of the product 8. What is the main reason of insurance agent in participating in the planning of new product? A. Feedback on the market B. To establish a goal for the agency and ways to achieve it C. New ideas is established D. To promote self-esteem and confident in agent 9. Customers who have purchased policies from a sales oriented organization, usually ended buying policies which I. they do not understand II. cannot meet their needs III. can meet their needs IV. they surrender for its value or paid-up A. I, II and III B. I, II and IV C. I, III and IV D. II, III and IV 10. What is the extra knowledge/requirement needed for an investment-linked life insurance agent? A. all relevant knowledge about technical aspect of life insurance, coverage and scope B. all aspects about life cover C. all aspects of life insurance and legal requirements D. the financial advice in order to fulfill the customer s needs 11. During the process of assessing the customer s needs, if it is found that the needs are beyond the investment-linked life insurance agent s expertise, what can be done? A. Refer the customer to a different insurer B. Discontinue further assessment and start on a new case C. Decide whether it is necessary to refer the customer to another expert advisor in another specialist field and how to do so D. Pass the case to his company to proceed further if necessary Page 84

87 12. When selling investment-linked life insurance policies, the objectives of an insurance agent to his customers are I. to impose his views on the customers concerning investment II. to satisfy his customers needs and requirements III. to increase his sales quota by all means IV. to earn an income for himself A. I and III B. II and IV C. III and IV D. II and III 13. The term used in marketing where results are measured against the plan and changes made when and where necessary is known as A. planning B. sales goal C. controlling D. sales strategy 14. The following are the General Sales Principles required under Part II of LIAM s Code of Ethics and Conduct: I. The intermediary must make known to the prospective customer his principal and produce his authorization card II. Ensure that policy proposed is suitable to meet the needs of customers and not beyond his resources III. To give all advice sought irrespective of his knowledge so as not to lose his prospect s confidence in him IV. All information supplied by the prospective customer can be revealed to people who request it A. I, II and III B. I, III and IV C. I and II D. All of the above 15. Why is the personal delivery of policy regarded as an important aspect of providing aftersale service? I. It alleviates the customers cognitive dissonance by the agents reassurance on the right purchase II. The agent can take the opportunity to obtain more names of referred leads and others prospects III. it re-emphasize the agents commitment to provide the policyholder with quality service IV. policyholder is encouraged to call the agent whenever the need arises A. I,II and III B. II, III and V C. I, III and V D. All of the above Page 85

88 16. Which of the following statements about rebating are TRUE? I. Rebating is prohibited under the Professional Agent Code of Conduct II. Rebating deals with offering the prospect a special inducement to purchase a policy. III. Rebating will enhance the sales performance and uphold the prestige of an agent A. I and II B. I and III C. II and III D. I, II and III 17. Which of the following statements is FALSE? A. twisting is a specific form of misrepresentation B. misrepresentation is a specific form of twisting C. switching is a facility allowing policyholders to switch to other offered by company D. rebating is to offer a prospect a special inducement to purchase a policy. 18. Which of the following statement about twisting is FALSE? A. it refers to an agent offering a prospect a special inducement to purchase a policy B. twisting is a special form of misrepresentation C. it refers to an agent inducing a policyholder to discontinue policy with another company without disclosing the disadvantage of doing so D. it includes misleading or incomplete comparison of policies. 19. Misrepresentation resulting in inducing policyowner to cancel or have his policy made paidup in order to purchase a new policy to earn more income for the agent is known as A. switching B. replacement C. twisting D. changing 20. In part II of General Sales Principles of LIAM s Code of Conduct, intermediaries are forbidden to I. sell high premium policy with good income for herself II. make inaccurate or unfair criticism of any insurers III. deal with or source other specialist advice when in doubt except from his supervisor IV. attempt to persuade a prospect to cancel any existing policies unless these are clearly unsuited to his needs A. I and II B. II and III C. II and IV D. III and IV Page 86

89 Answers To Self-Assessment Questions No. Chapter D A C B A C B B A B D C 2 A C A C B A A A A C B C 3 B A C A B D D B D A B B 4 D A D C B C C B A D A D 5 A B D B B A D B C C B B 6 A A C C C A B D A C A 7 D B B A C B A C B B A 8 D C B C D D C C D A 9 C B C C D C B C D B 10 A A A A C A C C A D 11 A D B A C C A C 12 D D B A D B B B 13 C D A A D A B C 14 C A D C B C 15 C C A D D A 16 B D C C B A 17 B A D D B 18 C C A A A 19 B A B A C 20 A D A B C 21 D A B C 22 A C B 23 D D 24 C 25 C 26 C 27 A 28 B 29 A 30 B 31 D 32 A 33 D 34 A 35 D Page 87