certificate examination in investment-linked...

CEILLIC E R T I F I C A T E E X A M I N A T I O N I N I N V E S T M E N T - L I N K E D L I F E I N S U R A N C E

CERTIFICATE EXAMINATION IN INVESTMENT-LINKED LIFE INSURANCE

PREFACE

This course contains the study materials for the Certificate Examination in Investment-Linked Life Insurance. The book may look ominously thick but please bear in mind that the market out there, both, the product producers and clients market has undergonetremendous changes in the last 15 years. The sudden deluge of information found here as compared to the earlier version is to provide a slightly higher level of understanding amongst agents, so that they can be better prepared when facing a client.

The objective of this course is to provide basic fundamental knowledge of howinvestment-linked life insurance works and how to market it to the public. This coursealso introduces the agent to the world of Investment-Linked L i fe Insurance sales andit is also hoped that the agents will not stop with this course but empower themselveswith higher qualifications in the coming future.

The Chapters in this course are designed in such a way, that a new person will get a clearpicture of what Investment-Linked Life Insurance is all about and also sets a template for them to follow to a higher level in the future.

It is hoped that the agents will utilise this course effectively and carry out their sales activities with stronger conviction and heightened confidence.



1st Edition 1998 (First published by The Malaysian Insurance Institute)

2nd Edition 1999

3rd Edition 1999

4th Edition 2000

5th Edition 2002

6th Edition 2010

Study Text



Copyright The Malaysian Insurance Institute 2010

All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted in any form by any system, electronic, mechanical, photocopying,recording or otherwise, without the prior permission of The Malaysian Insurance Institute.

The Malaysian Insurance Institute would like to express our gratitude to Persatuan InsuransAm Malaysia, the Life Insurance Association of Malaysia and all the various individuals who contributed in various ways to make the publication of this course book possible.

Published by The Malaysian Insurance Institute (35445H)No. 5, Jalan Sri Semantan Satu, Damansara Heights

50490 Kuala LumpurWebsite : www.insurance.com.my

ISBN 978-983-2432-02-9

Pages

11.1 Introduction

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C O N T E N T S

The Malaysian Insurance Institute

INTRODUCTION TO INVESTMENT - LINKEDLIFE INSURANCE

KEY CONSIDERATIONS IN INVESTMENT

2.1 Introduction2.2 Investment Objectives2.3 Funs Available2.4 Risk Or Security2.5 Investment Horizon2.6 Acessibility Of Funds2.7 Taxation Treatment2.8 Performance Of The Investment2.9 DiversificationSelf-assessment Questions

TYPES OF INVESTMENT ASSETS3.1 Introduction3.2 Investment Choices3.3 Cash And Deposits3.4 Fixed Income Securities3.5 Shares3.6 Unit Trusts 3.7 Investment Trusts3.8 Properties 3.9 Derivatives 3.10 Exchange Traded Funds 3.11 Sukuk Bonds3.12 Capital Guaranteed FundSelf-assessment Questions

CERTIFICATE EXAMINATION ININVESTMENT - LINKED LIFE INSURANCE

Self-assessment Questions13

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C O N T E N T S


INVESTMENT - LINKED LIFE INSURANCE PRODUCTS– A WORLD SCENARIO

4.1 Introduction

4.2 In The United Kingdom

4.3 In The United States Of America

4.4 In Singapore

4.5 In MalaysiaSelf-assessment Questions

5.1 Introduction

5.2 Definitions

5.3 Characteristics Of Investment - Linked Insurance Policies

5.4 Types Of Investment - Linked Insurance Policies

5.5 Loans And Withdrawals Of Investment - Linked Insurance Policies

5.6 Risk Base Capital GuidelinesSelf-assessment Questions

TYPES OF INVESTMENT - LINKEDLIFE INSURANCE PRODUCTS

STRUCTURE OF INVESTMENT - LINKED FUNDS

6.1 Introduction

6.2 Accumulation Units 6.3 Distribution Units

6.4 Types Of Investment - Linked Funds

6.5 Risk - Return Profile

6.6 SwitchingSelf-assessment Questions

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BENEFITS AND RISKS OF INVESTING ININVESTMENT - LINKED FUNDS

8.1 Introduction8.2 Benefits8.3 Risks Of Investing In Investment - Linked FundsSelf-assessment Questions

COMPARISONS BETWEEN INVESTMENT - LINKEDLIFE INSURANCE AND TRADITIONAL WITHPROFIT LIFE INSURANCE PRODUCTS

9.1 Introduction

9.2 Traditional Guaranteed Without - Profit Life Insurance Products

9.3 Traditional With - Profit Life Insurance Products

9.4 Investment - Linked Life Insurance Products

9.5 Other Comparison - TransparencySelf-assessment Questions

7 HOW INVESTMENT-LINKED LIFEINSURANCE PRODUCTS WORK

7.1 Introduction 7.2 The Working Of Investment - Linked Life Insurance 7.3 Top - Ups 7.4 Single Premium Policies - Methods Of Calculating Benefits 7.5 Withdrawal Benefit 7.6 Surrender Value 7.7 Death Benefit7.8 Regular Premium PoliciesSelf-assessment Questions

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10 TAXATION AND LAW COVERINGINVESTMENT - LINKED LIFE INSURANCE PRODUCTS

10.1 Introduction10.2 Taxation Of Investment - Linked Life Insurance

10.3 Law Covering Investment - Linked Life Insurance

10.4 Other Legal RequirementsSelf-assessment Questions

IDENTIFYING AND ESTABLISHING CUSTOMER NEEDS

11.1 Introduction

11.2 Establishing Relationship With The Client

11.3 Gathering All Relevant Financial Data

11.4 Establishing Current Financial Position And Goals

11.5 Developing Plans And Strategies To Meet The Goals

11.6 Discuss Possible Recommendations

11.7 Implementation Of The Agreed Recommendations

11.8 Monitoring The PortfolioSelf-assessment Questions

MARKETING AND AFTER SALES SERVICES, ETHICS AND CODE OF CONDUCT

12.1 Introduction

12.2 Marketing 12.3 Ethics And ConductSelf-assessment Questions

ANSWERS TO SELF - ASSESSMENT QUESTIONS

8989

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1INTRODUCTION TO INVESTMENT - LINKED LIFE INSURANCE

I N T R O D U C T I O N T O I N V E S T M E N T - L I N K E D L I F E I N S U R A N C E

1.1 INTRODUCTION The insurance industry in Malaysia has experienced a steady growth in the last 15 years. Part of this growth is due to the fact that, Insurance companies in Malaysia have stepped up their efforts in designing and offering very good plans that are more customer-centric. These changes have augured well for the whole industry. The new plans have been well received by the market and one of the most popular products is the Investment-Linked Life Insurance plans. It is reported, according to Bank Negara’s DGI report 2009, that the total number of new life insurance policies has grown from 498,338 policies in 1990 to 1,403,562 policies in 2009.

One very interesting fact is that, part of the reason for this growth was the introduction of Investment-Linked Insurance plans in Malaysia. This plan was first introduced in the late 1990s and has seen a very steady growth. Bank Negara’s report also shows that, distribution of annual premiums that has gone into Investment-Linked Insurance policies has gone from 25.7 % in 2005 to 30.6% in 2009.

We have also seen that more and more insurance companies are moving away from sellingtheir traditional Whole Life and Endowment plans and have included many Investment-Linked plans in their portfolios. We see this as a positive move. Malaysians are becoming more discerning and now, they want to make sure that they are in control of the kinds of investments they choose. The Investment-Linked insurance policies, allows them to do this. Policyholders are quite happy to buy Investment- Linked policies because they can choose the amount of coverage needed and still enjoy a sizeable return on their savings.

So, what is an Investment-Linked Insurance policy? An Investment-Linked insurance plan offers a policyholder or investor a policy that is directly connected to investment performance.In other words, this plan not only offers the policyholder, a chosen amount of insurance cover but also provides that a portion of the premiums paid, is used to purchase funds in one or an array of investments offered by the insurance company.

Policyholders must be told and made aware of one very important fact when they choose the Investment-Linked policy, that the policy is directly linked to investment performance. The value of the policy is translated into units in a chosen fund or funds that is/are operated by the insurer. Sometimes, the insurance company may also channel these funds to an appointed fund manager to manage these funds. Thus it must be made known to the policyholder that these funds are exposed to the everyday fluctuations of market forces and they will and can fluctuate accordingly.

Policyholders must be made aware that the value of the units, directly reflects the values of the underlying funds. Benefits are therefore expressed in investment at their market value at the time the benefits are paid. To put it simply, policyholders must be made aware that their Investment-Linked plan can go to zero or grow at a good rate over time. There is a possibility that if the funds do badly, they can lose all the premiums paid and also the coverage provided. It is also important to know that the opposite of this can also take place and they can reap a good rate of return in the future.

This policy is designed to shift the uncertainty of investment gains or losses to policyholders and it does not provide any guarantee of either interest rates or minimum cash values. Theoretically, the cash value can go down to zero, and if so, the policy will terminate. This is because the policyholder must realise, that in order to gain the additional benefit of better-than-expected investment returns, they also have to assume all the possibility of investment losses.

The investment fund that is used for the Investment-Linked policy can have a wide range of investment modes. It also can cover a wide area of investments like equities or stocks, bonds , fixed interest , foreign funds , real estate, currency and so on. These funds can either be ‘external unit trusts’ or an ‘internal unitised investment -linked fund’ Please remember that an internal unitised investment-linked fund is part of the life insurance fund of a life insurancecompany. Thus, the policyholders are offered a range of unit-linked funds in which they can invest.

Investment-Linked Insurance plans are not a new phenomenon in the Insurance industry. Investment-Linked policies have been around for a long time but it was only introduced in Malaysia in the late 1990s. For the purpose of this study, we will use the term “Investment-Linked” to mean the same plans sold in Singapore and also similar to the term “Unit-Linked” in the United Kingdom and to the term “Variable Life” in the United States.

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SELF-ASSESSMENT QUESTIONS

CHAPTER 1

1. What was the main reason for the steady growth of the Insurance Industry in Malaysia?

a. The liberalisation of regulations by the Ministry of Finance and Bank Negara Malaysia. b. The introduction of Investment-Linked policies. c. The efforts by insurance companies to design and offer customer-centric and good plans. d. The robust growth of the country’s economy.

2. What is an Investment-Linked policy?

a. A participating Whole Life Policy. b. A Capital and returns guaranteed policy. c. An endowment policy only. d. A plan that offers clients’ coverage and investment returns.

3. All the following statements are True, except;

a. The Investment-Linked policy is directly linked to investment performance. b. Once the policy is in force, the clients’ investments will grow steadily. c. Fund Managers will make sure that the Investment Linked policy is shielded from market fluctuations. d. The Investment Linked policy only provides coverage and nothing else.

4. Investment-Linked Insurance policy is named as the following around the world except

a. Mutual Fund-Linked Policy. b. Unit-Linked Policy. c. Variable Life Policy. d. Takaful Investment-Linked life.

5. “... is designed to shift the uncertainties of investment gains or losses to the policy holders...” The excerpt describes what of the following accurately?

Policyholders who choose to take Investment-Linked policies must realise that they are also responsible to monitor the performance of their policy to ensure areasonable return.The chances that the policy values going to zero is impossible because the FundManagers, companies and agents will ensure that the policy is profitable at all times.Insurance companies, Fund Managers will wash their hands off the policy oncethe policy is taken and leave it solely to the agents and policy holders to monitor it.Agents are responsible to the clients’ only and must ensure that they monitor the policy atall times.

a.

b.

c.

d.


4

An Investment-Linked plan has the following features :- 6.

Provide cover for death and Total Permanent Disability.Participate in investments managed by the Insurer.Can provide a good return if monitored well.Largely depends on the clients’ ability to be good at investing in equities market.

i.ii.iii.iv.

i,ii,iv only.i,iii,iv only.ii,iii,iv only.i,ii,iii only.

a.b.c.d.

YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.

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2KEY CONSIDERATIONS IN INVESTMENT

K E Y C O N S I C E R A T I O N S I N I N V E S T M E N T

2.1 INTRODUCTION

Many people were adversely affected by the 1997 Asian Financial Crisis. They were subjected to a greater loss when the Global Financial Crisis took place recently. Economies collapsed and governments were sent reeling. Drastic actions by governments andindustries were taken to stem the flow and in the overall scenario, many people lost their life savings or saw their savings coming to nothing.

Having been through all these economic upheavals, it is quite a challenge to speak about investments to a client. Clients over the years have become more proficient in investing and most of them learnt it the hard way after being ‘burnt’. Having these economic ‘disasters’ in the back of the head, we must realise that there is an increasing need forsound and proper advice. The majority of Malaysian investors are small time investors, usually investing as retail investors. Most of the time, very little investment research and analysis is done by them. They usually base their investment decisions on hear say news, rumours, gossips, ‘tips’ from their friends and early morning coffee shop conversations.

The main aim of this course is to empower the agent to have some basic knowledge ofhow, what, when, where and why investments must be done. The agent owes the client a moral obligation to educate them with some basic sound investment principles, so thatthe client will be able to make a sound judgement on investments.

There are some basic fundamental considerations that must be taken into account when making a decision on investment. The following key considerations must be made known to the client. A good understanding of these considerations is important before we get into an investment. The key considerations are as follows;

.

2.2 INVESTMENT OBJECTIVES

The objectives for investing our savings are continuously increasing, yet every single investmentvehicle can be easily categorised according to 3 fundamental characteristics i.e.;

a) Safety.b) Income. c) Growth.

1. Investment Objectives2. Availability of Funds3. Risk or Security4. Investment Horizon5. Accessibility of Funds6. Taxation Treatment7. Performance of the Investment8. Diversification

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2KEY CONSIDERATIONSIN INVESTMENT


While it is possible for an investor to have more than 1 of the objectives above, the success of one must come at the expense of the others. Let’s look at the 3 fundamental characteristicsmentioned above a little more closely;

a) SAFETY

It is not wrong to say that there is no such thing as a completely safe and secure investment. We can get close to ultimate safety for our investment through the purchase of Governmentissued bonds or sukuk bonds and also from those found in the money market such as TreasuryBills or Fixed Deposit accounts. (These instruments will be discussed at length in Chapter 3).

These instruments lend a relatively safe investment return but the client has to forego growth and income stream. The returns from these instruments are quite conservative and at best would help the client to create a hedge against inflation.

b) INCOME

The safest investments are also the ones that are likely to have the lowest rate of income as found in Fixed Deposit accounts in banks. If a client wants to see a steady stream of income, then they would have to place their investments in a portfolio that has a higher risk attached to it. The client must be told that there is a RISK – RETURN trade off and they must be able to accept this before venturing into vehicles such as these. As an illustration, the following graph would be a succinct illustration of the fact;

RISK

RETURNSBONDS/FD EQUITY/SHARES

c) GROWTH

Some investors seek growth in their investments. This is ideally done when they invest in growth based investments such as common stocks, commodities and other share based investment. The objective of the client to be involved in these types of investment is to realise capital gains and also to hold the stocks for a long time to derive profits from the growth of the investments. Investors seeking capital gains are likely not those who need a fixed, ongoing source of investment returns from their portfolio, but rather those who seekthe possibility of longer-term growth.

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Depending on the objectives identified above, the person would need to choose between investing in income producing instruments or growth weighted instruments. It must be made known to the client, that different types of investments produce different combinations of income and also the risk factors involved in them.

The agent now has to ascertain, the correct mix of objectives that the client has and the agent has to also analyse the risk-return factors, to realise the completion of these objectives.It is by no means an easy task but it is not impossible either. Making sure that the clients are given a sound understanding of how investments work is the crux of the matter. Identifying the surplus funds that will be utilised to reach these objectives is what the agent must strive to do. In doing so, the agent not only wins the conf idence of the clients but he is in a position to offer proper advice that can be accepted by the clients.

Growth of capital is most closely associated with the purchase of common stocks, particularly growth securities, which offer considerable opportunity for increase in value. For this reason, common stock generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future. Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital, generated by long-term increases in corporate revenues and earnings as the company matures.

OTHER INVESTMENT OBJECTIVES

Whilst the basic objective of every investor can fall into one or more of the 3 categories discussed above, investors also have secondary objectives that are more close to their hearts, that are more focussed for specific needs. The specific objectives of the investor can fall into the following headings;

a) Ensuring a comfortable standard of living.b) Providing funds for their dependents.c) Providing funds for education and up bringing of their children.d) Improving their financial position.e) Hedging inflation.f ) Liability cancellation.g) Retirement income.h)Achieving Financial Freedom.i ) Achieving a state – Beyond Financial Freedom.j ) Funds for paying necessary expenses and taxes when a person dies.

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A) SIMPLE MONTHLY CASH FLOW ANALYSIS

No Income (A)

RM Expenditure (B) RM1 Salary- 5,000.00 Rental/Housing Loan Payments 2 Rental- 500.00 Groceries and U�li�es -3 Commissions- 1,000.00 Childcare/Parents allowance -4 Others- 1,000.00 Educa�on Expenses -5 Loans (Car,Credit Cards etc) -6 Insurance Premiums -7 Savings -8 Misc -

TOTAL 7,500.00

1,000.00750.00500.00250.00

2,000.00500.00500.00

1,000.006,500.00

Thus, by this simple analysis we can identify that, this client has RM 1,000.00 a month as surplus funds and this can be utilized to fund an investment plan.

B) A SIMPLE NETWORTH ANALYSISNO ASSETS ( Present Value) AMOUNT LIABILITIES AMOUNT1 House 220,000.00 Housing Loan Balance 200,000.002 Car 30,000.00 Car Loan Balance 35,000.003 EPF 20,000.00 Credit Card Balance 5,500.004 Savings Account 1,500.00 Personal Loan Balance 10,000.005 Ins. Cash Value 20,000.00 Others 15,000.00

TOTAL 291,500.00 265,500.00

2.3 FUNDS AVAILABLE

It is very important for a client to know how much funds are available for him to invest. The level of funds available will ultimately affect the investment decision. To do this, it is important for everyone to have a personal budget drawn out. The biggest challenge many of us face, about investments is finding enough surplus funds. Most of the time we are engrossed in balancing our income and expenses, and we often forget the need to do a proper budget. Drawing up a personal budget allows a person to take control of spending and find enough money to save and invest for vacations, retirement and your children’s education.

It is important that each client is exposed to the fact, that they would have to do a Cash Flow and Net Worth analysis, before getting into any investment decisions. These analysis will then be able to assist the client to make sure that they have enough money to put aside for investments and that they will be able to follow through with the investments financial obligation. It will be useless if the client agrees to an investment plan purely based on the enthusiasm created by the agent and the prospects of making money. Therefore, having a Cash Flow and Net Worth analysis done is important. For the purpose of this course, we will not indulge in a detailed method of Cash F low and Net Worth analysis but a simple method can be utilized as illustrated below;

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2.4 RISK OR SECURITY

There is a trade-off between expected return and risk that should prevail in a rationalenvironment. Investors unwilling to assume risk must be satisfied with the risk-free rate ofreturn. If they wish to try to earn a larger rate of return, they must be willing to assume a larger risk.

The first thing about learning how to invest in the stock market is to know what kind ofinvestor risk profile you have. In so doing, you will determine how best to allocate your savings amongst various asset classes. Not knowing what kind of risk profile you have or what you are investing in may cost you financially. For example, if an 80 year old is found to own very aggressive funds, or a single person in their twenties has investedpurely in bonds, shows that a risk profiling exercise has not been done. Not having the stomach or r ight disposition may make you cut in and out of investments, that is detrimental to your portfolio and before long, you will find yourself wondering why you are left with a so little money of what you had initially.

What’s Your Investment Risk Profile? Know Yourself!

Investing is a way to make your money work for you so that you can take calculated risks for the promise of a better reward: much better than simply stuffing your money in ahidden corner somewhere in your house. The more you know about risk and how it can affect you and your situation, the better off you will be. Bottom-line: there is a law that states that your returns are directly proportional to the risk you take. I found this definition of risk to be quite adequate:

The concept of “risk” in investment has to do with volatility or how widely the price of a stock or mutual fund fluctuates. The wider the fluctuations, the higher the risk. This isbecause you stand to make and also lose more money, compared to a fund that doesn’t fluctuate as wildly.

Based on the example above, we can say that the client has a positive Net Worth position whereby, we subtract the ASSETS with the LIABILITIES i.e. RM 291,500 – RM 265,500 = RM 26,000.Based on this analysis we can then offer a viable and simple plan that will meet the client’s investment objectives.

We can save some money even if a major portion of our income goes into servicing various debts e.g. home loan, personal loan or for that matter Credit Card bills we have accumulated. As Warren Buffet advises ”you need to first set aside m o n e y f o r investments before thinking about spending it”. You don’t need a million to start investing. You can start with a humble sum of RM 500 per month and see it grow. Based on the availability of funds, the client can then decide which investments should be chosen and invested regularly. If the client can set aside a fixed amount of current income which is a surplus to his needs, then investment options like investment-linked insurance plans, unit trust and the like can be considered.

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2.5 INVESTMENT HORIZON

Investment horizon can be defined as; the length of time a sum of money is expected to be invested. An individual's investment horizon depends on when and how much money will be needed, and the horizon influences the optimal investment strategy. In general, the shorter the investor's horizon, the less risk he/she should be willing to accept.

Basically Investment horizon can be defined as the total length of time that an investorexpects to hold a security or a portfolio. The investment horizon is used to determine the investor's income needs and desired risk exposure, which is then used to aid insecurity selection.

2.6 ACCESSIBILITY OF FUNDS

We should understand that a client will invest with an objective to make money and he will need the money to settle a specific event. With this in mind, we can divide the accessibilityof funds into 3 clear components;

Risk profiling test and many others like it tend to concentrate on finding out your age, strength of income, family situation, current financial picture, overall tendencies and investment disposition. I would say that one other important element in figuring out where you stand as an investor is, how sophisticated you are and what kind of experience you have with investing. Ultimately, your overall background and attitude about investing will affect how you should proceed.

Following on from this investment concept, “aggressive” or “high risk” means that a mutual fund or stock can potentially achieve higher returns because of greater volatility. In contrast, “low risk” or “conservative” means that a stock or mutual fund will trade close to itshistorical average prices and will tend to be quite stable.

If a client needs the fund in a short p e r i o d o f time, the client would not want to place his money in an investment, that will not allow him to unlock it in a time frame that is short. It would be meaningless for him to place his investments in a long terminvestments like real estate or long term bond funds. When he decides to take the money back, he might not be able to realize the returns expected and at times might have to pay a penalty for exiting early.

The second element is the cost or penalty that the client has to pay if he exits early. This is important because if the cost is going to be very big then it defeats the purpose of the investment objectives. Thus it is important to make sure that the funds can be taken out without having to pay hefty penalties.

The third considerat ion is how much is i t going to cost the client to get into an investment? It is important for us to tell the client the exact amount of money that is needed to set up the investment account and its cost. It would be very helpful if we can clear this upfront with the client before the investment is set up.

a)

b)

c)

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2.7 TAXATION TREATMENT

A client should consider the different tax treatment on different types of investmentsbefore making a decision on what to invest. Different types of investment portfolios attract or enjoy a wide range of tax treatment. Knowing how the tax treatment for the particular investment portfolio is important before the investment decisions are made.

As far as Investment-Link insurance is concerned, there is no specific tax laws regarding this and the Investment-Linked plans enjoy the same tax treatment as the traditional plans. (Chapter 10 will deal with the tax issues in detail).

2.8 PERFORMANCE OF THE INVESTMENT

The performance of an investment depends on the following factors:

These are some of the considerations that must be taken into account when we make an investment decision.

a) Country’s economic factors.

b) Regional and Global economic factors.

c) The competencies and capabilities of the management team.

e) Performance also depends on the past experience.f) History of the invested company..

g) Life cycle of the investment.

d) The invested company’s level of costs.

2.9 DIVERSIFICATION

Diversification in investment is the process of investing across different asset classes andacross different market segments. Diversification is a strategy used by professional fund managers that has proven effective, in reducing risk without sacrificing returns. Investors should also try to invest in a range of investment vehicles when they decide on their investment portfolio.

Diversification can substantially reduce risk with small reductions in return. It involves the spreading of risks by putting the money under management into several categories of investments such as shares, bonds, money market instruments and real estate investment trust(REITs). Diversification can also be achieved by buying shares in different countries and by choosing different types of shares.

Chapter 3 will discuss these areas in detail and illustrate the various options available in investments for the clients.

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Why do you think, client’s nowadays are averse to investments?1.

The adverse economic conditions, in the last 15 years, have made them be wary of investments.The fall of many established financial institutions in the last few years.The stock market cannot be approached by ordinary people.Many investors have seen their fortunes dwindling, due to the financial crisis.

i.

ii.iii.iv.

i,ii,iii only.i,ii,iv only.ii,iii,iv only.i,ii,iii,iv.

a.b.c.d.

CHAPTER 2

An agent owes the client a moral obligation to...2.

educate a client to be an expert investor.to recommend specific funds to invest in.educate clients’ with some basic and sound investment principles.make decisions on behalf of the client.

a.b.c.d.

What considerations must be taken before making an investment decision?3.

Investment objectives, Availability of Funds, Diversification.Risk or Security, Promised Money, Tax issues.Investment Horizon, Performance of Investment, Accessibility of Funds.Economic Reports, Insurance Companies Asset base, Government Regulations.

i.ii.iii.iv.

i.iii only.i,ii only.i,iv only.iii,iv only.

a.b.c.d.

Clients want to invest;4.

to lead a comfortable lifestyle.to be comfortable during retirement.to amass great wealth.to provide adequate funding for their children’s needs.

i.ii.iii.iv.

i,iii.iv only.i,ii,iii only.i,ii,iv only.ii,iii,iv only.

a.b.c.d.

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What must an agent do to ensure the client is given proper advice on investment?5.

Ensure that there is a right combination of objectives and make sure proper risk analysis is done.Show the wide selection of investment for the client to choose from.Motivate the client to borrow money to invest in guaranteed investment vehicles.Ensure that the advice is advantageous to the agent and the insurance company.

a.

b.c.d.

Why is diversification in investment recommended?6.

So as not to be exposed in one particular class of investments.To even out market fluctuations and not suffer too much losses.To ensure the investments will always do well.To ensure that they can realise their financial objectives faster.

i.ii.iii.iv.

i, iii only.i,ii only.ii,iv only.iii,iv only.

a.b.c.d.


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3TYPES OF INVESTMENTASSETS

T Y P E S O F I N V E S T M E N T A S S E T S

3.1 INTRODUCTION

It is now possible for Malaysians to invest in a wide range of investment vehicles. Over the last 15 years the choices made available has been steadily improved and it is heartening to know that the Government is very pro-active in promoting the growth of these areas. It is also a sign of success when we see F inancia l Ins t i tu t ions and the man on the street responding positively to the new investment choices. In this chapter, we will look at the range of investment choices available to individual investors.

3.2 INVESTMENT CHOICES

3.3 CASH & DEPOSITS

The term cash and deposits refers to all liquid instruments that carry little or no risk. The possi-bility of losing the principal amount invested is very low.

Strictly speaking however, cash cannot be considered as an investment. Cash is, ultimately, used as a means only to finance investments. The capital value of cash will not increase and will not generate any additional income. It has no value in itself. It is of value only as a medium of exchange.

For the purpose of this course however, the definition of cash will include short-term debt instruments. These cover:-

a) Treasury Bills.

b) Bank accounts.

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.

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3.3.1 TREASURY BILLSThe Government plays a very important part in the life of its citizens. It has to make sure that the country has adequate amenit ies and ut i l i t ies that will serve the people well. Roads, schools, hospitals, security inside and outside the country have to be taken care off. This list is not exhaustive. To a large extend, the Malaysian Government finances these amenities funded by the taxes collected by the Government. However, total governmentexpenditure cannot be fully funded by taxes alone, thus the government has to come up with some borrowing on a short-term basis.

One of the methods used by the Government to borrow money from its citizens is via the issuance of Treasury Bills. These are short-term government funding vehicles issued on a regular basis with repayment normally within a year. The Treasury Bills are 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.

3.3.2 BANK ACCOUNTS

These are time or fixed deposits placed with banks for fixed periods with fixed interest rates for that period. Generally, the longer the deposit period, the higher will be the interest rate. Some of the accounts available are Savings Accounts, Current Accounts, Fixed Deposits, Investment Accounts, Time Deposits and Offshore Accounts.

The factors that may influence the choice of deposits are as follows;

Funds available for investment. The duration the funds can remain in the account. Will there be emergency withdrawals. Prevailing market conditions.

As all banks in Malaysia are licensed and regulated by Bank Negara Malaysia, there is very little risk of loss of principal and interest. The Malaysian government has at all times assured depositors that their money is safe with the banks. A good initiative to further strengthen the confidence level of depositors, was the setting up of PERBADANAN INSURANS DEPOSIT MALAYSIA (PIDM).

PERBADANAN INSURANS DEPOSIT MALAYSIA (PIDM).

PIDM is a Government agency established under the Akta Perbadanan Insurans DepositMalaysia 2005 to protect you against, the loss of your deposits in the unlikely event of a bank failure, and promote financial system stability.

PIDM was set up to protect Islamic and c o n v e n t i o n a l d e p o s i t s , provide incentives for promoting sound risk management and promote and contribute to the stability of the financial system in Malaysia.

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What Is Deposit Insurance?

Deposit insurance is a system that protects depositors against the loss of their insured deposits,placed with banks in the unlikely event of a bank failure. It is established by the Government to enhance the consumer protection framework and promote financial system stability. It is notrelated to or managed by general or life insurance companies. Generally, it is a Government sponsored scheme, although in certain countries it is sponsored by the banks.

The deposit insurance system in Malaysia was launched in September 2005 and is managed by Perbadanan Insurans Deposit Malaysia (PIDM). PIDM is a Government agency establishedunder the Akta Perbadanan Insurans Deposit Malaysia 2005.

The benefits to depositors are :-

Deposit insurance protection is automatic. PIDM protects depositors holding deposits with banks. There is no charge to depositors for deposit insurance protection. Should a bank fail, PIDM will promptly reimburse depositors their deposits.

The benefits to the financial system are :-

PIDM promotes public confidence in the Malaysian financial system by protecting depositors against the loss of their deposits.

PIDM reinforces and complements the existing regulatory and supervisory framework by providing incentives for sound risk management in the financial system. PIDM minimises costs to the financial system by finding least cost solutions to resolve troubled banks. PIDM contributes to the stability of the financial system by dealing with bank failures expeditiously and reimbursing depositors promptly.

With the introduction of a deposit insurance system in Malaysia, depositors receive protectionfor their deposits under the law. Depositors will know how and when reimbursement of their deposits will be made in the event of a bank failure.

As set in the Akta Perbadanan Insurans Deposit Malaysia 2005 PIDM’s objectives are as follows :-

Administer a deposit insurance system. Provide insurance against the loss of part or all of deposits of a financial institution. Provide incentives for sound risk management in the financial system. Promote and contribute to the stability of the Malaysian financial system.

Besides the above mentioned objectives, PIDM's main functions are to :-

Assess and collect premiums or fees from banks. Manage the Deposit Insurance Funds. Undertake resolution of non-viable banks. Reimburse depositors should a bank become insolvent. Comply with Shariah principles in respect of Islamic deposits and funds. Conduct ongoing public awareness and education initiatives.

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3.4 FIXED INCOME SECURITIES

A group of investment vehicles that offer a fixed periodic return is known as Fixed Income Securities. It is a security or certificate showing that the investor has lent money to the issuer, usually a company or a government, in return for fixed interest income and repayment of principal at maturity. Fixed income securities can be regarded as IOUs issued by companies or government to raise funds.

Fixed income securities generally stress current income and offer little or no opportunity for appreciation in value. If there is an active secondary market, they can be bought and sold at anytime before maturity. This marketability gives the investor the opportunity to realise capital gains since fixed income securities prices may rise if interest rates fall. However, if the secondary market is inactive, the investors’ money is locked up for the full life span of the security.

The types of Fixed Income Securities include :- a) Money Market Instruments (as discussed under 3.3 on Cash and Deposits). b) Government Bonds. c) Corporate Bonds. d) Preference Shares (discussed under 3.5 on Shares later in this chapter).

3.4.1 GOVERNMENT BONDS

Government bonds are effectively financial instruments used by the government to borrow money from the public. Government bonds are the safest types of investments, carrying almost no default or credit risk, since the government guarantees interest payments and repayment of the principal. The term and interest rate of government bonds are fixed and usually issued in multiples of RM 1,000. The investor gets the interest and his capital back on maturity.

Government bonds can be classified according to the maturity period as follows:- Short term bonds, usually less than five years to maturity. Medium term bonds, usually five to ten years to maturity. Long term bonds, usually more than fifteen years to maturity.Government bonds are issued from time to time by the government when it wants to raise money to finance government projects aimed to serve the people of the country.

3.4.1.1 ADVANTAGES AND DISADVANTAGES

Government bonds are backed by the government. They are considered to be very safe. The marketability and income for the future is guaranteed. The only disadvantage is in times of high inflation, capital can be eroded when money is invested in these types of investments.

Deposit insurance is recognised internationally as an important component of a country’s financial safety net and has been implemented in some 100 countries around the world.

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3.4.2 CORPORATE BONDS

3.4.2.1 DEBENTURE STOCKS

Companies can also issue bonds or loan stocks to raise capital. Just as the governmentraises capital to fund its development programmes, these companies also raise these instruments to fund the growth of their companies operations. Corporate bonds can be classified under three categories. They are as follows :-

Debenture stocks. Loan stocks. Convertible stocks.

Debenture stocks are effectively secured loans to a company. The security is either a fixed charge on the company’s property or some of its assets such as trading stock. If the companydefaults on the loan, the investor can take over the said assets and sell them to get his money back.

Trustees are appointed on the issue of stocks, to supervise the way the company performs its obligations concerning the payment of interest and capital. In the event of a default, the trustees act for the investors.

Like government bonds, debenture stocks pay fixed interest rates for a fixed term at the end of which the capital is repaid.

The company also has an option to repay the debenture stocks earlier, if it wishes to do so. Corporate stocks are not as secure as government bonds as the government does not guarantee them. A company can become insolvent and be unable to pay the interest due. Hopefully, the charge on property would mean that this could be sold to repay the capital, b u t a forced sale might not r a i s e e n o u g h m o n e y to cover the capital.

Interest rates for corporate bonds tend to be higher than government bonds as the security is lower.

3.4.2.2 LOAN STOCKS

These are unsecured loans to a company. Both the interest rate and term are fixed.

If the company defaults, the investor has no security and thus is in the same position as all the other unsecured creditors of the company. The investor may or may not get back his capital depending on the company’s performance. Compared to debentures, loan stocks are much less secure and therefore they carry a higher interest rate.

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3.4.2.3 CONVERTIBLE STOCKS


3.5 SHARES

The difference between convertible stocks and the above two (i.e. debenture and loan stocks) are that, it can be converted to ordinary shares of a company on a fixed date.

On that date therefore, the investor can convert his investment from a fixed interest loan, to being a part owner and is entitled to a share of its profits through dividends declared. The decision to convert depends on whether dividend income and capital appreciation in share price are better than the fixed interest given.

In general, corporate bonds tend to give a higher return than government bonds. For some investors, they are also m o r e m a r k e t a b l e a n d can be sold for capital gains. However, they are more risky than government bonds.

Shares are different from stocks, in that, a shareholder is a part owner of the company. A company is a separate legal entity, which is to say, that it is owned by all of its shareholders. The shareholders control the company through the fact, that basically each share carries one vote at company meetings. The shareholders can then decide on major issues and vote in new directors to run the company if they wish. Shareholders are not liable for the debts of the company.

Each company maintains a register of each shareholder and each shareholder gets a share certificate as evidence of ownership.

Companies can be public or private. Generally, private company shares are not listed in the Stock Exchange and are not available to ordinary investors. Public limited company shares can be quoted in the Stock Exchange if they meet the Exchange’s requirements.

Shares of listed companies are easy to buy and sell through stockbrokers. In theory, the shares can be bought and sold on any working day, although on a new issue of shares in a popular company, there may be more would be buyers than shares available. Equally, if a company is in trouble, there may be no buyers at all.

The value of a share fluctuates according to the market’s view of the worth of the company. If a company is doing well, its share prices will tend to rise and if it is doing badly it will tend to fall.

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3.5.1 ORDINARY SHARES

Share prices are also influenced by other factors, such as how the country’s economy is doing in the overall sense, the general level of interest rates, inflation rate, company’s earnings and currency performance. Since we are living in a more connected globalised era, sometimes adverse events in other countries and adverse performance of other major stock exchanges wi l l also affect the performance of the local stock exchange.

A share can thus, be a volatile investment. A shareholder must therefore realise that he could lose all his money in the invested share. In theory, the chances of this happening should be reduced by investing in shares of large, well established, well managed and reputable companies, but events like the Asian Financial Crisis in 1998 and the Global Financial Crisis in 2008 has shown, that this rule of thumb can sometimes be wrong in real life.

The cost of buying and sell ing shares include stockbroker’s commission as well as the difference between buying price and selling price.

In this section we will dissect the following :-

a) Ordinary Shares.

b) Preference Shares.

The holder of an ordinary share in a company is a part owner of the company and is entitled to share in its profits in the form of divide n d s . D ividends are paid out of the company’s profits as decided by the directors.

There is no certainty that a company will make profits and thus there is no certainty that there will be a dividend. However, a company’s track record can be inspected to judge whether profits are likely to be made and dividends paid.

Dividends are usually paid bi-annually, and provide income from the investment to the shareholders.

An investor will also hope to make a capital gain from the shares by an increase in the share price, although this is in no way guaranteed. The price of a listed share will fluctuate from day to day according to the company’s progress and general economic conditions. Announcements of high profits and dividends will tend to increase the price. Low profits have the opposite effect.

A shareholder can always realise his investment by selling the shares. This may be easy for a successful, listed company. Shares are thus a risky investment. An investor could lose all his money, particularly if he only invests in one company’s shares. A portfolio of shares in different companies is thus more advisable than having al l one’s eggs in one basket. Dividends on shares are paid net of basic tax rate. Profits that are made via capital gains are not liable to tax.

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3.5.2 PREFERENCE SHARES

3.5.3 ADVANTAGES AND DISADVANTAGES

3.6 UNIT TRUSTS

By investing in shares, the investors participate directly in the future of the company. Shares also provide good dividends and capital appreciation. They are also very liquid, as shares can be traded in the open market. However, as mentioned before, shares can be very risky as the value can go below the price the shares were originally bought for.

These are shares which gives the holder a right to a fixed dividend provided enough profit has been made. This right takes precedence over the right of ordinary shareholders to dividends. Preference shares differ from stocks, in that although the income is fixed, it is not interest payment and they may not be paid if profits are not made.

Preference shares differ from ordinary shares in that the dividend will never be more than the fixed rate, even if profits are more than enough to cover it. They are therefore, slightly more secure than ordinary shares but less profitable.

Unit trusts are useful vehicles for small private investors. This is true when investors, who do not have sufficient funds and/or time, to receive the benefit of professional investment management, access to a diversified range and spread of investments which is not readily available to them individually. The investment in unit trusts could generate income in the form of dividends, interest and capital gains.

In Malaysia, unit trusts are author ised and supervised by the Securities Commission.

A unit trust is a pool of funds contributed by many investors kept in trust by a trustee(usually a bank) and managed by a professional fund manager.

A unit trust is established by a trust deed. This deed enables a trustee to hold the pool of money and assets in trust on behalf of the investors. Another party, the investmentmanager (also called fund manager), manages the pool. The fund manager manages the portfolio of investments and operates the market for the investments (i.e. administers the buying and selling of shares in the unit trust itself). The unit trust is essentially a three-way arrangement among investors, the trustee and the fund manager.

The investments of the unit trusts, though selected and managed by the fund managers, are legally owned and held by the trustee for the benefit of the investors (who are the unit-holders). The trustee must ensure that the fund managers adhere to the provisions of the trust deeds and act accordingly to protect the unit-holders.

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Investors buy units in the unit trust at the offer price calculated as per the trust deed. Units can be sold back at any time at the bid price.

It is not necessary to use a stockbroker and sales can be made without the need to find a purchaser, as would be in the case of shares. The fund manager can create as many new units as investors require and can cancel units, if new purchases are exceeded by encashment, i.e. the amount of cash that the units can be converted into.

Unit trusts however have no fixed redemption date. The trusts are open-ended funds and, if too many investors cash their units, the trust will have to sell the fund’s assets.

The unit trust investments fluctuate in line with the stock market prices and it also involves up-front charges. Unit trusts should not be seen as a very short-term investments option.

When investing in Unit Trusts, an investor can choose from an array of unit trusts funds with different investment objectives. These unit trusts can also be invested in a wide range of market instruments to provide the diverse appetite of the investor. A unit trust may aim for high income or a high capital growth, or a combination of both. Some unit trusts also invest in specific countries or regions.

It is important that the types of unit trusts chosen, match the investment objectives of the particular investor. All unit trusts are required to clearly state their investment objectives in their prospectus. Every investor should have this prospectus and read and understand it before buying into the trust. The types of assets that may be bought by the fund manager are also specif ied in the object ives of the trust c o ntained in the trust deed.

Examples of unit trusts include those marketed by Amanah Saham Nasional, Public Mutual Fund, Hwang DBS and a whole lot more.

The advantage in unit trusts is the spread of investments open to unit-holders. In addition, unit trusts have lower risks when compared to shares. Furthermore, professional investment services are provided by the fund managers and this minimises paper work to the investing unit-holders. Income from dividend can also be reinvested. Nowadays, the investor can utilise a portion of his contribution to the Employees’ Provident Fund (EPF) from account A to purchase EPF approved unit trusts from the Unit Trusts companies in Malaysia. This withdrawal can also be done on a regular basis provided all EPF terms and conditions are met.

The trust deed sets out :- The fund manager’s investment powers; The price structure; The registration of unit-holders; The remuneration to the fund managers; The accounting and auditing rules.

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3.7 INVESTMENT TRUSTS


The function of the investment trust is similar to that of unit trusts, i.e. to make investment much simpler, more accessible and more cost effective for small investors.

It is important, however, to recognise that an Investment Trust Company, is a company registered under the Companies Act. An investor is therefore purchasing shares in that company. The company itself will invest in a wide range of equities and other investments.

Investment trusts, like unit trusts, both pool contributions from their investors, and the total fund is then managed by specialist fund managers, whose function is to buy and sell shares of the trust to make investment profits.

Those profits increase the value of the fund and the value of each investor’s share, if the fund increases. If the trusts suffer losses then the investor’s share will be reduced in value and the price of his units will fall.

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.

If the Investment Trust has 10 million units and the investments could be sold for RM 20 million, then the bid price will be RM 2 per unit. There is a spread, generally around 5% between the bid and offer price, which is effectively a form of charge. There is also an annual management fee deducted by the fund managers from the income of the trust.

Investment trusts should also not be seen as very short term investments of less than, preferably,three years. Investment trust generally has a higher risk/reward profile than unit trusts.

Examples of an Investment trust is the listed Seacorp Schroders, ICapital.biz

These are similar to unit trusts mentioned above, except that investment trusts are more flexible as investors can borrow to finance their purchases of the investment trusts. This can be very beneficial to the investment trust holders. However, with the flexibility to borrow funds to purchase the investment trusts also means that investors are open to greater risk exposures if the price of investments suddenly goes down.

The disadvantage in unit trusts includes the bewildering array of funds, the extra costs or charges which must be paid when purchasing the units and also when switching from one fund to another.

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3.8 PROPERTIES

3.8.1 REAL ESTATE INVESTMENT TRUST. (REITs)

Real Estates have always been part of the investment scene. There are basically three types of real estate investments. These are agricultural property, domestic property and commercial/industrial property both locally and overseas.

The price of an agricultural property depends on the following factors;

Quality of land as reflected on the quality and profitability of crops it grows. The location of the land. The value of the buildings on the land.

On the other hand, the price of domestic and commercial/industrial properties generally depends on the location and types of buildings on the land.

Besides investing in the original form of Real Estate properties i.e. land, building, houses etc, there is now a new form of real estate investment available to the Malaysian public. It is known as Real Estate Investment Trust ( REITs).

A new asset class investment option has emerged with potential fair return of investment in Malaysia. REIT - also known as Real Estate Investment Trust has a similiar concept like unit trust.It operates in a similiar fashion like unit trust whereby money that goes into this investment is gathered from all size of investors. REITs based companies will invest, manage and distribute rental as dividend back to the investors. It is also being trade in Bursa Kuala Lumpur with ease of buying and selling back like a normal equity.

REITs is not new to the world, in many other developed countries, REITs has been developed for decades - with steady fixed income as opposed to fixed deposit as an alternative.It targets long term investor with moderate risk such as insurance companies, pension funds, unit trust funds and even individual investor. As many investors may not be able to invest in a huge property portfolio, REITs gain strength from pool of funds gathered from the investors and is invested into high profile and high value properties for better return.

REIT returns averagely in develop market is around 3-5% depending on its individual performance.However, REITs in Malaysia are very attractive because, as we are in a so-called last phase of becoming a developed nation, our nation’s property’s values are still behind many developed countries in Asia. This emerges as an opportunity with average attractive yields between 6-8% which is higher than other major developed countries.

As our nation property’s value is undervalued for decades, there will be a high potential of asset revaluation that will bring capital growth to the investor. Typical a potential return will be between 20-30% around a five year period.

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STAREIT, launched in 2006 has, to date, performed at a 7% dividend yield return based on the Net Tangible Asset (NTA) of 97 sen. If compared to fixed deposit of 3-4% and even with goverment based senior citizen bond that offer 5.5%, STAREIT becomes much more attractive to investors in general.

A high perfomance reit is like your property fund manager. They will develop new opportunities, acquire more properties into their portfolios locally and some countries and jointly develop property projects. This will provide even a higher potential return compared to those low to moderate risk investment instruments.

Thus, if you are trying to find a good investment tool for your long term retirement plan, do consider REITs in Malaysia within the next few years. REITs will be attractive with a fair risk to be tolerated compared to Fixed Deposit. As equities are high risk to some extent, bonds have relatively moderate returns, investing in property directly will require high capital investment and also you have to manage all these investment portfolios yourself. REITs will be a good choice as an alternative asset class for investment.

Properties can provide good capital appreciation and a steady flow of income. They are therefore, considered low risk investment especially if you have good tenants and good repayment methods are obtained. By mortgaging the property, capital can also be freed. However, during economic recession, property could be difficult to be disposed off.

3.9 DERIVATIVES

Instead of buying a security outright, an investor can buy a derivative of the security instead. Derivatives are financial instruments whose values are linked to the price of underlyinginstruments in the cash markets. For example, a stock index future is linked to the performance of a specified stock market. Stock options and financial futures are two popular derivative instruments for investors.

3.9.1 OPTIONS

Rather than trading directly in a security, investors can buy a right, not an obligation, to purchase or sell the security at a future date. This is called an option. Option need not be exercised, and often will not be worth exercising.

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A share option is a financial instrument that gives the investor the right to buy or sell a given number of shares of the underlying stock at a fixed price within a specified time period.

The life of an option may vary but the common duration adopted is three, six and nine months. Over-the-counter options can also be bought by institutions for longer periods, from one to five years.

A call option gives the holder of the option the right to buy(or ‘call away’), say, 100 shares of a particular stock at a specified price, premium, any time, prior to the specified expiration date.

A put option gives the holder of this option the right to sell (or ‘put away’), say, 100 shares of a particular stock at a specified price prior to a specified expiration date.

Investors purchasing call options will be hoping that the share price will rise so that when the option is exercised, the premium plus the fixed price will be less than the value of the shares. Call options, therefore permit investors to speculate on a rise in the price of the underlying shares without buying the shares itself.

Investors purchase put options if they expect the share price to fall, because the value of the put options will rise as the share price declines. Put options allow investors to speculate on a decline in the share price without selling the shares short.

Sellers of either of these options will want the reverse to happen so the options will not be exercised and they will profit by the amount of the premium.


By investing in options the investor has the potential to boost profits from share price movements. However, investing in options is also risky as an investor must be prepared to lose all his money.

3.9.2 WARRANTS (TRANSFERABLE SUBSCRIPTION RIGHTS [TSR])

Warrants are similar to that of the call options. A warrant is a corporate-created option to purchase, within a specified time period, a stated number of shares of the underlying stock at a specified price.

Warrants, also known as Transferable Subscription Rights (TSR), give the holder of the option to subscribe the shares in the company

At a pre-determined ratio ( conversion ratio); At a pre-determined subscription price ( exercise price); and

Within a specified time period. The life span of a warrant is fixed at the beginning and cannot be varied.

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Warrants typically have maturities of at least several years, and their terms are notstandardised. Each warrant is unique.

Warrants are seldom issued on their own, but are often issued free and attached to rights or loan stocks as an added attraction or sweetener allowing the corporate issuer to obtain a lower interest rate (i.e. financing cost). Warrants can be detached from the loan stock and sold separately in the securities market. The options 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.

Purchasing warrants is one benefit to investors without a large initial outlay to establish an exposure to shares. The investor will buy the warrant, pay the exercise price at a later date and convert the warrant to the underlying share.

By selling the warrants given to him in the first instance, an investor can benefit from the capital gain. When the price of the underlying shares goes up, the investor may profit by selling the warrant or exercise it to get the stock.

The disadvantage of the warrants is that on expiry, warrants which are not exercised lose their value completely. Unlike ordinary shares, there is no chance for price recovery. Once the warrant has expired, it is worthless. In addition, holders of warrants do not receive any income in the form of interest or dividends. They also carry no voting privileges.

3.9.3 FUTURES

Physical commodities and financial instruments typically are traded in cash markets. A cash contract calls for immediate delivery and is used by those who need a commodity now. Cash contracts cannot be cancelled unless both parties agree. The current cashprices of commodities and financial instruments can be found daily in such sources as the business pages of the national newspapers.

There are two types of cash markets:- spot markets and forward markets. Spot markets are markets for immediate delivery. The spot price refers to the current market price of an item available for immediate delivery. Forward markets are markets for deferred delivery. The forward price of an item is the price of an item for deferred delivery.

Forward contracts are centuries old, traceable to at least the ancient Romans and Greeks. Organised future markets, on the other hand, only go back to the 1860s, with financial futures being relatively new, dating from the introduction of foreign currency futures in 1972.

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Futures markets are, in effect, organised and standard i sed forward markets. An organised futures exchange standardised the non-standard forward contracts, establishing such features as contract s ize, delivery dates and condition of the items that can be delivered. Only the price and the number of the contracts are left for the future traders to negotiate. Individuals can trade without personal contact with each other because of the centralised market place. Performance is guaranteed by a clearinghouse, relieving one party to the transaction from worry, that the other party will fail to honour its commitments.

A future contract between two parties (the buyer and the seller) thus set a price today for an instrument that will be delivered on a specified future date. Stock index futures are futures contracts, based on a particular share price index, constructed to measure the overall price movement of a stock market.

The trading of the index futures involves standardised contracts to buy or sell a hypothetical portfolio of all stocks included in the index at some specified future date, at a price agreed at the time of the deal.

The buyers agree to take delivery and to make cash payment at expiry date, and the sellers agree to make delivery at the same time. The settlement of the contracts is made in cash without the actual delivery of the securities covered by the index. The profit derived from trading stock index futures is determined by comparing the original contract value with the contract value at the time of settlement.


The futures market serves a valuable economic purpose by enabling investors to protect their investments (or hedging) by taking positions, in the futures market to protect the gains they have made in the cash market. The risk of price fluctuations is shifted from participants unwilling to assume such risk, to those who are.

Another economic function performed by futures market is price discovery. Because the price of the futures contract reflects current expectations about the values at some future date, transactions can establish current prices against later transactions.

An investor may also wish to engage in speculative trading and takes on price fluctuation risks in order to have a chance at making large gains. However, a clear understanding of the concept of hedging (which can be briefly described as, assuming of futures positions opposite to cash positions, in an attempt to minimise the risk of financial loss from adverse price changes) and the amount of gain or loss that could result from any change in the price of the index futures contracts is necessary before an investor ventures intoinvesting some of the money in futures contracts.

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3.10 EXCHANGE TRADED FUNDS (ETF)

An exchange-traded fund (ETF), also known as an exchange-traded product (ETP), is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades, at approximately the same price as the net asset value of its underlying assets, over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

Only so-called authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly f rom/to the fund manager, and then only in creationunits, large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates to the net asset value of the underlying assets. Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market.

An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be "ETFs", even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs.

Types of ETFs a) Index ETFs b) Commodity ETFs or ETCs c) Bond ETFs d) Currency ETF or ETCs e) Actively managed ETFs f) Exchange-traded grantor trusts g) Leveraged ETF

3.11 SUKUK BONDS

Sukuk is the Arabic name for financial certificates, commonly referring to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that complywith the Islamic law can be classif ied in accordance with their tradabil ity andnon-tradability in the secondary markets.

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Conservative estimates by the Ten-Year Framework and Strategies suggest that over $1.2 trillion of assets are being managed according to Islamic investment principles. Such principles form part of Shari'ah, which is often understood to be ‘Islamic Law’, but it is actually broader than this, in that it also encompasses the general body of spiritual and moral obligations and duties in Islam. In the Persian Gulf and Asia, Standard & Poorestimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

The Sukuk is similar to an obligation backed by an asset but is not in anyway a bond because it is not based on debt. It can be regarded as a commercial paper which gives the investor a share of ownership in the underlying asset.

The issuer must identify the assets to be sold to investors by transferring it on an ad hoc basis.

Investors enjoy the division of the assets in proportion to their investment and bear thecredit risk of the issuer.

The Sukuk are therefore equity securities which have the following characteristics:

They are issued by pooled funds (Mutual funds) ;They are based on hard assets that generate steady income and expectations;They may be guaranteed or not by their originators;Investors receive a fee equal to the income of the underlying assets;These securities are issued by Special Purpose Vehicles (SPVs), often subsidiaries of banks or trusts called SPV;Most Sukuk are issued in dollars;The Sukuk differ from conventional bonds because they are based on tangible assetsinstead of being based on the debt;There are about fourteen kinds of Sukuk but the most used today are Sukuk Al Ijara and Sukuk Al Mucharaka.

1.2.3.4.5.

6.7.

8.

3.12 CAPITAL GUARANTEED FUND

Capital Guaranteed Fund is an investment vehicle offered by certain institutions that guarantees the investor's initial capital investment from any losses. Even though these products prevent investors from losing their invested capital, they also limit the amount of return that investors can obtain if the investments appreciate. This is how the offeringinstitutions can afford to guarantee the principal investment.

Definition of Capital Guaranteed Fund (CGF)

CGF is an investment vehicle offered by certain institutions that guarantees the investor’s initial capital investment from any losses. When you invest in a CGF, it is guaranteed that you will not lose any money provided that you don’t redeem your investment before the maturity date.

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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 minimumamount normally starts at RM5,000.Not so high entry fee. The service charge is 1.5% practiced by the industry at thismoment.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.

OSK-UOB Capital Guaranteed Funds SeriesRHB Unit TrustHwang-DBS Capital Guaranteed Fund

Some examples of Capital Guaranteed Funds available in Malaysia

1.

2.

3.4.

5.6.

7.

8.9.10.

a)b)c)

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SELF-ASSESSMENT QUESTIONSCHAPTER 3

All the following statements are TRUE, except1.

Cash can be regarded as an investment.The capital value of cash will not increase and will not generate any additional income by itself.Cash deposits are liquid instruments that carry little or no risk when the principal amounts invested can be lost.Cash instruments can include Treasury Bills and Bank Accounts.

a.b.

c.

d.

The following instruments fall under Corporate Bonds EXCEPT;2.

Debenture Stocks.Loan Stocks.Convertible Stocks.Warrants.

a.b.c.d.

What is a disadvantage of investing in Unit Trusts?3.

Unit trusts have lower risk compared to shares.They are managed by professional investment teams.Extra costs and charges are included in this vehicle.Income dividend can be reinvested.

a.b.c.d.

An Exchange Traded Fund is;4.

Stocks traded in the stock exchange.An instrument that only big corporations and institutional players can buy.An investment fund traded in the stock exchanges approximately at the same price as the value of the underlying assets.A vehicle where a client can exchange stocks from one counter to another at any given time.

a.b.c.

d.

Sukuk have the following characteristics EXCEPT5.

They are issued by pooled funds.They adhere to strict Syariah principles.They can be guaranteed or not by their originators.They can only be bought by Banks and Financial Institutions.

a.b.c.d.

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Mr.Indran wants to invest his money in a conservative steady income generating investment vehicles.Your suggestion to him would be to put his money in;

6.

Treasury Bills, Sukuk Bonds, REITs, Preference Shares, Warrants, Derivatives.Fixed Income Securities, Government Bonds, Corporate Bonds.Commodities, Futures, REITs.

i.ii.iii.iv.

i,ii,iii,ivi,iiiii,iiiiii,iv

a.b.c.d.


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4INVESTMENT-LINKED LIFE INSURANCEPRODUCTS-A WORLD SCENARIO

I N V E S T M E N T - L I N K E D L I F E I N S U R A N C E P R O D U C T S - A W O R L D S C E N A R I O

4.1 INTRODUCTIONThe Investment-Linked life insurance product is not a new phenomenon. It has been around for many years in all parts of the world. This new method of providing insurance coverage and at the same time providing investment returns has been practised for a long time. Over the years this product has become more sophisticated and has evolved tremendously.

For the purpose of this course, we will see how the Investment-Linked policy has been in other countries besides Malaysia. We will discuss its presence in The United Kingdom, United States of America, Singapore and in Malaysia.

4.2 IN THE UNITED KINGDOM

The Investment-Linked life insurance business has been transacted in the United Kingdom for more than 30 years. Over this period there has been considerable evolution in the design of the products culminating in the current flexible Investment-Linked whole life plans that, allow the policyowner total flexibility to alter his needs for investment andprotection in accordance to his wishes.

The first Investment-Linked life insurance contract in the United Kingdom was an individual retirement annuity for the self employed. It was introduced by the London & Manchester Assurance Company Limited in 1957. Investment was l inked to an external unit trust.

By 1960, there were six companies offering Investment-Linked life insurance contracts with total new annual premiums of under £ 500,000 and virtually no single premiums policies. By 1970 the number of insurers had grown to 91 and new annual premiums totalled £ 25 million with an additional £53 million in single premiums.

In 1996, approximately 130 companies were writing Investment-Linked life insurance business with total annual premiums of £ 543 million and single premiums of £ 4,448 million. These figures only relate to ordinary life policies and exclude investment-linked executive pension plans, that have also been a major growth area in recent years. The Investment-Linked life insurance business in 1986 represented 30% of all new annualised life premiums.

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.

Life insurance cover was built on a similar basis in order to be comparable with the still popular endowment with profits. The sum insured usually remained level so that the actual amount of risk benefit provided was in reality a decreasing term insurance to supplement the value of the underlying investments.

However, the greater cost of the life cover at the older ages obviously detracted from the investment values, for those who were primarily interested in the investment aspect and only regarded the life insurance element, as a necessity to obtain the substantial tax relief on premiums.

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4 INVESTMENT-LINKED LIFE INSURANCEPRODUCTS- A WORLD SCENARIO


A breed of policy therefore grew up whereby the life insurance cover was only sufficient to make the policy qualify for tax relief (i.e. life cover of 75% of premiums payable).

The life cover was still a decreasing term insurance and often the actual term insurance cover would be extinguished as the investment values surpassed the guaranteed sum insured. In some cases this could occur as early as 5 years on a 10 year duration policy.

The short term (e.g. 10 years) policies were very much geared to investment and hence there was little room in the margins to pay high initial commissions – usually about 25% and rarely more than 40%.

Thus a significant proportion of investment-linked plans both for investment and protection were (and continued) to be sold for longer terms (20 years and above). However, the life insurers realised that there was no longer any need to have a fixed maturity date.

By making the policies “open-ended”, the policy owner could cash in their investments at anytime (usually without surrender penalty after 10 years) and leave the funds with the insurer for longer than perhaps had been originally intended.

Cash values, at various durations, would be shown in the sales literature when the sales presentation was geared to a fix term savings concept. For those who required additional protection, supplementary term insurance or family income benefits would be added to the basic guaranteed sum insured under the investment-linked life insurance policies.

A new generation of Investment-Linked life insurance products evolved in the mid 1970s. Up to that time, Investment-Linked life insurance business had an image of being ‘risky’ as there were few guarantees in the products and in particular there was little to compete with traditionalwhole life insurance with guaranteed sum assured.

The first of the new generation of investment-linked life insurance products was really the Hambro Whole Life Plan introduced in 1977. This was an Investment-Linked whole life plan whereby the sum insured was guaranteed for a given investment of premium for the first 10 years.

At that point (and at 5 yearly intervals thereafter) an actuarial review of the new policy would take place. Hambro Life stated that, “as long as the investment growth was at least 7.5% compounded and that the insured mortality did not differ from the then publishedmortality tables of the Institute of Actuaries”, they would renew the sum insured/premium guarantee for a further 5 year period.

Because they were able to dispense with the long term investment and mortality guarantees,Hambro was able to discount as much as one third off the traditional whole life premium rate. For the first time the charge for the mortality cost was deducted each year on a current cost basis by cancelling the required number of investments.

The Hambro Whole Life Plan was itself superseded as the ‘state of the art’ plan two years later in 1979 by Skandia Life UK. Whereas the Hambro plan had a fixed sum assured per investment of premiums according to age at entry, the Skandia plan allowed the policyowner to select whatever sum insured the policyowner required within a given range of cover.

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4INVESTMENT-LINKED LIFE INSURANCEPRODUCTS- A WORLD SCENARIO


4.4 IN SINGAPORE

4.3 IN THE UNITED STATES OF AMERICAIn the United States of America, investment-linked plans are known as Variable Life insurance. It was offered to the general public in the US in 1976. This was after the investment-linked life insurance products had been successfully marketed in The Netherlands, United Kingdom and Canada.

The marketing of variable life was pioneered by the Equitable Life Assurance Society but the initial success was quite limited. In 1991, variable life insurance accounted for 8% of the individual life market and 28% of the individual annuity market. Whole Life, Universal Life and Term Life made up the balance of the individual life market and fixed annuities accounted for the balance of the individual annuity market.

Compared to the traditional products, variable life insurance was more affected by regulations in the US. Apart from state insurance laws and regulations, variable life contracts are also subject to Federal security laws and are regulated by the Securities and Exchange Commission. Principally, the securities laws governing variable life insurance are the Investment Company Act,1940, the Securities Act, 1933 and the Securities Exchange Act,1934.

The Investment Company Act, 1940 regards entities that investment assets of variable life insurance policyowners as investment companies. This Act regulates the investment company’s marriage merit and operation.

The Securities Act, 1933 requires that potential clients be 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, chargeable fees and expenses and rights of policyowners.

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. Additionally, they must register with the National Association of Securities Dealers (NASD) and pass an examination.

The first single premium investment-linked policy introduced in Singapore was in 1973 by NTUC Income. In 1992, Prudential joined the investment-linked life insurance market with the single and regular premium products. This was followed by other life insurance companies who added investment-linked life insurance business to their portfolio. In the last few years, sales of investment-linked life insurance business in Singapore have grown significantly.

One of factors which contributed to the expansion in Singapore of the 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 1993. This scheme enables the CPF members who have cash of at least S$50,000 in their ordinary account, to invest 80% of the excess in one or more of the eligible investment instruments. Life insurance policy is one of the eligible investment instruments under this scheme.

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4 INVESTMENT-LINKED LIFE INSURANCEPRODUCTS- A WORLD SCENARIO


4.5 IN MALAYSIA

Investment-Linked life insurance products have been around for the last 25 years since the introduction of a simplified form of investment-linked life insurance product sold by Syarikat Takaful Malaysia Sdn Bhd to the public in 1985. Ever since then, the investment-linked insurance plans have taken a major platform in all major insurance and takaful companies in Malaysia. In fact, Bank Negara’s report shows that distribution of annual premiums that has gone into Investment-Linked Insurance policies has gone from 25.7 % in 2005 to 30.6% in 2009. (Premium allocation of RM 1.7 billion in 2005 rose to RM 2.2 billion in 2009).

In July 1997, Berjaya Prudential Assurance Bhd became the first traditional insurance company to launch the investment-linked life insurance product. Since then, most of the traditional insurance companies in Malaysia have developed and included numerous Investment-linked life insurance policies in the platforms. In fact most companies also offer Conventional and Islamic investment-linked life insurance policies to the Malaysian public. Now it is possible for clients to subscribe to these policies to meet their insurance and investment objectives, be they for child education planning or asset accumulation or simply to have a good amount of insurance cover.

The Takaful Investment-Linked Life Insurance policies were developed by the Takaful(Islamic Insurance) companies not due to financial considerations or consumer demands, but purely, they were developed as a response to the religious principles and practises of the Muslims. The premiums received from Takaful policies are invested in stocks and other assets that comply with the requirement of Islamic law and principles. Investments that do not conform to Islamic principles i.e. those considered ‘haram’ in Islam, like businesses that deal with liquor, gambling and whose primary business is interest-based, were left out from the ‘investment basket’ of Takaful based companies. The conventional Insurance companies have also taken heed of this and they too have come up with investment-linked policies that strictly comply with the Syariah laws.

Based on the development in the last 25 years, we can safely say that Takaful based investment-linked life insurance and conventional Investment-Linked life insurance policies are here to stay for a very long time and the clients’ appetite for these sorts of plans are growing steadily. Nowadays it is common to have non-Muslims subscribing to Syariahbased Investment-Linked policies as they have been able to produce good returns yearly.

In 1997, two existing investment schemes of the CPF, that are the EIS and the Basic Investment Scheme (BIS) merged to form a new scheme known as Investment Scheme (IS). The introduction of this scheme allowed more CPF members to invest in a wider range ofinvestment instruments. All CPF members who retain at least the required minimum sum in their CPF accounts, including cash amount will be allowed to invest up to 80% of their remaining CPF balance in all eligible instruments, including those which were previously reserved for the EIS scheme.

Among the life insurance policies, only endowment policies were approved by the CPF Board as eligible investment instrument. This is because of the general focus of endowment policies on investment returns, unlike whole life or term insurance policies where a substantial part, if not the whole of the cost, is used to provide death benefits.

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It would not be wrong to say that, with the development of Investment-linked life insurance policies (both Islamic and Conventional), the Malaysian public has been given a wider choice to pick and choose as to how they would like to invest their money and at the same time sleep peacefully knowing that they have a sizeable cover for any eventualities.

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The Investment-Linked Life insurance policy was introduced to these countries 30 years ago EXCEPT :-

1.

United States Of America.United Kingdom.Malaysia.Singapore.

a.b.c.d.

Adam lives in the UK. He was impressed by the Investment-Linked Life Insurance Policy that you had bought when he was down for a holiday in Malaysia. He now is in London and wants to buy a similar plan. What plan should he say that he wants to buy to his agent?

2.

Investment-Linked Life Insurance Plan.Universal-Variable Life Insurance Plan.Variable Life Insurance Plan.Unit-Linked Life Insurance Plan.

a.b.c.d.

The Takaful Investment-Linked Life insurance plan was developed due to;3.

Meeting the market demands and financial demands.The response to the religious principles and practises of the Muslims.The fact that there were no products suitable for Muslims in Malaysia before this.Tap into a vast and very lucrative insurance market.

a.b.c.d.

All the following statements are false EXCEPT :-4.

Takaful Insurance plans can only be sold by Islamic insurance companies.All insurance companies can develop and sell Takaful products as they wish.Takaful insurance products must adhere to the Syariah law requirements.Takaful insurance can only be sold to and purchased by Muslims in Malaysia.

a.b.c.d.

Which of the following acts do not govern the selling of Investment-linked Life insurance in the United States?

5.

Invesment Company Act 1940.The Securities Act 1933.The Security Exchange Act 1934.The Securities Commissions Act 1983.

a.b.c.d.

The first Investment-Linked Insurance plan was introduced by which company in Malaysia?6.

Mayban Life Assurance Berhad.Syarikat Takaful Malaysia Berhad.Berjaya Prudential Assurance Berhad.Malaysian Assurance Alliance Berhad.

a.b.c.d.

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5TYPES OF INVESTMENT-LINKED LIFE INSURANCE PRODUCTS

T Y P E S O F I N V E S T M E N T - L I N K E D L I F E I N S U R A N C E P R O D U C T S

5.1 INTRODUCTION

Investment-linked life insurance policies were introduced in Malaysia, as a way of offering policyowners, life insurance policies with values directly linked to the investmentperformance. This is usually done by linking the value of the policy to units in a special unitised fund managed by the life office.

5.1.1HOW DO INVESTMENT-LINKED LIFE INSURANCE POLICIES WORK?

Investment-Linked life insurance policies operate on similar principles as unit trust. In Investment-Linked l ife insurance, a major portion of the policy premiums are used to purchase units in the Investment-Linked fund managed by the life offices. Part of the premiums will be allocated for the mortality protection aspects under the policy.

The investment returns under the Investment-Linked life insurance policies are not guaranteed. They are linked to the performance of an investment fund managed by the life office. Ownership of the fund is subdivided into units, each of which represents an equal share of the net asset value of the fund.

The fund invests in assets that fluctuate in value as market prices rise and fall. As the asset value of the fund falls, so does the unit price. The policies therefore lack thesmoothening process of the traditional with-profit life policies and instead reflect, theinvestment performance actually achieved with the policyowners’ money. Different generations of policyowners receive different results. Some do better than others, and it is possible to lose money.

Premiums that the policyowners pay is allocated into units at the unit price, prevailing oneach investment date. Units are al located on each investment date. Units are allocated at the life office’s selling price (called offer price-discussed under definitions).When units are cashed to meet death, maturity, surrender claims or expenses, they are cashed at the life office’s buying price (called bid price). In the case of life funds, the difference between the offer and bid prices in normal market conditions is 5%-6% of the offer price. This difference is known as the bid-offer spread.

Under traditional with-profit life policies, each premium is made up of several elements, one part to provide insurance protection against death, another to cover expenses and sales cost, and the bulk of the premium to be invested. The premium apportionment ofinvestment-linked life insurance policies is similar. The fundamental differences, however, are;

a) traditional with-profit life policies aim to produce a steady return by smoothening out market fluctuations. Investment-linked life insurance policies offer the potential for higher returns but at the expense of market volatility and a higher degree of risk, although, this risk is considerably less if the investment-linked life insurance policy invests in a managed fund, which has a broadly similar investment portfolio as a traditional with-profit life fund ( for example, government bonds, shares and properties).

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investment-linked life insurance policies are likely to offer far more choices in terms of the type of investment funds ( for example, shares, government bonds, property or a mix of all of these).

investment-linked life insurance policies may or may not be more flexible than the traditionalwith-profit life insurance policies.

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 of units of investment.

Unlike traditional with-profit life policies, the peaks and troughs of investment-linked life insurance policies are not adjusted to provide policyowners with a smoothened rate of return, as the net benefits and risks of investment returns are immediately passed to the policyowners.

The structure of policy charges and the investment content of the investment linked life insurance, are more identifiable by the policyowners as they are specified in the investment-linked life insurance policy document. Policy fees, initial set-up cost, mortalitycharges and the amount set aside for investment (and the investment charges) can be determined by a careful study of the policy document and policy statement.

Under traditional with-profit life policies, the expenses of running a life office and acquiring business are covered by making certain charges on the policy issued, both ‘up-front’ and regular policy charges. Such charges under traditional with-profit life policies are not specifically detailed in the policy terms. The policyowner bears some of these charges directly in relation to his particular policy; others are taken out of the life fund as a whole.

By contrast, charges levied on investment-linked life insurance policies are stipulated openly, including the types and levels of charges imposed by the life offices. The charges are likely to be a combination of two or more of the following:

b)

c)

d)

e)

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

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5.2 DEFINITIONS

The policy fee payable by the policyowner is the same as for traditional life insurance policies. It covers the administrative expenses of setting up the policy. As the cost of setting up a big or small policy is almost the same, the life office will normally levy a uniform policy fee on each policy

UNIT TERM DEFINITION

5.2.1 POLICY FEE

5.2.2 ANNUAL FUND MANAGEMENT FEE

The management of the investment-linked fund is handled by professional investment managers. A deduction of a percentage of the investment-linked fund accumulated within a policy’s holding of investment units to cover investment managementcharges will be made. This could be anywhere from 0.5% to 2% of the fund each year.

5.2.3 OFFER PRICE The offer price is the price at which units under an investment-linked life insurance policy are offered for sale by the life office. If the offer price is RM1 and the whole premium amount of say RM 100 is used to buy units, it will buy 100 units.

5.2.4 BID PRICE The bid price is the price at which the units under the investment-linked policy life insurance policy are when the policy matures, or when the policy is surrendered, or at which time units are cashed out to pay for charges under the policy. Bid price is always lower than the offer price at the published date. Assuming that there are no other charges levied, 100 units can be claimed for RM 95 if the bid price is RM 0.95

5.2.5 BID-OFFER SPREAD There is commonly a difference between offer price and bid price, with the offer price being higher than the bid price, usually falling from 5% to 6% of the offer price. The difference is known as the bid-offer spread and is an effective initial charge of 5% or 6% by the life office to the policyowner on every premium made to cover expenses in setting up the policy

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UNIT TERM DEFINITION

5.2.6 REDUCTION IN ALLOCATION OF UNITS-UNALLOCATEDPREMIUMS

5.2.7 INITIAL UNITS

5.2.8 MORTALITYCHARGES

5.2.9 SURRENDERCHARGES

This is a charge deducted from the value of units at surrender and is applicable to policies with uniform allocation. It represents initial expenses which have already been incurred but not yet recovered.

Under this form of charge, the life office does not use all of a policyowner’s premiums to buy investmentunits. The difference representing the life office’s charge to meet marketing expenses and setting-up expenses of the policy. Thus a policyowner may find that only, say 60% of each premium is used to purchase investment units, in say, the first year or two of the policy contract. Some insurers make nil allocation to units until their initial charges have been recouped.

Alternatively, a life office may allocate the policyowner’s entire premium to units. However, the units allocated in the early years will be known as ‘initial units’ and will have a higher annual managementcharges such as 6% per annum throughout the term of the policy contract. Initial units bear heavy discontinuance charges and their cash value is much lower than their face value for years. This method is much less common these days as in the past.

This covers the mortality costs of the policy and is, therefore, dependent on age. It is possible for the mortality charge to be a recurrent charge (e.g. monthly). In this event, the mortality cost is funded by cancellation of units on a regular basis, and the life company can then allow the policyowner to vary the sum assured over time.

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5.3 CHARACTERISTICS OF INVESTMENT-LINKED LIFE INSURANCE POLICIES

The characteristics of all forms of investment-linked life insurance policies can be grouped as follows :-

5.4 TYPES OF INVESTMENT-LINKED LIFE INSURANCE POLICIES

Although there are numerous variations and types of investment-linked life insurancepolicies available in the overseas market, of which the major types will be describedbelow, the basic types currently being sold in Malaysia are confined to single premium life insurance plans (where a ‘once-off’ contribution to the policy is made) and the regular premium life insurance plans (where premiums are paid in more regular intervals). The following are some of the investment-linked life insurance policies available in Malaysia:-

Single Premium Investment-Linked Whole Life Plan.

Regular Premium Investment-Linked Whole Life Plan.

Investment-Linked Individual Pension Plan.

Investment-Linked Permanent Health Plan.

Investment-Linked Dread Disease Plan.

Investment-Linked Education Plan.

Investment- l inked l i fe insurance policies can be used for investments, regularsavings and protection. The protection element may take the form of life cover,total and permanent disability, dread diseases cover, accidental death or personal accident benefit and personal health insurance.

Investment-l inked life insurance policies generally (although not necessarily) have a 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 perfomanceof the underlying assets and this performance is reflected by the prices of the units in the investment-linked fund.

The protection cost are generally met by explicit charges (i.e. types and level of charges imposed by the life office are stipulated openly in the policy terms), which 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 wil l normally be variable but the life office must normally give asix months notice prior to any change.

The cash value is normally the value of units allocated to the policyowner, calculated at bid price.

a.

b.

c.

d.

e.

f.

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5.4.1 SINGLE PREMIUM INVESTMENT-LINKED WHOLE LIFE PLAN

A number of insurance policies and combinations of policies can be used as singlepremium investment. Typically investments are single premiums investment-linked whole life insurance plans, where a ‘one-off’ premium contribution is made to the policy which uses the premium to purchase units in an investment-linked or unitised fund and provides a certain level of life cover.

In Malaysia, single premium policies must at least have a minimum premium of RM3, 000 (discussed under 10.3 - Law Covering Investment-linked Life Insurance).

Single premium investment-linked whole life plan was one of the first types ofinvestment-linked Life insurance policies available. It is simple in design. The amount ofinsurance protection is a percentage (usually 125%) of the single premium paid, and is subject to a minimum amount (in Malaysia this is RM5,000).

The emphasis for single premium investment-linked whole life plan is normally on longterm savings and investment. Thus, the plan only offers nominal life protection

Administration and insurance charges or cost are recovered by imposing policy fees, other administrative charges and mortality charges. The investment-linked fund would normally incur an investment management fee of 0.5% to 2% per annum, depending on the type of fund and the bid - offer spread.

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. This is attractive to investors who want to have easy access to their funds.

5.4.2 REGULAR PREMIUM INVESTMENT-LINKED WHOLE LIFE PLAN

The scope of regular premium investment-linked whole life insurance plan is similar to that ofsingle premium investment-linked whole life. The exception is that instead of the premiums being paid in a lump sum, the premiums under this plan are paid at regular intervals, either monthly, quarterly, half yearly or annually.

Units in the investment-l inked or unitised fund would be purchased as premiums are received. 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.

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5.4.3 INVESTMENT-LINKED INDIVIDUAL PENSION PLAN

5.4.4 INVESTMENT-LINKED PERMANENT HEALTH PLAN

The basic investment-linked individual pension plan usually involves a high allocation of premium contributions to investments through simply accumulating the fund to retirement, when the fund is then used to purchase either a traditional annuity or an investment-linked annuity.

Conventionally, there is usually 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.

Recent development saw the latest investment-linked individual pension plans being launched with the life insurance cover being funded by cancellation of investments on the pension plan.

A further development is the introduction of investment-linked individual pension plans where all or part of the funds can be converted into a traditional with-profit life insurance policy as an alternative to switching into other investment-linked funds.

Such plans are popular overseas as there are tax advantages for employees' owncontributions to these plans. The governments concerned want to encourage savings by giving tax incentives.

Some life offices have created other types of investment-linked plans. Instead of providing the usual death coverage, they offer other forms of coverage such as permanent health and dread disease/living insurance plans.

The investment-linked permanent health insurance :-

provides health coverage such as disability income. contains cash value unlike traditional health products that does not have cash value.

A new investment-linked life insurance product which incorporates long term disability income benefits i s now avai lable in the overseas market. This product is priced very competitively when compared to traditional with-profit life insurance products, sometimes by as much as 25% off the costs of traditional with-profit life insurance products in strong economic environment.

The product design of this investment-linked permanent health insurance also has the advantage of offering cash value despite the competitive price. This new product has taken the UK market by storm. Within 12 months of launch, Allied Dunbar's product has captured an estimated 34% of the entire individual permanent health insurance (PHI) market.

The first universal life long term disability plans are now beginning to appear in the USA and their design followed that of the UK version.

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5.4.5 INVESTMENT-LINKED DREAD DISEASE PLAN

One of the most successful innovations in investment-linked life insurance product design in the UK was Living Assurance by Abbey Life Company. 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 by-pass, 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.

5.4.6 INVESTMENT-LINKED EDUCATION PLAN

Parents are always worried and concerned about their children’s education in the future. With this in mind and also to capitalise on the tax relief of RM 3,000, companies have also designed Investment-linked insurance plans solely to satisfy the educational needs of the policyowner’s children. These plans have also received wide acceptance and is one of the main selling policies in almost all insurance companies in Malaysia.

5.4.7 INVESTMENT-LINKED TAKAFUL POLICIES

5.4.7.1 WHAT IS INVESTMENT-LINKED TAKAFUL POLICIES?

An investment-linked takaful is a family takaful plan that combines investment and takaful cover. Your contribution wil l provide takaful cover, which includes death and disability benefits, and part of the contributions will be invested in a variety of Shariah-approved investment funds of your choice. As a participant, you can decide on the allocation of your contribution towards protection and investment.

The investment fund is divided into units of equal value to derive at the investment-linked unit price. This unit price is published daily in the newspapers for you to track the value of your investments.

Different from the investment-linked takaful, insurance companies also offer investment-linked product for Shar iah-approved Secur i t ies Funds, whereby the investments are invested in Shariah-approved investment instruments whilst the insurance cover does not conform to the Shariah requirement.

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5.4.7.4 IMPORTANT CONSIDERATIONS TO CHOOSE THE RIGHT PLAN

5.4.7.2 TAKAFUL CONCEPT INVESTMENT-LINKED TAKAFUL POLICIES

5.4.7.3 UNIQUE FEATURES OF INVESTMENT-LINKED TAKAFUL POLICIES

In an investment-linked takaful, part of your contribution will be allocated to a takaful fund in the form of participative contribution (tabarru’).The balance of the contributions will be used to purchase the investment-linked units. You will undertake a contract (aqad) to become one of the participants by agreeing to mutually help each other, should any of the participants suffer a misfortune arising from death or disability. If you did not make any claim during the period of takaful, you are entitled to a share of the surplus in the takaful fund. The surplus will be shared between you and the takaful operator based on the concept of surplus sharing according to a pre-agreed ratio. Your share of the surplus will be used to purchase additional investment-linked units.

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 service.

You are given the flexibility to choose your own level of protection and investment.

You can vary the amount of your contribution according to your changing financialcircumstances.

You can switch your current investment fund to other types of investment funds.

You can redeem part of your investment-linked units at any point of time.

You can choose from a variety of investment funds (equities, bonds or other financialinstruments) to invest in.

Investment-linked takaful has the following unique features:-

Takaful cover

Your contributions usually provide takaful coverage for death and disability. You can extend the basic cover by way of additional contributions to also include personal accident and critical illnesses.

Selection of investment fund

You are given a choice of investing in various investment funds. The investment-linked unit price fluctuates according to the value of its investment fund. When the investment-linked unit price falls, the value of your investment will also reduce and vice versa. You may realise a gain or loss when you sell your units. It is important that you select an investment fund that reflects the level of risk that you are comfortable with, as the investment risk will be borne solely by you. Past performance of the investment-linked fund may not be a reliable guide to future performance.

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Fees and charges

The takaful operator may impose fees and charges for their services such as fund managementfee, service and surrender charges. The fund management fee is charged annually and calculated as a percentage of the value of the investment fund. The service charge is to cover the costs in administering your investment-linked takaful. The surrender charge will only be applicable if the plan is surrendered before its maturity.

Fund switching

Should you feel that you have made the wrong choice or you would like to change the profile of your investment portfolio, you are allowed to switch your unit linked-fund from one investment fund to another. Most companies allow one switch per year without charging any switching fee. For additional switches, a small fee may be imposed.

Cash value accumulation

Regular contributions investment-linked takaful may not accumulate adequate cash value during the early certificate years. This means that if the certificate is terminated during the early period, you may not get back any investment value.

Bid and offer prices

You will be provided with two prices: the offer price for selling units and the bid price for buying them back, much like unit trusts. The difference between the offer and bid prices is called the bid/offer spread and is usually expressed as a percentage of the price, usually around 5%.

Cooling period

There is a 15-day cooling-off period for you to decide whether you wish to continue with the investment-linked takaful after you have signed for it. If you decide to cancel your plan within this period, the takaful operator will refund the investment-linked units and the tabarru’ contributions less medical fees and underwriting expenses incurred in assessing the risk. The value of the investment-linked units refunded would be based on the price in accordance with the certificate.

Annual statement

You should receive at least an annual statement on the status of your investment-linked takaful, showing all transactions or charges during the period.

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5.6 RISK BASE CAPITAL GUIDELINES

5.5 LOANS AND WITHDRAWALS OF INVESTMENT-LINKED LIFE INSURANCE POLICIES

• Before you put your money into an Investment-L inked Takaful, think about the risks you are wil l ing to take and make sure you ful ly understand the risks involved and be prepared to have your money tied-up for a certain period. • You can get professional advice from your Takaful operator or your agent on the risks and benefits of a particular Investment-Linked Takaful. • Read carefully all the information provided.

From the above notes you will see that the mechanisms involved in Takaful base Investment-Linked Products and conventional Investment-Linked Products do not differ much in shape but the main difference is that the Takaful products are strictly governed by Syariah law and these principles are more apparent in these products.

Some investment-linked life insurance policies grant loans to policyowners. However,because the cash values fluctuate on a daily basis, a loan of the entire cash value could leave the life office without security, for some portion of the debt if the value of the underlying portfolio declined after the loan was made. Thus, loans are 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.

To understand this area better, please refer to the paper that was published by Bank Negara Malaysia on the related topic. This is an important article and a good understanding of this is vital for agents. Excerpt taken from Bank Negara Malaysia’s :-

Prudential Regulation and Supervisory Frameworkwww.bnm.gov.my/files/publication/fsps/en/2008/cp03_001_whitebox.pdf

Implementation of Risk-Based Capital Framework for InsurersThe Risk-Based Capital Framework for Insurers (RBC) came into effect on 1 January 2009 after almost two years of parallel run with the previous solvency regime from April 2007. The framework aims to better align the regulatory capital requirements with the underlying risk exposure of each individual insurer, improve the transparency of prudential buffers, and allow greater flexibil ity for insurers to operate at different r isk levels thatcommensurate with risk management infrastructure and practices. A new set of valuation rules was also introduced to ensure that assets and liabilities are valued in a realistic and market-consistent manner.

5.4.7.5 WHAT YOU NEED TO REMEMBER?

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A key objective of RBC is to ensure that prudential buffers reflect the underlying risk profiles of individual insurers. To achieve this, RBC requires more explicit quantification of the various risks inherent in the insurance business. This provides insurers with an additional tool to manage business more effectively, by identifying the sources of risk, and implementing the appropriate measures to mitigate, manage or remove risks. In the long run, having an improved understanding of the relationship between risk and capital, together withbusiness strategies centered on sound risk management practices, will enable insurers to achieve sustainable profitability whilst safeguarding policyholder’s interests.

Under RBC, capital adequacy requirements are more granular and risk-sensitivecompared to the previous solvency regime which did not differentiate between the nature and sources of risk. For example, insurers whose asset portfolios are concentrated in high-risk assets or assets that are inadequately matched with the corresponding liabilities will be required to hold more capital under RBC compared to the previous solvencyregime. Similarly, insurers who underwrite volatile lines of business or are highly concentrated in a single line of business will be required to hold more capital than insurers with diversifiedportfolios of relatively stable lines of business. The new solvency measure is hence a better reflection of financial strength and has resulted in greater differentiation between insurers with varying risk profiles. The new capital adequacy requirements are also based on explicit capital charges for market, credit, insurance and operational risks,thereby enhancing transparency and improving insurer’s ability to identify, measure and manage the risks inherent in the insurance business. This will enable insurers to respond to emerging risks in a more pre-emptive manner.

With the introduction of RBC, insurers with capital resources that commensurate with their risk profiles will have higher Capital Adequacy Ratios (CAR), thus allowing for the more efficient deployment of any ‘excess’ capital towards value generating activities. A number of insurers with inadequate capital and exhibiting low CAR under RBC have undertaken remedial actions, and are in the process of reducing the overall level of riskexposure or injecting additional capital. Throughout the parallel run, the Bank has required these insurers to submit capital management plans with specif ic milestones on strategies and action plans to improve their capital positions. These milestones and action plans are closely monitored to ensure an orderly transition to the RBC regime.

To achieve its objectives, RBC is supported by a new set of valuation rules, requiring insuranceliabilities and the related assets to be valued on a realistic basis, using market values or market value proxies, which reflect the prevailing conditions in the business andeconomic environment. The implicit margins that existed in the old valuation rules for insurance liabilities have been replaced with explicit margins for adverse deviations, which are now based on the actual experience of each individual insurer. For example, general insurers are now required to ensure that reserves are sufficient to meet expected claims based on the actual volatility of the claim patterns observed in the individual portfolios.Similarly, life insurers must hold reserves based on actual experience of mortality, morbidity, expenses, and persistency, instead of using a standardised mortality table with a fixed margin for prudence. In addition, insurers who underwrite innovative products with financialguarantees must hold additional reserves to ensure that those guarantees can be met even in adverse market conditions.

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On the asset side, the introduction of market values has resulted in a more realistic balance sheet in accordance with the requirements of the relevant accounting standards.In response, many insurers have already taken the necessary steps to optimise asset portfolios according to risk appetite and expected return, while others are planning to make similar tactical shifts at the right market levels.

Investment strategies are being rebalanced in response to prevailing market conditions and to improve the degree of matching between assets and liabilities. Portfolio changes during the parallel run have resulted in an increased level of assets of higher quality,which has served to support insurers well in the light of ongoing uncertainties in the capital markets.

The introduction of RBC has also provided the insurers’ management teams with an additional quantitative tool to analyse and monitor the risks inherent in insurance activities. This shift of focus t o w a r ds r i sk and i ts re lat ionsh ip wi th capital requirements has enhanced overall risk awareness and improved the quality of operational risk management and corporate governance. Many insurers are enhancing operations to improve their risk profiles, for example, by improving the quality of risk selection and underwriting, and by reducing volatility in loss exper ience through better claims management. Life insurers are also placing greater emphasis on product design and pricing, particularlyto enhance the capital efficiency of their product range.

A survey of insurers also revealed posit ive changes to the intensity and breadth of oversight and discussion by Boards and Board Committees as a result of additional information arising from RBC. The same survey also revealed that many insurers areexploring other avenues to complement existing risk mitigants or increase available capitalresources, such as reinsurance to transfer out excess insurance risks, derivatives to hedge asset-related risks or by the use of hybrid capital instruments.

Another positive development in the insurance industry arising from the introduction of RBC is the enhancement of insurers’ technical expertise. The increased granularity and complexity of RBC computations have inevitably increased the demand for technical expertise, especially in the areas of realistic valuation of assets and liabilities, stress testing and the calculations for the various components within RBC. For example, insurers without access to in-house actuarial expertise have engaged external consultants to assist in the technical aspects of the RBC requirements.

This is expected to further enhance insurer’s technical competency through knowledge from such engagements. Furthermore, the increased proficiency of insurers in areas such as financial modeling will also support more effective risk management by enablinginsurers to better anticipate emerging risks and to respond preemptively. Arising from the RBC requirements and the resulting increase in interaction with technical experts, insurers now recognise the need for developing such expertise internally or by obtaining therequired support from group resources or external consultants.

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The implementation of RBC is expected to further raise the overall level of resilience of Malaysian insurers, as the industry players continue to optimise their risk profiles and capital positions over the near future. The improvement in the quality and depth of statutory reporting brought on by RBC has also enhanced Bank Negara Malaysia’s supervisory capabilities by providing an additional tool to identify problem areas early. Finally, the current market turmoil has also highlighted the need for a highly robust prudential framework that is supportive of strong capital adequacy, liquidity positions and risk management practices of insurers during periods of stress, while reducing the pro-cyclical effects of regulation through economic cycles. To achieve this, the Bank is continuously reviewing and recalibrating the methodologies and parameters within RBC, to ensure that theyremain relevant and appropriate at all times.

INVESTMENT OF INSURANCE FUNDS

Investment and risk management policy

Greater investment flexibility is accorded to insurers under the Framework to allow better management of assets appropriate with the nature and profile of insurer’s liabilities.

The oversight of and accountability for, the investment of insurance funds rests ultimately with the board of directors. To ensure proper investment of insurance funds, insurers must put in place an investment and risk management policy that is in line with the risk appetite set by the board of directors for the insurer. The investment and risk management policy should be approved and reviewed regularly by the board of directors and cover overall investment strategy and proper risk management systems, including monitoring and control mechanisms.

The policy on overall investment strategy should cover, at least, the following elements :-

The risk management systems must cover the risks associated with investment activities that may affect the coverage of insurance liabilities and capital positions. The main risks include market, credit and liquidity risks.

As part of good risk management practices and to ensure proper monitoring and control of the investments, insurers are also required :-

the investment objectives, both at company and fund-specific levels;the risk and liability profile of the insurer.the strategic asset allocation, i.e. the long-term asset mix for the main investment categories and their respective limits;the extent to which the holding of certain types of assets is restricted or disallowed, e.g. illiquid or highly volatile assets; andan overall policy on the usage of derivatives and structured products.

i.ii.iii.

iv.

v.

To establish adequate internal controls to ensure that assets are managed in accordance with approved investment policies, and in compliance with legal, accounting and relevant risk management requirements. These controls should ensure that investment procedures are documented and subject to effective oversight. There should be in place appropriate segregation of responsibilities for measuring, monitoring, settling and controlling asset transactions, from the front office functions;

i.

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Senior Management is responsible for setting, managing and reviewing the investmentpolicies of the insurer. In the case of a participating life fund, Senior Management should ensure that the investment policy is consistent with the bonus and/or dividend distribution policy of the insurer. Senior Management is also responsible to ensure the proper implementation of investment policies approved by the board of directors, and timely and regular reporting to the board of directors of the insurer’s investment activities.

The Bank may impose requirements on an individual insurer to invest in a specified manner, or restrict or prohibit an insurer from investing in certain asset classes or individual asset to safeguard insurance funds. Such requirements, restrictions or prohibitions will form part of supervisory actions as a result of the Bank’s assessmentof an insurer’s risk profile and investment risk management function.

To have in place rigorous audit procedures that include full coverage of the investment activities to ensure timely identification of internal control weaknesses and operating system deficiencies. If the audit is performed internally, it should be independent of the function being reviewed;

To install effective procedures for monitoring and managing the asset-liability positionto ensure that the investment activities and asset positions are appropriate in relation to the liability and risk profiles;

To put in place suitable plans to mitigate the effects arising from deteriorating marketconditions;

To undertake regular stress testing for a range of market scenarios and changinginvestment and operating conditions in order to assess the appropriateness of assetallocation limits; and

To ensure the key staff involved in investment activities have the appropriate levels of skills, experience, expertise and integrity.

ii.

iii.

iv.

v.

vi.

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Investment-Linked Life insurance products are similar to Unit Trusts EXCEPT1.

a.b.c.d.

All the premiums paid are invested into providing investment returns.All the premiums paid are invested into providing coverage.A portion of the premiums are used to smoothen out the ‘highs and lows’ of market fluctuation.A portion of the premiums are used to provide cover whilst the major portion is used forinvestments.

CHAPTER 5

What are the fees and charges that are levied on an Investment-linked product?2.

i.ii.iii.iv.

Policy Fee, Management Fee, Buying Price, Surrender Charges.Unallocated Premiums, Selling Price, Withdrawal Charges, Free look Charges.Bid Price, Offer Price, Mortality Charges, Initial Units.Allocated Premium, Withdrawal Charges, Mortality Charges, Policy Fee.

a.b.c.d.

i,ii only.i,iii only.i,ii,iii only.ii,iii,iv only.

Chandran wants to have enough money to fund a traditional annuity or investment-linked annuity before he retires. What plan would you suggest to him?

3.

Single Premium Investment-Linked Whole Life Plan.Investment-Linked Individual Pension Plan.Regular Premium Investment-Linked Whole Life Plan.Investment-Linked Takaful Whole Life Plan.

a.b.c.d.

Which of the following will qualify as an investment vehicle in an Investment-Linked Takaful Policy?

4.

A GovernmentBond issue that is for the development of housing and basic amenities for the people who are living in the interiors of Sabah and Sarawak.A C o r p o r a t e B o n d issued by a company that wants to expand its business in livestock farming in Indo China and China.A company that mainly deals with Sports betting and games of chance.A company that has got a mixed business interest in food and beverages of dubious nature.

a.

b.

c.d.

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What are the following supplementary benefits that can be added to an investment linked fund?

5.

Dread Disease Rider.Loan Cancellation Rider.Medical Benefits Rider.Holiday Planner Rider.

i.ii.iii.iv.

i,ii,iii.i,iii,iv.i,iii.ii,iii,iv.

a.b.c.d.

Which of the following statement about Investment-Linked Takaful Product is TRUE?6.

This product was solely created to satisfy the needs of all Muslims in Malaysia so as to provide a savings and protection program.Conventional insurance companies also provide takaful cover to the Malaysian public.Due to the importance placed in Syariah compliance, Investment-Linked Takaful is generally unpopular and is only bought by religious people.Takaful products do not have the kind of flexibility that other Investment-linked products have.

a.

b.

c.

d.


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6STRUCTURE OF INVESTMENT-LINKED FUNDS

S T R U C T U R E O F I N V E S T M E N T - L I N K E D F U N D S

6.1 INTRODUCTION

Premiums from investment-linked life insurance policies are invested in the investment-linked funds according to written instruction of policyowners.

Investment-linked funds can be structured into 2 ways :-

Accumulation units, and Distribution units.

6.2 ACCUMULATION UNITS

The investment income of these funds is ploughed back into the fund. Therefore, the unit prices will increase over the long term.

6.3 DISTRIBUTION UNITS

Instead of ploughing the investment income into the fund, 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.

6.4 TYPES OF INVESTMENT-LINKED FUNDS

As the value of investment-linked life insurance policy depends on the performance of financial instruments, the policyowners bear both the risk and the benefit of the policy. In theory, the fund can be invested in any f inancial instrument. Currently, thefollowing instruments are used :-

Cash Funds.

Equity Funds.

Bond Funds.

Property Funds.

Specialised Funds.

Managed Funds.

Balanced Funds.

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6.4.1 CASH FUNDS

Cash funds invest mainly in cash and other forms of bank deposits. Cash deposits type instruments are low risk and relatively safe.

6.4.2 EQUITY FUNDS

Equity funds invests in equity assets such as shares, stocks etc. Equity assets are inherently higher risk in nature. Prices of equity shares are volatile. Investors who buy equity assets usually aim for capital appreciation. During a market crash, equity assets are usually the first to depreciate in high amounts. But the magnitude of the change in unit prices will depend on the quality of the equities held.

6.4.3 BOND FUNDS

Bond funds invest in government and corporate bonds, and in other forms of fixed income instruments. The assets are chosen on the basis of their income producing characteristics. They are also known as 'income' or 'fixed income' funds.

6.4.4 PROPERTY FUNDS

These funds invest in properties, such as real estates and property shares. Normally only large property funds invest directly in real estates.

Property funds are generally considered to be safer than equity funds, but have lower liquidity.

Properties, especially real estates, are illiquid assets. It is not always possible to quickly sell a property when policyowners redeem their units. As a result, property funds 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.

6.4.5 SPECIALISED FUNDS

These funds are normally segmented based on geographical regions or particular industries.

Specialised funds that are restricted to investment in a particular geographical region include such funds as the ASEAN Fund, the Emerging Markets Fund and the International BondFund.

Specialised funds that are restricted to investment in a particular country only include such examples as the China Fund and the US Fund.

For industry specialised funds, investment are put in specialised sectors such as commodities,mining, plantation, public utilities, etc.

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6.4.6 MANAGED FUNDS

Specialised funds offer a policyowner exposure to different markets in different regions of the world and in different currencies.

It is important to take note of the currency risk when investing in a specialised fund invested overseas, particularly in times of volatile currency and financial markets.

These funds invest in a wide variety of assets such as equities, bonds, properties, cash, etc. and the asset allocation depends on the fund managers' views of the future prospects of the financial markets involved.

6.4.7 BALANCED FUNDS

The funds invest in fixed proportion of specified assets. For example, 70% of the funds are in equities and 30% in bonds.

6.5 RISK-RETURN PROFILE

The risk-return profiles of some types of investment-linked funds are shown for comparison between returns of funds in relation to the levels of risk involved.

Risk

Managed Equity Funds

Fund

Bond Funds Balanced Funds

Cash Funds

Returns

The risk-return graph above shows that higher return normally comes with higher risk. At the top end of the graph are the equity funds. The relatively riskless cash funds sit at the bottom end.

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6.6 SWITCHING

If a life insurance company sells investment-linked life insurance policies and it offers more than one investment-linked fund to its policyowners, it usually provides a switching facility which allows a policyowner to switch part or all of his investment from one fund to another fund.

Switching practices vary. Switches between funds may :-

be offered free of charge, or 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 a specific charge for each and every switch.

The switching facility is very useful for the purpose of financial planning. For example, a policyowner can change the asset allocation of his investment between the funds when his investment needs change as he goes through the life cycle. Assuming that he has an "aggressive investor" profile, based on a study of his risk profile, he may invest 100% of his premiums in an equity fund when he starts out in his 30s but he may shift his investment gradually to 30% in equity fund and 70% in bond fund as he reaches retirement age.

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CHAPTER 6

Rank the following funds on an ascending order in their risk portfolio?1.

iv,iii,i,v,ii.v,i,ii,iii,iv.iv,v,i,ii,iii.iv,iii,v,i,ii.

a.b.c.d.

Equity funds.Derivatives and Futures fund.Government Bond fund.Cash fund.Balanced fund.

i.ii.iii.iv.v.

During a market crash, which fund suffers the biggest fall?2.

a.

b.c.d.

Funds that mainly invest in cash instruments l ike fixed deposits, treasury bills, government bonds.Funds that invest in overseas properties, REITs and growth stocks.Funds that invest in fixed income funds, balanced funds and Sukuk Bonds.Funds that invest in equities market both locally and overseas.

Funds that basically invest in government, corporate and fixed income instruments seeking income producing characteristics are known as :-

3.

a.b.c.d.

Balanced fund.Cash fund.Bond fundSpecialised fund.

Switching of funds happen in Unit trust and Investment-Linked products. Switching is advantageous because;

4.

a.b.c.d.

It allows the smoothening process of uncertain market conditions.It allows the clients to make huge profits whence switches are done.It is a method to safeguard your principal invested.It is good because the client does not incur any charges related to constant switches.

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5. Rahim is a very cautious investor. He wants steady income and hopefully safe-guard his principal amount invested. Where would you suggest he puts his money?

i.ii.iii.iv.

Government, Corporate and Sukuk BondsFixed income instrumentsCash fundsSpecialised funds

i, ii, iv.ii,iii,iv.i,ii,iii.i,iii,iv.

a .b.c.d.

6. Chee Seng wants to have a specific amount of money in 10 years. He is not averse to risk. He wants your suggestion. Where can he put his money?

i.ii.iii.iv.

In a unit trust and Investment-Linked product that is heavy into equities.In a fund that specifically targets on high growth.In a fund that is mainly invested in government securitiesIn a bank deposit and cash fund.

i,ii,iii.i,ii.i,iii,iv.iii,iv.

a .b.c.d.


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7HOW INVESTMENT-LINKEDINSURANCE PRODUCTS WORK

H O W I N V E S T M E N T - L I N K E D I N S U R A N C E P R O D U C T S W O R K

7.1 INTRODUCTION

Over the past few years, the insurance companies in Malaysia have made investment-linked products very attractive and have designed some tangible products that please, the aims and goals of the policyowner. A wide array of products to meet the basic and secondary needs of the clients have been developed over the years. In fact some companies have made the investment-linked as their major products and we also see that more and more insurance companies are moving away from offering traditional with-profit plans.

For investment-linked life insurance products, the insurance companies offer policyowners a range of investment-linked funds in which they can invest. The fund may invest either in a range of assets, similar to a traditional with-profit life fund, or in a more specialised and specifically defined range of investments, such as property or Malaysian equities or fixed income securities .

7.2 THE WORKING OF INVESTMENT-LINKED LIFE INSURANCE

Let us look at a fund which invests only in stocks and shares (called an equity fund). Let us assume that the value of this investment-linked fund at a certain point in time is RM1 million. This is calculated by adding the value of all of the investments owned by the fund.

Instead of looking at the fund as a whole when considering how a policyowner might benefit from that investment, this investment-linked fund is nominally divided into a number of units, in a similar way to the ownership and value of a company being divided into anumber of shares.

In our example, let us say that the number of units currently in existence is 100,000 units.

The value of each unit can easily be calculated by dividing the value of the total fund by the number of units in existence - thus giving us value for this fund of RM10 per unit (i.e. RM1 million divided by 100,000 units).

The holders of these units will either profit or suffer lose from the rise or fall in the value of the investments held by this equity fund. If the value of the investments increases the value of the fund to, say, RM1.5 million then, if there are still 100,000 units in existence, the value of each of these units will have increased from RM10 to RM15 (i.e. RM1.5 million divided by 100,000 units).

Under traditional with-profit life insurance policies, the life fund maintains a reserve to help level out the short-term fluctuations in the value of the life fund's investments. Maintaining a reserve could mean either that policyowner does not receive the full value in a year of high investment gains (some of the profits being transferred to the reserve), or does not suffer in a year of poor investment conditions (money being drawn from reserve to subsidise the bonus).

No such reserve is held for investment-linked life insurance policies, and so the investment- linked policyowners take the full impact of the changes in investment conditions - the value of their units being directly related to the value of the underlying investments held in the fund.

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7HOW INVESTMENT-LINKED INSURANCE PRODUCTS WORK


Perhaps you can already see some of the major differences between the bonuses from investment-linked fund and that from traditional with-profit life insurance.

A traditional with-profit life insurance policy can never reduce in value, provided that the life office is solvent, as the reversionary bonuses are added to the guaranteed sum assured, and can then, never be taken away.

In contrast, the value of an investment-linked life insurance policy will fluctuate depending on the value of the units the policy holds. If the value of those units falls then the underlying value of the policy will also fall.

An investor in a traditional with-profit life insurance policy will have their investments held, usually, in a wide spread of assets chosen by the insurer. An investor in an investment-linked life insurance policy can choose a particular investment area which he believes can offer good value at that time (although, for the majority of investment-linked life insurance policy-owners who may not want this responsibility, a managed fund is usually available, which invests in a spread of assets). An investment-linked life insurance policyowner will usually be allowed to switch his investment between funds if he believes greater opportunities are available, in another fund at a particular time.

Turning to the actual mechanics of a policy invested in the unitised funds, you should understand how premiums are used to build up the value of the policy, so that you can make a comparison with the increasing value of a traditional with-profit life insurance policy, as bonuses are added.

Under an investment-linked life insurance policy there is no guaranteed minimum sum assured for the purposes of declaring bonuses, although there will, of course, be a sum assured as a level of life insurance.

Instead, each of the policyowner's 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. Thus for a premium of RM100 and buying units with current value of RM2 per unit, the number of units that can be purchased will be 50 (i.e. RM100 divided by RM2).

Purchases of units can only be made from the fund itself, which will then create new units and add the investment monies to the value of the fund.

The value of the policy will therefore depend on two factors :-

i. the value of each of the units; and

ii. the number of units the policy has accumulated to date.

Over a long period of years, the value of the policy should rise considerably as the number of units increase, with every premium invested, and also with the increase in the value of each unit. In the short term, however, the value of the policy can decrease if the fund's investments fall in value.

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Under an investment-linked life insurance policy, a policyowner pays either a lump sum (for single premium plans) or a regular payment (for regular premium plans) to the insurance company. The insurance company invests the premium in the investment-linked fund. This is usually done after the insurance company deducts its initial expenses which include, expenses for setting up the fund and for marketing. The balance of thepremium is then allocated to buying units at the offer price.

The units purchased are invested in either fixed income securities or equities so that the value of the units will increase. At any time, the policyowner may top-up the policy. The policyowner may also sell some or all of his units at any time. These are called withdrawals and surrenders respectively.

7.3 TOP-UPS

PoIicyowners are normally allowed to top-up their policies at any time, subject to a minimumamount. To top-up a policy, the policyowner pays further single premium at the time of top up and these premiums will be used in full (after deducting charges for top-ups), to purchaseadditional units of the investment-linked fund, which will be added to the existing units in the policyowner's account.

7.4 SINGLE PREMIUM POLICIES- METHODS OF CALCULATING BENEFITS

For ease of understanding, we will concentrate on the tabulations for single premium investment-linked life insurance policies in this text.

For single pricing method of single premium policies, there is only one price quoted whether the policyowner is buying or selling his units.

Under 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. The bid price is always lower than the offer price. The difference in the bid and offer prices is called the bid-offer spread. (Discussed under Chapter 5 - Definitions).

The charges that are normally deducted for either method are the policy fee and the administrative and mortality charges.

In the cases presented below, we have assumed a policy fee of RMI00 and mortality charge of 1%. (Please note that mortality charge depends on the age of the life assured and it differs from company to company).

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7.4.1 NUMBER OF UNITS

7.4.1.1 Single Pricing Methods

Below is an example of how Single Pricing Methods is done as a guide to the agents.

Under the single pricing method, the number of units that can be bought is equivalent to the premium paid divided by the unit price. However, many companies do deduct a sum, usually 5%, as charges before the premium is allocated to the purchase.

Say a policyowner pays a premium of RM 4,000. The price per unit of investment at thetime of purchase is RM 1. If the insurance company deducts a charge of 5%, then to calculate the number of units that can be bought, the insurance company must :-

firstly, receive the amount of premium allocated by the policyowner to buy theinvestment,

secondly, deduct the charges imposed by by the company from the amount of the premium allocated by the policyowner to buy the investment,

lastly, divide the balance premium amount, after the deduction of charges, by the unit price.

Amount of premium allocated to buying of units is RM 4,000

5% charge to be deducted

= RM 4,000 x 5% = RM 200

Balance amount of premium

= RM 4,000 - RM 200 = RM 3,800

Thus, the number of units purchased = RM 3,800 ÷ RM 1 = 3,800 units.

7.4.1.2 Dual Pricing MethodsUnder the dual pricing method, the number of units that can be bought is equivalent to the premium paid divided by the offer price. If the policyowner cash in or claim under the policy, he will receive the amount of money derived by multiplying the number of units owned by the bid price.

Suppose that offer price is RM 1.00 and the bid offer spread is 5% and the amount of premium allocated to buying of units is RM 4,000.

Amount of premium allocated to buying of units is RM 4,000. Number of units that can be purchased= RM 4,000 ÷ RM 1 = 4,000 units.

Assuming that there is no change in the value of the unit price.

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Then bid price = RM 1.00 x (100% - 5%) = RM 1.00 x 95% = RM 0.95

If the policyowner cashes in or claims under the policy, he will receive RM 3,800 (i.e. 4,000 units x RM 0.95). If there was an increase in the value of the offer price to RM 1.20 per unit.

Then bid price = RM 1.20 x (100% - 5%) = RM 1.20 x 95% = RM 1.14

If the policyowner cashes in or claims under the policy, he will receive RM 4,560 (i.e, 4,000 units x RM 1.14).

7.4.2 CASH VALUE

7.4.2.1 Single Pricing Method

The cash value under single pricing method is obtained by multiplying the number of units with the unit price and deducting the mortality charge and the policy fee.

Using the example above, the number of units is 3,800, the unit price is RM 1, the mortality charge is 1% and the policy fee is RM 100.

Cash value = (Number of units x Unit price) - (Mortality charge + Policy fee) = (3,800 units x RM 1.00) - ([3,800 units x RM 1.00 x 1%] + RM 100) = RM 3,800 - (RM 38 + RM 100) = RM 3,800 - RM 138 = RM 3,662

7.4.2.2 Dual Pricing Method

The cash value under dual pricing method is obtained by multiplying the number of units with the bid price and deducting the mortality charge and the policy fee.

Using the above example, the number of units is 4,000, the bid price is RM 0.95, the mortality charge is 1% and the policy fee is RM 100.

Cash value = (Number of units x Bid price) - (Mortality charge + Policy fee) = (4,000 units x RM 0.95) - ([4,000 units x RM 0.95 x 1%] + RM 100) = RM 3,800 - (RM 38 + RM 100) = RM 3,800 - RM 138 = RM 3,662

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7.4.3.2 Dual Pricing Method

7.4.3 ANNUAL YIELD ON GROSS PREMIUMTo calculate the annual yield on gross premium for single premium plans, the return ongross premium must first be obtained. Only then can the annual yield be tabulated.

The formula for Return on gross premium (RGP) is:- Ending Value of Investment

Beginning Value of Investment

The formula for Annual yield is (RGP)l/n -1, where n is the number of years.

7.4.3.1 Single Pricing Method

Under the single pricing method, still using the example above, suppose the unit price after 10 years is RM 1.97. The Ending value of investment = (Number of units x Unit price) - (Mortality charge + Policy fee) = (3,800 units x RM 1.97) - ([3,800 units x RM 1.97 x 1%] + RM 100) = RM 7,486 - (RM 74.86 + RM 100) = RM 7,486 - RM 174.86 = RM 7,311.14

The Beginning value of investment = 4,000 units x RM 1 = RM 4,000 The Return on gross premiumEnding Value of Investment Beginning Value of Investment

RM 7,311.14 RM 4,000.00 = RM 1.828 The Annual yield = (RM 1.828)1/10 - 1 = 1.062 - 1 = 0.062 or 6.2%

Under the dual pricing method, and continue using the example above, suppose the offer price after 10 years is RM 1.97.

Then the bid price = RM 1.97 x (100% - 5%) = RM 1.97 x 95% = RM 1.8715

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The Ending value of investment = (Number of units x bid price) - (Mortality charge + Policy fee) = (4,000 units x RM 1.8715)- ([4,000 units x RM 1.8715 x 1%] + RM 100) = RM 7,486 - (RM 74.86 + RM 100) = RM 7,486 - RM 174.86 = RM 7,311.14

The Beginning value of investment = 4,000 units x RM 1 - RM 4,000

The return on gross premium Ending Value of Investment= Beginning Value of Investment

RM 7,311.14= RM 4,000 = RM 1.828

The Annual Yield = (RM 1.828)1/10 – 1 = 1.062- 1 = 0.062 or 6.2%(Please note that details may vary from company to company for both method as the policy fee may be deducted at inception).

7.5 WITHDRAWAL BENEFIT

Policyowners may make withdrawals in term of number of units or fixed monetaryamount through cancellation of units. Usually a minimum and maximum withdrawal limit is imposed. The amount of money that a policyowner will get is the number of unitswithdrawn multiply by the unit price for the single pricing method, and multiply by the bid price for the dual pricing method. If the policyowner chooses to withdraw a fixed monetary amount, then the number of units that will be cancelled will equal the amount withdrawn divided by the unit price or the bid price, as appropriate.

As an example, suppose the unit price (for single pricing) or bid price (for dual pricing) at time = RM 2, if a policyowner withdraws 500 units, he will receive :-

500 units x RM 2 = RM 1,000

On the other hand, if the policyowner withdraws RM3,000 then the number of units that will be cancelled is :-

RM 3,000 = 1,500 units. RM 2

7.6 SURRENDER VALUE

Many companies allow their policyowners to surrender their policy units at any time. The calculation for surrender value is similar to the calculation for withdrawal benefit.

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7.7 DEATH BENEFIT

Under investment-linked life insurance policy, death benefit is of two types depending on the company's policy plan.

7.7.1 UNIT VALUE PLUS SUM ASSURED

The first type of death benefitt relates to the value of the units in the policyowner's account plus the sum assured covered.

……….. Death Benefit

----------- Value of units

________ Death Cover

Death benefit for single pricing method = (number of units x unit price) plus sum assured covered.

Death benefit for dual pricing method = (number of units x bid price) plus sum assured covered.

Using the example above, under the single pricing method, suppose the sum assured is RM 5,000, and the unit price at the time of death is RM 1.22.

The Death benefit = (3,800 units X RM 1.22) + RM 5,000 = RM 4,636 + RM 5,000 = RM 9,636

Using the example above, under the dual pricing method, suppose the sum assured is RM 5,000, and the offer price is RM 1.22, then the bid price is RM 1.22 x (100% - 5%) = RM 1.22 x 95% = RM 1.159.

The Death benefit = (4,000 units x RM 1.159) + RM 5,000 = RM 4,636 + RM 5,000 = RM 9,636

..............................

..............................

..................

--------------------------------------------------------

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7.7.2 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. In the graph shown below, the death benefit equals the death cover before time t and equals the value of units after time t.

_______ Death Cover

----------- Value of Units

Under this type, using the examples and calculations above, the value of the units will be RM 4,636 for both single pricing method and dual pricing method. As the amount of death cover is the higher of the unit value and death cover, the death benefit will be RM 5,000.

7.8 REGULAR PREMIUM POLICIES

Regular premium investment-linked life insurance policies operate under similar principles as single premium policies. The important difference here are :-

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.

The policyowner may surrender all his units or partially surrender his units. A partial surrender is known as a withdrawal.

The policyowner may vary the sum assured of his policy without changing the level ofhis regular premiums. Increasing in sum assured would normally require further medicalUnder writing. The higher the level of coverage, the more the mortality charges and the lower the cash values. The converse is also true.

The policyholder may also increase or reduce the level of his regular premium subject to certain constraints.

a.

b.

c.

d.

time t

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Having read the technical aspects of the way that the investment-linked plans work, it is important that each agents understands this as it will be useful when explaining to a client. Clients will not be interested in the technicalities but having a sound knowledge of this will allow the agent to do a better job when presenting his sales pitch. Now we will look at how we can use the knowledge gleaned so far and put them to real life sales situation. The two examples below will be of some help.

SCENARIO 1.

Tan Chor Seong is a fresh graduate. He has just landed himself a job as an engineer in K.L. He is 25 years old and is single. He earns a take home salary of RM 3,000.00. He lives with his parents in P.Jaya and his parents are still working. His only liability is his PTPTN that he took while in University. After having done a simple cash flow analysis, you as the agent, have identified that he can save RM 900.00 a month. He is planning to buy a new car and also set up a savings plan. His car instalments and car usage per month will take away RM 700.00 a month. He has approached you to work out a plan for him.

Tan’s present situation- Objectives and Goals

a)

b)

c)

SIMPLE CASH FLOW ANALYSIS FOR TAN CHOR SEONG

No Income RM Expenses RM

1 Salary 3,000.00 Travelling Cost 300.00

2 Food 300.00

3 Clothes and Accessories 200.00

4 Hand Phone Bill 150.00

5 PTPTN Loan 350.00

6 Parents 250.00

7 Night Out with Friends 250.00

8 Miscellaneous Expenses 300.00

TOTAL 3,000.00 TOTAL 2,100.00

Tan wants to create a savings of RM 30,000 in 10 years to start a consultancy with a friend.

He is not covered by his c o m p a n y f o r any eventualities as he is new. He will be eligible to participate in the company’s Employee Benefit Scheme in 3 months after he is confirmed but will lose the benefits when he resigns from the company. He wants a good cover for these eventualities.

Plans to get married at age 30.

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Agent’s Recommendation;

a) Tan cannot afford to buy a brand new car right now as it will take away at least RM 700.00 by way of instalment payments, road tax, insurance, fuel, toll, parking andmaintenance cost. It would be prudent to advise him to buy a fairly new and goodsec o n d h a n d car to cut his expenses from his expected RM 700.00 to RM 450.00 a month.

b) He will have to get himself covered for the following areas of concern :-

i) Medical Card.

ii) Comprehensive Personal Accident Cover.

iii) 36 Dread Diseases Cover.

iv) Death and Total Permanent Disability Cover.

v) Waiver of Riders Cover.

vi) Make sure that there is enough money left in the policy to create the desired amount in 10 years.

c) The agent a l s o shou ld impress upon him to save a portion of the money in a savings account for liquidity purpose and emergency expenses.

d) Based on these inputs, the agent can suggest an Investment-Linked Plan for Tan.

e) Please bear in mind that the total premium outlay per month cannot exceedRM 300.00 and Tan will have to make regular top-ups every year as his salary increases.

SCENARIO 2.

Alimudin Hamzah is a 35 year old man. He is a Business Development Manager in a Courier company in Ipoh, Perak. He has a take home pay of RM 4,000.00 He is married and has 3 children age of 1 year, 6 years and 8 years. His wife, Norzakiah, is working as a Staff Nurse in a Private Hospital in Ipoh and earns RM 3,500.00 a month. His children are taken care of by Norzakiah’s elderly mom and assisted by an Indonesian maid. They live in a house that is under a bank loan, under Alimudin’s name. Alimudin has a car provided by the company and his wife has a car under her name. Alimudin has a housing loan, a personal loan and 2 credit card payments to make a month. His wife has a personal loan and 1 credit card payment to make a month. You had approached Alimudin and he has agreed to meet you at home to discuss an Investment Link Plan.

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3)

4)

5)

6)

SIMPLE CASH FLOW ANALYSIS FOR ALIMUDIN AND NORZAKIAH

No Income RM Expenses RM

1 Salary- Alimudin 4,000.00 Car Running Cost- Norzakiah 300.00

2 Car Loan and Maintenance 450.00

3 Salary- Norzakiah 3,500.00 Food 1,000.00

4 Others (i.e. pro -rated yearly bonus and incen�ves)

1,000.00 Clothes and Accessories 250.00

5 Hand Phone Bill 150.00

6 Personal Loan (both) 700.00

7 Mom’s Medica�on and Care 400.00

8 Family Holidays and Night outs 150.00

9 Credit Card (both - se�le in full) 1,200.00

10 Maid 450.00

11 Housing Loan 600.00

12 House U�li�es and Maintenance 350.00

13 Tui�on for Kids 200.00

14 ASM/ASB (Both) 800.00

15 Miscellaneous Expenses 500.00

TOTAL 8,500.00 TOTAL 7,500.00

Medical cards for their children.

Save RM 25,000.00 in 10 years to buy a piece of land.

Start planning for their retirement

A l imudin and h i s w i fe have a Group Insurance Cover with his company thatincludes Personal Accident Cover, Medical Insurance and A Term Cover.

Alimudin and Norzakiah’s present situation- Objectives and Goals

1)

2)

They would like to set up an education fund for each of their children. They want their children to study locally.

They would like to have a good insurance cover, to cover areas like Death, Total and Permanent Disability.

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b)

c)

d)

e)

Based on the information above, you will be able to make a recommendation to the two clients.

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Suggest a 36 Dread Disease rider be included in an Investment-Linked policy for every one with premium waivers. Please ensure that the policy should concentrateon the coverage part as both Alimudin and his wife will need a good cover to offset the liabilities that they have.

Work out the policies with a total premium of RM 800.00 a month and to do top-ups on a yearly basis to meet the cash accumulation.

A higher premium will be allocated to the older children as they do not have the luxury of time as the youngest child.

Have a savings of RM 200.00 a month in bank for emergency use.

Agent’s Recommendation;

a) A medical card and an education Investment Linked Policy for each of his children. It would be advisable, if it is taken under both of them to maximise the tax relief that is given for medical and education premium payments by IRB. (i.e. up to RM3000 per person).

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CHAPTER 7

A policy holder has invested RM 5,000 as premiums. If the price of the unit is RM 1 per unit and the company deducts a charge of 5%, how many units will he have bought in a Single Pricing Method?

1.

4,500 units.4,750 units.4,250 units.5,000 units.

a.b.c.d.

Question 2 and 3 is based on the following scenario :-Samy bought an investment-linked policy 10 years ago.He contributed RM 3,000 every year for 10 years.The bid price of his units was RM 0.95 all the way through.

How many units would he have accumulated to date on a dual pricing method?2.

28,500 units.29,850 units.21,850 units.27,500 units.

a.b.c.d.

Samy wants to cash in the policy to use the funds to pay for his child’s college fee. If the Offer price is RM 1.25, how much will Samy get from the policy?

3.

RM 41,250.RM 42,750.RM 32,775.RM 32,700.

a.b.c.d.

Top-ups are allowed in Investment-linked policies. What happens to the total premium paid under the top-up?

4.

The company converts the total top-up premium and accumulates it into the existingaccount.The company opens a new account and deposits the converted top-up units into thisaccount.The company deposits the top-up premium into the existing account and levies all charges as per the original policy.The company will use the top-up premium minus the top-up charges and deposit the units into the policyowner’s account.

a.

b.

c.

d.

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A Company can use the following method in an investment-linked policies death claim payout;5.

Upon a Death claim being submitted, the company will pay only the claim based on the total unit accumulation multiplied by the offer price.Upon a Death claim being submitted, the company will pay the face amount of the initial death coverage irrespective of unit accumulations.Upon a Death claim being submitted, the company will pay the unit value plus the sum assured.Upon a death claim being submitted, the company will pay only the unit value plus the sum assured and any top-up amounts separately.

i.

ii.

iii.iv.

i,ii,iii.i,ii,iv.i,iii,iv.i,ii,iii,iv.

a.b.c.d.

In a Regular premium Investment-linked policy, the policy holder can do the following EXCEPT;6.

Have a premium holiday if there are sufficient funds in the policy.Increase or decrease his sum assured according to his present needs.Increase his premium payments with regular premium top-ups and single top-ups.Have his cover cancelled and only ensure his premiums are used for investments.

a.b.c.d ..


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8.1 INTRODUCTION

An investment-linked insurance plan is a life insurance that combines investment andprotection. Your premiums provide not only a life insurance cover, but a part of the premi-ums will also be invested in specific investment funds of your choice. You get to choose how to, allocate your insurance premiums towards protection and investment. Like all financial instruments that we have, we must also consider the benefits and the risks of purchasing this form on investments.

8.2 BENEFITS

8.2.1 POOLING OR DIVERSIFICATION

Like unit trust funds, investment-linked funds offer the policyowner an access to a "pooled" or "diversified portfolio" of investments. The funds normally consist of wide range of equity stocks and fixed income securities. On his own, the policyowner, with small sum of money, is unable to construct such a diversified portfolio. A well-diversified investment-linked fund has better risk characteristics than a less-diversified one.

8.2.2 FLEXIBILITY

Investment-linked products have simple product design with clear structure that caters separately for investment (unit-driven) and insurance protection (charge-based).

As a result, 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.

Traditional with-profit life insurance products are sum assured driven and they are very inflexible to allow major changes in product features. For example,

a change of plan from a whole life insurance policy to an endowment policy involves complicated calculations.

traditional life insurance policy does not allow policyowners the option of choice of investment portfolio.

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BENEFITS AND RISKS OF INVESTING INVESTMENT-LINKED FUNDS

B E N E F I T S A N D R I S K S O F I N V E S T I N G I N V E S T M E N T - L I N K E D F U N D S

8.2.3 EXPERTISEInvestment-linked funds are managed by professional fund managers who have the investmentexpertise to invest the fund to achieve high return over the long term in, accordance with the investment objectives.

An ordinary policyowner does not normally have good knowledge of financial markets to invest his money wisely.

8

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8.2.4 ACCESS

A policyowner can gain access to well diversified investment-linked funds managed by professional investment managers with proven track records, simply by buying an investment-linked life insurance policy with an initial investment, at as low as RM 4,000.

8.2.5 ADMINISTRATIONThe policyowner is relieved of the day-to-day administration of his investments, which can be a complicated affair. 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 newspapers.

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8 BENEFITS AND RISKS OF INVESTING INVESTMENT-LINKED FUNDS


8.3 RISKS OF INVESTING IN INVESTMENT-LINKED FUNDS

The death and disability benefits of an investment-linked life insurance policy are based on the sum assured and/or the value of units. Its 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 because it is directly linked to investment performance of the underlying assets of the fund.

In times of volatile stock market, the cash and maturity values of an investment-linked life insurance policy (with units invested in an equity fund) will rise and fall drastically. It shows that the potentially higher return of equity fund comes with greater risk.

Investment-linked life insurance policies (especially those risks which are fully invested in units of equity funds) are only suitable for a policyowner who can tolerate the risks of short term fluctuations in his cash value. The policyowner can, however, expect to achieve higher return than the traditional product over the long term.

These investment-l inked l ife insurance policies (with high equity investment) are 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. In this case, it is better that the policyowner buys a traditional non-participating product to meet his insurance needs.

8.3.1 INVESTMENT RISKS

8.3.2 CHARGESThe administration fee, insurance charge, fund management fee etc, of an investment -linked life insurance policy are usually not guaranteed. They are subject to regular review and they can be changed by the insurance company after giving a written notice over a specific period e.g. 3 months.

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8BENEFITS AND RISKS OF INVESTING INVESTMENT-LINKED FUNDS


SELF-ASSESSMENT QUESTIONSCHAPTER 81. The benefits of investing in an Investment-linked policy is all False EXCEPT;

Client is expected to monitor and switch the funds on his own all the time the policy is in force.The burden of fund management is borne by the company’s professional managementteam and does not burden the client.Client has the option to instruct the fund managers to follow his investment outlook and strategies.Client has the option to make decisions on how the company must invest his money totally.

a.

b.

c.

d.

2. The benefits of an Investment-Linked policy are as follows ;

The ability of the company to pool and diversify.The flexibility it offers.The minimal charges levied on the policy.The insulation of market risks by the company for the client.

i.ii.iii.iv.

i,ii only.ii,iv only.i,iii only.iii,iv only.

a.b.c.d.

3. The flexibility offered by the Investment-Linked policy includes the following;

Policyowner can ascertain the level of premium that needs to be paid.Policy owner can decide to add single or multiple top-ups.Policyowner is subjected to a definite amount of premium payment that is non negtiable.Company will not charge any fees for premium holidays taken.

i.ii.iii.

iv.

i,iv only.i,iii only.i only.i,ii only.

a.b.c.d.

4. The disadvantage found in an investment-linked policy are;

It is subjected to the smoothening process of the company.It is subjected to no charges if the company does not make any investment returns.It is subjected to fixed charges specified in the policy document.It is subjected to the vagaries of the stock market.

i.ii.iii.iv.

i,iii only.i,ii only.ii,iv only.iii,iv only.

a.b.c.d.

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8 BENEFITS AND RISKS OF INVESTING INVESTMENT-LINKED FUNDS


“Cash values that use investment vehicles are not immune to risk. This means that the value of the cash value account c an increase and decrease depending on the performance of the market. Individuals who use earnings from the cash value account may need to pay more out-of-pocket from premium payments when investments are performing poorly. Individuals are also not permitted to withdraw funds from the cash value while the policy is in force.”

What can be gleaned from the passage above?

5.

Clients investing in an investment-l inked product are at a disadvantage andshould choose to put their money in traditional whole life with profit plans.Clients must accept the fact that by buying an investment-linked policy they are also responsible to accept the changes that can take place in the stock market.Clients must put the total burden and blame on the fund managers who are responsible in making only positive returns.Clients can treat the investment-link policy as their personal bank account and do as they wish.

a.

b.

c.

d.

The apparent advantages of an Investment-Linked Insurance policy are :-6.The flexibility it offers in terms of choosing the premium payment amount, the sum assured and top-ups.The ability to design the policy to meet one’s life goals as you go along the policy term.The guaranteed cash value accumulation that happens.The definite understanding that all investment-linked policies are guaranteed by the company and Bank Negara.

i.

ii.iii.iv.

i,ii,iii only.i,ii only.ii,iv only.i,iv only.

a.b.c.d.


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9.1 INTRODUCTION

When comparing investment-linked life insurance products with traditional life insurance products (i.e. term, whole life and endowment), the following criteria are used :-

Investment Returns and Risks

Premium Computation

Death Benefit

Surrender Value

Option To Top-up

9.2 TRADITIONAL GUARANTEED WITHOUT-PROFIT LIFE INSURANCE PRODUCTS

These traditional life insurance products guarantee a fixed rate of return. Examples are temporary (or term) assurance and non-participating whole life and endowment.

9.2.1 INVESTMENT RETURNS AND RISKS

Under term insurance, a payment is made when the insured dies within the term or period of assurance. Under an endowment policy, payment is made when the policy matures or when the insured dies within the term of assurance. Whole life policies are similar to endowment policies except that in most cases 'whole life' is defined to be 80, 90 or 100 years. Under such traditional without-profit life insurance products, the amount payable does not depend on the investment performance of the company, as it is fixed at the inception of the policy. Therefore, there are no investment risks for these products except the risk of insolvency of the life insurance company.

9.2.2 PREMIUM COMPUTATION

Under a traditional without-profit life insurance policy, the premium is determined and fixed at inception and is stated in the policy. Once the contract has been made, the life company may not alter the terms and conditions without the agreement of the policyowner.

CEILLI C O M P A R I S O N B E T W E E N I N V E S T M E N T - L I N K E D L I F E I N S U R A N C E A N D T R A D I T I O N A L W I T H P R O F I T L I F E I N S U R A N C E P R O D U C T S

9COMPARISON BETWEEN INVESTMENT-LINKEDLIFE INSURANCE AND TRADITIONAL WITH PROFIT LIFE INSURANCE PRODUCTS

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9 COMPARISON BETWEEN INVESTMENT-LINKED LIFE INSURANCE AND TRADITIONAL WITH PROFIT LIFE INSURANCE PRODUCTS

C O M P A R I S O N B E T W E E N I N V E S T M E N T - L I N K E D L I F E I N S U R A N C E A N D T R A D I T I O N A L W I T H P R O F I T L I F E I N S U R A N C E P R O D U C T S

9.2.3 DEATH BENEFIT

Under traditional without-profit life insurance products; the death benefit (i.e. the sum assured) is determined and fixed at inception and is stated in the policy. As in the case with premium, once the contract has been made, the life company may not alter the terms and conditions without the agreement of the policyowner.

9.2.4 SURRENDER VALUE

Other than term insurance of more than 20 years, no payment is made when a term insurance policy is surrendered. Under endowment and whole life policies, as these policies earn interests which build-up cash values, an amount is payable at the surrenderof the policies, called the surrender value.

9.2.5 OPTION TO TOP-UP

Some life companies offer policies where the sum assured can be increased each year by a set percentage (often ten per cent) of the original sum assured. Other companies offer short-term policies that can be renewed at the end of the term for a higher amount. For example, the holder of a five-year level term insurance may have the right at the end of the five years to effect a new policy for a sum assured of up to 50 per cent more than the original policy.

9.3 TRADITIONAL WITH-PROFIT LIFE INSURANCE PRODUCTS

Traditional with-profit life insurance products are similar to the without-profit life insurance products except 'profits' are added to the sum assured. Examples of with-profit products are with-profit whole life and with-profit endowment insurances.


Every year the life office will carry out a valuation of the assets and liabilities of its life fund. This will normally reveal a surplus, part of which can be allocated to the with-profit policyowners in the form of an addition to the sum assured. This additional amount is called a bonus. However, the allocations are not directly linked to the life office's investment performance. The reason is that the life office has already smoothen the peaks and troughs of investment returns, and pass these smoothened returns as bonuses to the policyowners. The life office is able to smooth these returns by contributing into reserves in good investment years, and drawing from reserves in bad investment years.

Bonuses may be of three types :- cash, reversionary and terminal.

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Cash bonus usually takes the form of a cash distribution. Once declared, cash bonus can be withdrawn immediately by the policyowner or be kept within the policy.

Reversionary bonus can either be simple (based purely on the original sum assured) or compound (based on the sum assured plus previous bonuses). Once allocated, reversionary bonuses cannot be removed or reduced. Reversionary bonus under a policy is paid at the time of death under the life policy or on maturity of the policy.

Terminal bonus is different in concept. Terminal bonus is only payable on policies resulting in claims either by maturity or death. It is not payable on surrender. It is usually expressed as a percentage of the total bonuses and will vary in accordance with the performance of the underlying assets of the life fund.

Future bonuses are never guaranteed. They can be reduced if the life insurance company cannot afford to sustain its bonus rates. This is the distinctive difference between with-profit and guaranteed products.


As with the traditional without-profit life insurance policy, the premium for a with-profit policy is determined and fixed at inception. It is based on the sum assured and the expected bonuses payable. Similar to the without-profit policies, once the contract has been made, the life office may not alter the terms and conditions without the agreement of the policyowner.

9.3.3 DEATH BENEFIT

Under traditional with-profit whole life insurance policies, the death benefit is a fixed sum assured plus whatever bonuses accumulated up to the date of death and less whatever outstanding policy loan(s) and automatic premium loan(s), inclusive of interests. Only the sum assured is guaranteed at the outset. These policies are almost the same as non-profit policies; the only difference is that the amount payable on death of the without-profit whole life insurance policies has no inclusion of bonuses.

In the case of a with-profit endowment policy, the death benefit is the same as with the with profit whole life insurance except that it has a maturity benefit. The maturity benefit is the fixed sum assured plus whatever bonuses, reversionary and terminal, accumulated up to the date of policy maturity and less whatever outstanding policy loan(s) and automatic premium loan(s), inclusive of interests


In the case of a with-profit policy, the net cash surrender value includes the surrender value reversionary bonus up to the date of surrender. This is usually higher than the amount under a without-profit policy. It varies with the age of the life assured, being higher at older ages.

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9.3.5 OPTIONS TO TOP-UP

Very few with-profit policies allow the option to top-up. If they do, it is similar to the without-profit policies.


9.4 INVESTMENT-LINKED LIFE INSURANCE PRODUCTS

The benefits under investment-linked life insurance products are wholly or partly determined by reference to the value of, or the income from, property of any description or by reference to the fluctuations in, or in an index of, the value of property of any description.

Investment-linked life insurance products, as mentioned earlier, refer to policies where the policy values vary according to the values of the underlying assets that the policies are tied to at the time. Therefore, the investment returns and risks of these products are directly transferred to the policyowners. The policyowners enjoy the entire investment reward, nett of charges and bear all the risks.

A fund that invests solely in fixed income securities can reasonably be assured of a capital guarantee but the prospective rate of return is modest. On the other hand, a fund that invests solely in equities will have greater volatility, but the potential return is high.


As mentioned earlier, the premium charged and the benefit under t raditional lifeinsurance policy are stated in the policy at its inception. The premium is fixed based on the specified sum assured. Thus traditional life insurance policies are sum-assured driven.

On the other hand, investment-linked life insurance policies are account driven, in that the investment-linked life insurance policyowners have the flexibility in changing their premium payments, take premium holidays and add single premium top-ups. The life office may also retain the right to vary some of the charges made under the policies. For example, there may be a monthly policy charge which is expected to increase in line with inflation. In its init ial pricing exercise, the life office will make certain assumptions about future conditions and the changes it expects to make in its charges. If future experience differ from what it had assumed when the product was priced, the life office may depart from its intended policy towards varying charges. Thus there is an initial pricing exercise and an on going review, comparing actual experience with what had been assumed.


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9.4.3 DEATH BENEFITUnder the investment-l inked l ife insurance policy, the amount payable upon death depends on whether it is a single premium policy or a regular premium policy.

For single premium investment-linked life insurance policy, little protection is provided and the death benefit is either one of the following, depending on the company's policy :-

a. the minimum sum assured or the value of the units in the fund at the bid price which ever is higher; or b. the minimum sum assured plus the value of the units in the fund at the bid price.

In a single premium investment-linked life insurance policy, the insured bears the investment risk only if the benefit rises above the minimum death benefit.

For the regular premium investment- linked life insurance policy, more protection is provided and the death benefit is usually either one of the following, depending on the company's policy :-

a. the sum assured (chosen by the life assured) or the value of the units in the fund at the bid price whichever is higher; or b. the sum assured (chosen by the life assured) plus the value of the units in the fund at the bid price.

For a single pricing policy, the value of the units is the market price multiply by the units minus any charges. For a dual pricing policy, the value of the units is the bid price multiply by the number of units.

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9.4.5 OPTIONS TO TOP-UP

Under an investment-linked life insurance policy, the surrender value is the value of the funds calculated as follows :-

a. For a single pricing policy, it is the market price multiply by the number of the units;b. For a dual pricing policy, it is the bid price multiply by the number of the units.

Most investment-linked life insurance policies allow policyowners to buy additional number of units without taking out a new policy.

9.5 OTHER COMPARISON-TRANSPARENCY

Investment-linked life insurance policies are considered more transparent than traditional with-profit life insurance policies since the policy elements like charges are shown in detail in the prospectus.

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1. The premium system used in the calculation of premium rates in an Investment-linked policy is :-

a.b.c.d.

Using a combination of level premium and natural premium system.Using a level premium system.Using a multiple level premium system. Using a natural premium system.

2. Samantha wants to protect herself from some personal loans and credit card balances if she should die or be disabled. She is also tight for money and is worried about payingtoo much in premium payments. She seeks your advice on how to protect this area. What will be your advice?

a.b.c.d.

Buy a term insurance policy.Buy an Investment-linked life insurance policy.Buy a traditional whole life with profit policy.Buy an endowment policy.

3. In a traditional life insurance policy, the client enjoys the following EXCEPT;

a.

b.

c.

d.

The client is assured of being shielded by the vagaries of the stock market by the company’s smoothening process.The client can expect his returns on death or disability to be the accumulation of basic sum assured and addition of bonuses declared by the company.The client can choose to determine the level of protection needed and the amount of premium that he needs to pay.The client can pledge his policy as collateral in protecting a housing loan obligation.

4. Marcus argues that a person should buy a short, term life insurance policy, and invest the rest on his own in any or all possible investment vehicles. Do you agree with him?

a.

b.

c.

d.

Yes. It is wise for a person to do so as they are quite proficient in the workings of theinvesment markets.No. It would be disastrous as the person will not be able to handle the portfolio as it is a very difficult thing to do alone.No. The short, term life insurance policy, will not be able to cover his liabilities over a long period of time as we do not know what will happen to us when.Yes. This is an intelligent way of doing personal financial planning and it is being practisedby all successful people.

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5. You have just finished an interview with a client. He is a young married man with a 2 year old child. He wants to purchase insurance for his child. What would be a good combination that you would suggest?

i.ii.iii.iv.v.

A Term Life policy for protection on Death and TPD.A Comprehensive Medical Card.A Dread Disease Policy.An 18 years endowment plan.An investment-linked policy.

a.b.c.d.

i,ii,iii,iv.i,ii,iv,v.ii,iii,iv,v.i,ii,iii,iv,v.

6. What is the criteria used to compare traditional life insurance and investment-linkedpolicies?

i.ii.iii.iv.

Investment returns and Risks.Premium Computation.Death Benefit.Surrender Value.

a.b.c.d.

i,ii,iii.ii,iii,iv.i,ii,iv.i,ii,iii,iv.


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10 TAXATION AND LAW COVERING INVESTMENT-LINKED LIFE INSURANCE PRODUCTS

10.1 INTRODUCTIONInvestment-linked insurance products are basically life insurance products. Thus, the tax aspects of an investment-linked life insurance policy are treated in the same manner as other forms of life insurance policies.

As with taxation, the business of investment-linked life insurance is regulated by the laws that govern the other forms of life insurance business such as the Insurance Act, 1996 and its Regulations, the Companies Act, 1965, the Contracts Act, 1950 and legal provisions governing the common law of agency.

Funds that are collected by insurance companies in the form of premiums are made to work by being invested in various investment vehicles that will produce sufficient income to meet the obligations of the insurance company towards its policyowners. 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.

10.2 TAXATION OF INVESTMENT-LINKED LIFE INSURANCE

Premiums paid by the policyowners are, therefore, deductible against income for the purpose of income tax. 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. Effective from the year of assessment 1997, the sum of relief allowable in respect of payment of life insurance premiums for a life insurance policy is no longer subjected to the limit of 7% of the capital sum insured of the respective policy. In the case of separate assessments for married couples, the total relief is the same.

Under the 1996 Budget, an extra tax deduction of RM 3,000 under Section 49(1B) of the Income Tax Act, 1967 was announced which can be used for education and medical insurancepremiums. This is in addition to the normal tax deduction of RM 6,000 mentioned above.

The tax laws currently governing other forms of life insurance apply to investment-linked life insurance. The principal legal document regulating income tax in Malaysia is the Income Tax Act, 1967. The rates of tax and relief are usually reviewed annually when the Finance Minister proposes the budget for the year. These rates are then incorporated in the Finance Act for that year.

In order to encourage national thrift and promote individual financial independence particularly in old age, the government allows some tax relief in respect of premiums paid on life insurance policies and deferred annuities.

The premium relief is allowable when the life insurance or deferred annuity is :-

i. on the individual's life

ii. on the life of the spouse of the individual

iii. on the joint lives of the individual and his/her spouse

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10TAXATION AND LAW COVERINGINVESTMENT-LINKED LIFE INSURANCE PRODUCTS

Unlike unit trusts in Malaysia which are favourably placed as regard taxation, insurance companies do not have the same exemptions. Gains of a unit from the realisation of an investment in a unit trust are exempted from tax. Therefore, any distributions from this exempt account are also exempt in the hands of the recipient. Further, any interest received by a unit trust is also exempt if its interest received is from a government security, rated corporate bonds and bonds issued by a company listed in the KL Stock Exchange. This exemption does not apply to a convertible loan stock.

Insurance companies are, however, taxed at lower rates. The chargeable income and realised capital gains of a life fund is taxed at 8%. Thus the proceeds distributed to policyowners of investment-linked life insurance policies are tax-free in the hands of the policyowners since the surpluses generated from writing the investment-linked life insurance products are already taxed at the life insurance company level.

In addition, capital gains are not taxed in Malaysia with the exception of real property. Therefore, disposal of units in an investment-linked life insurance should not attract tax as they are capital receipts.

Income can accrue into a policy but there is no constructive receipt unless distributed. When a policy matures, or when it is paid upon the occurrence of an insured event or when it is cancelled or surrendered, it becomes a capital receipt. It is not income in nature. As long as there is no capital gains tax in Malaysia, there should be no tax consequences upon disposal of a life insurance policy or an investment-linked life insurance policy in the hands of the policyowners.

In Malaysia, the regulation of insurance business is achieved through the administration and its enforcement of the Insurance Act, 1996 and Regulations. The enforcement of the Act is carried out by the Governor who shall perform the functions of Bank Negara Malaysia on its behalf.

The main purposes of regulation include :-

The protection of public interest

By ensuring that the insurer is financially solvent and able to meet its obligations to its policyowners and claimants.

The promotion of fairness and equity

By ensuring that insurers, insurance brokers and adjusters (collectively known as licensees under the Act) are fair and equitable in their dealings with their clients and claimants.

10.3 LAW COVERING INVESTMENT-LINKED LIFE INSURANCE

The fostering of competence

By insisting on a high level of professional competence and integrity of insurers, insurance brokers and adjusters.



Playing a developmental role

Byencouraging the insurance industry to take an active part in the economic development of the country.

10.3.1 BNM GUIDELINES FOR INVESTMENT-LINKED BUSINESS

The Insurance Act, 1996 sets out the broad standards and policies, leaving the detailed requirements to be prescribed by regulations (such as the Insurance Regulations, 1996) or specified by way of guidelines, circulars and codes of good business practice.

10.3.1.1 DEFINITION OF INVESTMENT-LINKED LIFE 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.

10.3.1.2 Requirement for Approval

Section 7(l)(b) of the 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.

BNM requires an insurer who intends to market investment-linked life insurance business to submit a detailed business plan to enable BNM to assess the expertise and technical capability of the insurer to market and manage such business in an efficient and sound manner.

10.3.1.3 Separate Funds

Insurers are required to maintain separate funds in respect of each investment-linked fund. The assets of each investment-linked fund must be kept separate from all other assets of the insurer and each fund must have sufficient assets to meet its liabilities.



10.3.1.4 Investment Limits

BNM's circular JPI: 1/1997 on “Specification of Assets for the Purpose of a Licensed Insurers Margin of Solvency” which specifies the class or description of assets of a licensed insurer and the extent of a class of assets or description of assets that may be taken into account for the purpose of a licensed insurer's margin of solvency 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. The investment-linked funds are, however, subject to the following general restrictions, to reduce the risk exposure to any one company :-

i. Investments in securities in anyone investee should not exceed 5% of the paid up capitalof the investee company or n o t m o re than 5% of the total value of the assets of

the fund whichever is lower; and

ii. Investments in loans or debentures to anyone borrower or group of borrowers should not exceed 5% of the total value of the assets of the fund.

10.3.1.5 Valuation of Assets

As the amount of cash value and death benefits for investment-linked life insurance policies are based on the value of the underlying assets of the investment-linked fund, the assets of an investment-linked fund must be valued frequently to provide policyowners with more accurate unit prices and benefits. The valuation of investments at market value will enable the appreciation or depreciation in values to be immediately reflected in the unit prices and, hence, in the policyowner's benefits.

10.3.1.6 Valuation of Liabilities

In accordance with the requirements of the Insurance Act, 1996, 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 appointed actuary will be responsible to ensure that the obligations to policyowners are adequately reflected in the actuarial valuation.

10.3.1.7 Age Limit of Policyowners

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. Although Section 153(2) of the Act provides that a minor who has attained the age of 16 years may effect a life policy, a higher age requirement is imposed for investment-linked life insurance business in view of the need to confine the sale of such policies to individuals who are mature enough to make an evaluation of the investment risks involved and make sound investment decisions.



10.3.1.8 Free-Look Provision

Investment-linked life insurance policies must have a free-look provision of at least 15 days. 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.

10.3.1.9 Minimum Death Benefit

Investment-linked life insurance policies must have a minimum death benefit of RM 5,000 or 125% of the single premium whichever is higher. The minimum death benefit will ensure that investment-linked life insurance policies will be distinguished from other unit trusts products where there is no compulsion to have additional life coverage.

10.3.1.10 Minimum Premium Payment

Single premium policies must at least have a minimum premium of RM 3,000. This is to ensure a meaningful level of investment outlay for the benefit of the policyowners.

10.3.1.11 Intermediation

The investment-linked life insurance products should only be marketed by agents specifically trained and equipped with the product knowledge. The basic qualification would be the MIl Certificate Examination in Investment-linked Life Insurance. It is vital that agents who market these products have the necessary competence and expertise to be able to provide professional advice on the product to policyowners, due to the technical nature of theses products.

10.3.1.12 Disclosure of InformationA. Sales Materials/Illustrations

To ensure adequate disclosure and transparency of policies, all sales materials and policy forms for investment-linked life insurance policies must contain the following information :-

i. A general description of the investment policy and objective of the fund and the manner in which investment income will be distributed to policyowners;

ii. Policy benefits wil l be based on the performance of the funds and the factors affecting the policy benefits. Wherever possible, provide hypothetical illustrations to guide policyowners on the policy benefits;



Policyowners must be clearly informed that the investment risks under the policy are to be borne solely by the policyowners;

A maximum amount of initial charge, management fee, mortality cost and any other charges to be borne by policyowners must be stated;

The basis of computation of all policy benefits, bid and offer prices of the units, units allocation and the procedure for creating and cancelling of units must be stated;

The basis and frequency of valuation of assets underlying the fund;

A l l guarantees to po l icyowners, including the guaranteed minimum death and matur i ty benef i t s , and minimum surrender values and surrender penalty must be explicitly stated. Where no guarantees are provided, the policyowners' attention must be specifically drawn to that fact;

A statement of the investment performance of the fund for the past 5 years where available;

A prominently placed and clearly worded warning that the value of policy may rise or fall, the results shown are for illustrations only, the assumptions used for illustrations are hypothetical, and the performance of the fund is not guaranteed;

Any other information that BNM may from time to time deem necessary.

iii.

iv.

v.

vi.

vii.

viii.

ix.

x.

B. Statement to Policyowners

The statement to policyowners on the performance and status of their Investment-Linked life insurance policies should contain, as a minimum, the following information:-

The number and value of units held at end of the previous statement period;

The number and value of units bought/sold during the statement period;

The number and value of units at the end of the statement period;

Charges e.g. in i t ial charge, management fee, mortality and riders costs,etc, incurred during the statement period;

Total amount of premium received during the statement period;

The current death benefit and surrender value at the end of the current period;

The amount of outstanding loans, if any, at the end of the statement period; and


i.

ii.

iii.

iv.

v.

vi.

vii.

viii.



10.4 OTHER LEGAL REQUIREMENTS

Investment-linked life insurance business is not only subject to the Insurance Act, 1996 and Regulations but also to special legal principles that are embodied in insurance contracts such as insurable interest, utmost good faith, indemnity, proximate cause, as well as to laws pertaining to the formation of contracts, to agencies and to companies which are applied similarly to other classes of life insurance.

Readers should refer to the MIl study text on the Pre-Contract Examination for Insurance Agents for details on these subjects.

i.

ii.

iii.

iv.

v.

vi.

C. Fund Performance Report to Policyowners

The report to policyowners on the performance of the investment-linked fund must include the following information :-

A summary of the audited financial statement of the fund;

Trend analysis of not less than five (5) years, where available, on the net investment returnof the fund;

Composition and list of investments held by the fund as of reporting date;

Any charges levied against the fund during the year;

A statement on changes in the investment objective, orientation, restrictions and limitations, during the year consistent with the original intent; and





CHAPTER 10

1. The Government has allowed insurance premiums paid as relief to a certain extend because :-

The Government feels that by giving this relief, all Malaysians will be able to purchase insurance easily.The Government is giving this relief to encourage national thrift and promote individual financial independence.The Government feels that the tax that they will collect if the relief is not given is considerably low and insignificant.The Government is allowing this relief to make sure it is popular.

a.

b.

c.

d.

2. Salim and Siti are two self employed people. They do not contribute to EPF and have two young children. They would like to maximise their tax relief from insurance. What is the maximum relief that they can claim ?

RM 9,000 including Life , Medical/Education Premiums.RM 18,000 including Life , Medical/Education Premiums.RM 14,000 including Life , Medical/Education Premiums.RM 16,000 including Life , Medical/Education Premium.

a.b.c.d.

3. “In Malaysia, the regulation of insurance business is achieved through the administrtion and its enforcement of the Insurance Act, 1996 and Regulations. The enforcement of the Act is carried out by the Governor who shall perform the functions of Bank Negara Malaysia on its behalf.”The main purposes of regulation include :-

The protection of public interest.The protection of the Government’s interest.The promotion of fairness and equity.Playing a developmental role.

a.b.c.d.

i.ii.iii.iv.

i,ii,iii,iv.i,ii,iii.i,iii,iv.i,ii,iii,iv.



'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.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. The assets of each investment -linked fund must be kept separate from all other assets of the insurer and each fund must have sufficient assets to meet its liabilities.Investments in securities in anyone 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 which ever is lower.

All sales materials and policy forms for investment-linked life insurance policies must contain the following information;

Policy benefits will be based on the performance of the funds and the factors affecting the policy benefits. Wherever possible, provide hypothetical illustrations to guide policyowners on the policy benefits.The number and value of units held at e end of the previous statement period.Charges e.g. initial charge, management fee, mortality and riders costs, etc, incurred during the statement period.Any other information that BNM may from time to time deem necessary.

a.

b.c.

d.

a.

b.

c.

d.

6.

What does the section 7(2)(b) 0f the Insurance Act,1996 state;5.


4. The report to policyowners on the performance of the investment-linked fund must include the following information;

A summary of the audited financial statement of the fund; Trend analysis of not less than five (5) years, where available, on the net investment return of the fund;Composition and list of investments held by the fund as of reporting date; Any charges levied against the fund during the year;

a.b.c.d.

i.ii.

iii.iv.

i,ii,iii.i,iii,iv.ii,iii,iv.i,ii,iii,iv.

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11IDENTIFYING AND ESTABLISHING CUSTOMER NEEDS

11.1 INTRODUCTION

In the wake of the changing financial scenarios and also the major changes that has happened in the regional and global financial landscape, the man on the street is more worried, now than ever before, about getting into any investment portfolio. To him, the financial terms and jargons are confusing and he also doesn’t have the adequate knowledge, of how different financial market mechanisms work. Even though there is a heightened level of financial knowledge nowadays, compared to 15 years ago, the man on the street is still very wary of investments.

This is where the challenge sets in for an agent. Identifying and establishing a customer’s needs involves an agent applying the relevant knowledge and understanding, not only of the technical aspects of life insurance coverage and scope, but also the practice of giving financial advice in order to meet the customer’s needs.

In order to provide effective advice when marketing investment-linked life insurance product, a structured approach is important. The process of providing advice involves the following steps :-

a) Establishing relationship with the client

b) Gathering all relevant financial data

c) Establishing current financial position and goals.

d) Developing plans and strategies to meet the goals.

e) Discuss possible recommendations

f) Implementation of the agreed recommendations

g) Monitoring the portfolio.

11.2 ESTABLISHING RELATIONSHIP WITH A CLIENT

Agents have to begin this process by establishing a relationship with the client. The agent has to convince the client that he is in a position to assist the client to fulfil his financial goals. This is an important step. The agent can employ the various methods that are taught by their managers of the insurance companies as to how to go about establishing relationship with the client. It is important that this step is done properly because this is where the agent wil l be able to do a pre l iminary screening of the client’s financial objectives and goals.

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11.3 GATHERING ALL RELEVANT FINANCIAL DATA

I D E N T I F Y I N G A N D E S T A B L I S H I N G C U S T O M E R N E E D S

11 IDENTIFYING AND ESTABLISHING CUSTOMER NEEDS

The next step is to gather all relevant data that will assist the agent to do an analysis of what is needed in planning for the client. The agent has to conduct a thorough “fact-find” exercise and obtain all relevant data to help him move to the next step.

All Insurance companies have made it mandatory for agents to fill up the Customer Fact Find Form (CFF) before submitting the new business proposal. The CFF is an important document and it helps the agent to do the necessary groundwork to ascertain the client’s financial situation and also to establish the client’s needs. It is sad to note that the CFF is not fully utilised by present agents in the field and the real impact of the CFF is not truly realised. It is important that all agents understand the importance of the CFF and doing a thorough job will assist them to obtain all relevant information about the customer before making recommendations.

It also allows the agent to build a clear understanding of the customer’s present situation and help him formulate recommendations to achieve the customer’s financial goals and objectives. The CFF addresses the following areas;

a) Customer’s Personal and Dependents details.

b) Life and Financial Priorities and Goals.

c) Risk Profile.

d) Net Worth Analysis.

e) Cash Flow Analysis.

f) Recommendations and Record of Advice.

11.4 ESTABLISHING CURRENT FINANCIAL POSITION AND GOALS

After having gathered the relevant data, the agent will have to analyse these data and come up withan analysis that will help establish the client’s current financial position and also his future goals. This is important because this will allow the agent to come up with a blue print that will finally be recommended to the client and put in motion.

11.5 DEVELOPING PLANS AND STRATEGIES TO MEET THE GOALS

In this step, the agent has to develop the pertinent plans that will help the client to realise his goals. The analysis will give birth to recommendations that will satisfy the client’s need in areas like;



The list above is not exhaustive but these are the main areas that most of us worry about. Developing a constructive plan to meet the client’s need is important and this has to be done earnestly.

11.6 DISCUSS POSSIBLE RECOMMENDATIONS

Once the plan has been developed, the agent will then have to sit and discuss in length, the plan that has been developed for his client. Remember, every client is different, so if an agent thinks he can duplicate one strategy or plan for multiple clients, then he is wrong. A plan that has been developed is unique only to the particular client and the agent must understand this.

In this step, the agent must have a very detailed and involving discussion with the client. The agent must be able to mitigate any questions that will arise as to why a particular strategy has been recommended. After having discussed it thoroughly, the agent will have to make some changes to the recommendations, if any, and then move on to the next step of implementing it.

11.7 IMPLEMENTATION OF THE AGREED RECOMMENDATIONS

Now that the client has agreed to the recommendations, the agent will now put into effect all the recommendations that have been agreed to. Please make sure that the implementation is done as per the discussion and any changes to the amount of cover or premiums must be communicated to the client before it is put through.

11.8 MONITORING THE PORTFOLIO

Monitoring the client’s policies is a very important function in an agent’s scope of work. We must make sure that regular monitoring is done and the client should also be informed of the progress of his policies. As we are dealing with Investment-Linked life insurance products, the product provider will send a quarterly or yearly report to the clients. The agent must be sure that the client gets these reports and also be at hand to help explain the report to the client. The agent also has a moral obligation to ensure that the funds growths are in tandem with the initial objectives established. The agent must assist the client to make the necessary switching and adjustments to ensure that the client gets the best returns from the policies.

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.

a)

b)

c)

d)

e)

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Agents must commit themselves to do a policy review on a half yearly basis or yearly basis. Ad hoc reviews can also be done if there is a special need from the client or if thereis a major change that might have happened to the client’s investment account.

It is good to do these regular reviews as this will also be an avenue for the agent to obtain quality referrals from the clients to further expand their life business. It also allows the agent to be in a place to do cross selling of other insurance related products whilst conducting these reviews.




To project an air of professionalism to the client.To ensure that the client is comfortable and knows the important areas concerning the policy that he is going to buy.To ensure that the agent will get good referrals.To ensure that the agent gets to sell the policy as fast as possible.

a.b.

c.d.

Why is it important to identify and establish customer’s needs?

CHAPTER 11

1.

To submit a comprehensive picture to the company.To allow the agent to build up a clear understanding of the customer’s circumstances.To make sure that the clients’ information is used to design future and more effective policies.To only comply to Bank Negara Malaysia’s new requirements.

a.b.c.

d.

What is the use of the Customer Fact Find?2.

Customer’s Personal and Dependents Details.Life and Financial Priorities and Goals.Risk Return Ratio.Net Worth Analysis.

The CFF will address the following areas;4.

Establishing relationship with the client.Discuss possible recommendations.Establishing current financial position and goals.Implementation of the agreed recommendations.Monitoring the portfolio.Gathering all relevant financial data.Developing plans and strategies to meet the goals.

a. vi,i,ii,iii,iv,v,vii.b. i,vi,iii,vii,ii,iv,v.c. i,ii,iii,iv,v,vi,vii.d. i,vi,iii,ii,vii,iv,v.

a. i,ii,iii. b. i,ii,iv. c. i,iii,iv. d. ii,iii,iv.

i.ii.iii.iv.v.vi.vii

i.ii.iii.iv.

Arrange the financial planning process in order;3.

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Recommend that his agent be given a letter of commendation and an award from the company.Speak highly about the level of commitment and service given to him by his agent.Keep his agent as a very well guarded secret.Help him in prospecting and referring his friends to the agent.

a.

b.c.d.

To ensure that the client is well taken care of and, will assist him in providing add on business and quality referrals.To establish himself as a very good agent in the eyes of the company.To be able to attract more people to join him in carrying out insurance business.To ensure that no other agents will approach his client to sell life insurance products.

Why is important for agents to establish a good relationship with their clients?6.

a.

b.c.d.


Indran is a very satisfied insurance client. He is happy with his agent and the plans that have been offered to him. His agent has done a lot for him. Indran will definitely do the following EXCEPT;

5.

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12MARKETING AND AFTER-SALES SERVICES,ETHICS AND CODE OF CONDUCT

M A R K E T I N G A N D A F T E R - S A L E S S E R V I C E S , E T H I C S A N D C O D E O F C O N D U C T

12.1 INTRODUCTION

12.2 MARKETING

In this chapter, we shall look into the basic considerations which form a prerequisite to the process of marketing investment-linked life insurance and the need for self-regulation in conducting investment-linked life insurance business in Malaysia.

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. In a sales-oriented environment, the sales and marketing departments' role is strictly to sell company'sproduct which the company developed. Owing to the emphasis on sales, hard sales techniques are frequently used to stimulate customers' interest in company's products.

Customers who have purchased p olicies from such an organisation usually ended buying policies which they do not understand, meet their needs, nor could they afford.

Owing to changes in the market environment, many insurance companies have become market oriented. In market-oriented insurance companies, the role of the sales and marketing department is to determine the needs of customers and satisfying these needs by developing and distributing appropriate policies.

Generally, a market-oriented insurance company should undertake the following functions;

• Planning and control

Planning is needed to develop the marketing plan whi le controlling involves the measur ing of results agains t t h e plan and making necessary changes. A

marketing plan is a document which sets out the company’s marketing objectives, and sales goal for each product or product line.

• Market identification

This involves the selection of segments of the market which have needs that can be met by the products tha t c a n b e developed or have been developed by the

insurance company. A market segment is a group of customers with similar needs.

• Product development

A f t e r m a r k e t s e g m e n t s a r e i d e n t i f i e d , t h e i n s urance company would develop appropriate policies to meet the needs of the segment.

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12 MARKETING AND AFTER-SALES SERVICES, ETHICS AND CODE OF CONDUCT

• Selection of distribution channel

This involves the identification and selection of suitable channels for distributing the policies to customers. The channels of distribution used by insurance companies may include agents, brokers, salaried employees, mass mailing, vending machines, banks, credit card companies, discount card companies, etc.

• Promotion

This involves the identification and selection of suitable promotional activities including advertising, sales promotion and personal selling which will support distribution.

Insurance agents are frequently involved with some aspects of marketing of insurance products. Agents can influence the product design because their views are often sought by insurers before the insurers embark on the development of new policies.

More significantly, agents constitute the most important channel of distribution. While the other marketing factors, such as marketing plan, market identification, product development, pricing and promotion, may affect how much insurance is sold, the agents are the main force behind most insurance sales.

The success of an insurance company's marketing efforts therefore depends on the extent to which its agents are market-oriented. In other words, to ensure success in its marketing efforts, a market-oriented insurance company must be complemented with a market-oriented agency force.

12.2.1 A MARKET – ORIENTED AGENT

As has been mentioned earlier, insurance agents constitute an important channel of distribution for insurance companies. Since insurance agents are engaged by insurers to distribute policies to customers, a market-oriented agent would be one who distribute policies with the objective of satisfying customers' requirements and needs, and at the same time earn an income for himself.

Since an insurance agent distributes policies mainly through personal selling, the objective of satisfying customer's requirements profitably can be achieved through the use of sales plan, where sales goals, strategies and objectives are coordinated with market analysis, segmentation and targeting.

A sales plan is important because it allows an insurance agent to perform the function of planning and controlling. When an insurance agent is involved in planning, he is establishing a goal for the agency and the ways to achieve it.

A sales plan is equally important for controlling, that is measuring results against the plan and making necessary changes. A sales plan includes the following :-

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Sales goal.

Objectives - these can be in terms of target market.

Sales strategy.

Implementation and control.

An agent who engages in personal selling requires;

Product knowledge.

Market knowledge.

Selling techniques.

Knowledge of buying process.

Knowledge of selling process.

Selling techniques.

12.2.2 CONSUMER BUYING DECISION PROCESS

A knowledge o f t h e c o n s umer buying decision process is important to an insurance agent because i t he lps the agent to adjust to buyers and as a consequent the sales part will be more pleasant. There are five stages in consumer buying decision process :-

At this stage, the consumer becom aware of the threat of risks or a poten opportunity and feels the need for product to protect him from financial difficulties or to satisfy his needs.

When the need has been perceived, consumer searches for informationshops around. The intensity of these efforts depends on factors such as :-

a. the consumer's experience in purchasing the product; b. the importance of the purchase ( benefits from the purchase).c. the value involved.

Information search

Problem recognition

Evaluation of alternative policiesFrom the information obtained, the consumer will evaluate the product based on a set of criteria. The criteria are characteristics or features that are desired (or not desired) b y t h e c o n s u m e r . T h e c o n s u m e r t h en decides on which seller to buy from. S t u d i e s c o n d u c t e d i n t h e U . S . A . i n d icate that the most important factors for the selection of an insurer are;



a. Reputation of the insurer (60%); b. Quality of coverage and services provided (26%); c. Policy benefits (14%).

Other factors which have influence on the consumer buying decision are ;

a. Agent's personality and friendliness; b. Agent's professional capability; c. Premium and other terms.

Post-purchase evaluation

After the purchase has been made, the buyer begins to evaluate his purchase.The agent who del ivers a p ol icy promptly k e e p s 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.

Purchase

After evaluating the alternative products based on criteria and factors set by thec o n s u m e r h imse l f , wh ich are often inf luenced by personal public and marketer-dominated sources, the consumer makes the decision to purchase oneof the alternative products.

12.2.3 THE SELLING PROCESS

Locating the prospective customer

An insurance agent's potential customers are called prospects. Prospecting involves identifying, contacting, and qualifying potential customers. Prospecting is an ongoing process, and the ability to locate prospects is an early and continuous determinant of an agent's success.

An agent is sometimes supplied with a list of prospects. At other times, potential customersmust be discovered by the agent himself. The names of prospects can come from many sources including;

Current and past customers.

Friends, relatives, and neighbours.

Business associates.

Social and professional contacts.

Coupons and enquiries from telemarketing and advertising activities.

i.

ii.

iii.

iv.

v.

The selling process in personal selling involves five basic steps :-

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Creating a sales presentation

The sales presentation is the promotional message an insurance agent delivers to a prospectto explain, stimulate interest in, and motivate the prospect to purchase the product(s) recommended in the proposal. It may be informal or highly structured. Many agents use visual aids (brochures, charts or graphs) in their presentations. The presentation should be flexible so that it can be adapted to various situations.

It is important, however, to note that Section 150(4) of the Insurance Act, 1996provides that insurance agents must use sales brochures or sales illustration that is authorised by the insurer. Sales materials/illustrations must also contain the information discussed in 10.3.1.12

Conducting the sales interview

An insurance agent must first gain the attention of the potential customer. After gaining the prospect's attention, the sales presentation must develop the prospect's interest. Product samples or models are effective in doing this. After creating an interest in the prospect, the agent must create a desire for the product which would satisfy theprospect's need.

Handling objections

The success of the sales interview hinges on the effectiveness of insurance agent's skill in handling objections. The prospect may want time to think the idea over, or may not agree with the price. The quality of the product may also be questioned. The agent must learn how to answer questions and handle objections in a manner which helps to pave the way for successful completion of the interview.

Closing the sales

At some point, the prospect will reach decision whether to buy or not to buy. If the presentation is successful, the sale will be made. Sales are not always closed at the end of the first presentation. If more meetings are required, insurance agent should try to set a date for a follow-up interview.

Enquiries from internet home pages.

Seminars or education classes.

Newspapers and magazine articles or notices.

Mailing lists and directories.

Company records and reports.

vi.

vii.

viii.

ix.

x.



12.2.4 AFTER SALES SERVICES

The successful sale of an insurance contract does not free the agent from further interaction with his customers. In fact, insurance contracts require an insurance agent to provide after-sales services on a continuous basis. The follow-up stage helps ensure that the customers remain sat isf ied with the purchase. After-sales calls on customers also help reduce the customer’s cognitive dissonance. Cognitive dissonance a psychological state in which customers feel uncertain and often quest ion whether they should have purchased a product at all, or whether they should have purchased an alternative brand or another product rather than the one they actually bought. In the after-sales calls, the agent can reinforce the customers' original decision to buy the product.

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 may include the companies assigning their agents specific responsibilities such as;

a. Making sure that the application is complete and that all the proposer's answers have been recorded accurately clearly;

b. Providing timely response to any applicant or company questions or requests.

The delivery of a policy is also an important aspect of providing after-sales services. Delivery of a policy gives the agent an opportunity to perform the following :-

Dispel the customer ' s cognitive dissonance by reassuring the policyowner and other family members about their decision to buy the policy;

Provide a basis for future sales by reminding the policyowner about any currently unmet or future financial needs or expectations;

Re-emphasize the insurance agent's commitment to providing the policyowner quality service;

Encourage the policyowner to call the agent if the policyowner has any problems or questions that need to be answered;

Explain the policy's provisions, terms and conditions;

Obtain names of referred leads and other prospects;

Strengthen the customer relationship and help encourage persistency.

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12.3 ETHICS AND CONDUCTAn important aspect of professionalism that makes for success of, an insurance agent and also (sad to say) exposes those that fail to maintain their professional standards, is the ethical aspect of the job that is done.

Rules for the conduct of the business and for setting competency standards are required to ensure that the highest standards required, especially in handling investment-linked life insurance business where customers need the confidence that their advisor is professional in managing their financial choices, are present.

Choices of advice can affect the quality of service that is received by the customer. An insurance agent may not actually break specific rules, yet some advice may be less than ideal for the customer. Thus the insurance agent must decide how meticulous he will be in going beyond the specific rules in establishing and maintaining a set of personal ethics and conduct.

A truly professional person makes an uncompromising commitment to maintain an absolute ethical standard. It is, thus, not a matter of rules but of behaviour and attitude. Customer’s satisfaction is the best basis for the professional insurance agent's success and, therefore, it is good business reason to be ethical. Ethics should include :-

a. Behaving with Complete Integrity in an Insurance Agent's Professional Life

'Integrity' means uniformity, consistency, straightforwardness, directness and honesty. To carry this attribute into all aspects of the insurance agent's work is the key to being professional.

b. Complying with the Law and with the Best Principles and Practice relating to Financial Advice

To ascertain w h a t i s b est practice and to follow it in all cases is demanding, but is also highly rewarding. To follow the letter of the law is necessary but not sufficient

for a professional person who must also aim to be one of the best technically and ethically.

c. Behaving in a Professional and Honourable Manner towards Those with Whom the Insurance Agent is in Contact in Business

'Conduct' means every aspect of what a person does and how the person does it. 'Honourable' means to act always in a manner that a person can be proud of in the

future whenever the incident reoccurs to in the person's memory. It is not a matter of conforming to probably outdated codes on dress or social niceties.

It takes time for an insurance agent to be proven to be honourable, but a reputation for honour can be lost quickly, if there is a lapse. A maintained reputation for honourable conduct is , however, sti l l the best competitive advantage that any professional insurance agent could have.

d. Observing and Applying the Relevant Codes of Good Practices

In each business there are codes of practice, rules, prescribed and recommended guidance notes, etc. Each of these have a good intention behind them, and must be followed even where they appear bureaucratic or limiting to the free enterprising spirit.



12.3.1 LIAM’S GUIDELINES ON THE CODE OF CONDUCT

Besides the Guidelines provided by the regulatory authority, Bank Negara Malaysia, see Chapter 10 of this study text, there is currently no other special code of conduct or ethics set specifically for the transaction of investment-linked life insurance business. The guidelines formulated by the Life Insurance Association of Malaysia (LIAM) generally for self-regulating the life insurance business would apply to the investment-linked life insurance business until such time when a more specific code is provided. The LIAM's guidelines are provided under the following headings :-

Part I - Guidelines on the Code of Conduct.

Part II – Life Insurance Selling.

Part III Statement of Life Insurance Practice.

12.3.1.1 PART 1 – Guidelines on the Code of Conduct

This part deals with the following aspects concerning the code of conduct :-

Statement of Philosophy.

Coverage.

Monitoring Devices.

Seven Principles of the Guidelines.

Code of Conduct.

12.3.1.1.1 Statement of Philosophy

These guidelines hinge on the following statement of philosophy :- The life insurance business is based on the philosophy of risk sharing. It is universal that such business be operated and administered with the highest degree of integrity and ethics.

It is a business based on trust and honesty, requiring a high degree of responsibility and professionalism.

The confidence of policyowners and members of the public in the integrity and honesty of life insurers shall be safeguarded and enhanced.

Life insurers shall at all times see that their business is soundly managed to ensure the safety of policyowners' savings and the credibility of their companies.Life insurers shall maintain a policy of efficient and prompt service to policyowners and, to assist and advise them where necessary, with the aim of promoting goodwill.

i.

ii.

iii.

iv.

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In pursuance of the above objectives and philosophy, the life insurance industry has endeavoured to codify the ethics to provide a guidance to those employed in the industry to promote and maintain uniform ethical standards, and to uphold the trust and welfare of policyowners at all times.

It is evident from the above statement of philosophy that life insurance business particularly investment-l inked l ife insurance should be conducted in a responsible and professional manner with a high degree of integrity. This then will enable the commitments to the policyowners, in the various forms of financial guarantees provided, to be met at all times. It is thus a natural requirement that those involved, including the agency force, conduct their affairs in a responsible manner so that any one insurer, in particular, and the life insurance industry, in general, can meet the objectives formulated in the Statement of Philosophy.

The sections that follow provide summaries of the codified ethical rules which the employees of an insurer are expected to abide by at all times.

The guidelines cover all employees of a life insurer operating in Malaysia. The guidelines set out the minimum standards of conduct expected of all employees of an insurer. Insurers, if they so desire, are f ree to formulate more comprehensive sets of rules for maintaining ethical standards amongst their employees.

12.3.1.1.2 Coverage

12.3.1.1.3 Monitoring Devices

To ensure that the guidelines are abided by, the management of a life insurance company is required to established the following minimal procedures :-

Require all employees (existing and upon appointment in the case of new employees) to sign a declaration to observe the guidelines;

Require all intermediaries (existing and upon appointment in the case of newintermediaries) to sign a declaration to observe the guidelines;

Assign responsibility to the heads of department to ensure compliance with theguidelines on a day-to-day basis and to handle enquiries from employees on matters relating to the code of conduct;

i.

ii.

iii.

iv.

v.

vi.

Breaches observed are to be reported to an audit/disciplinary committee which reports directly to the Board of Directors. In addition, the committee is required to submit quarterly reports to Bank Negara Malaysia, the supervisory authority for insurance companies, on breaches observed and the actions taken on these, during the quarter;

Maintain centralised records of breaches;

Report immediately cases of fraud to the police and Bank Negara Malaysia.



12.3.1.1.4 The Seven Principle Underlying Guidelines

The document on the Code of Ethics and Conduct, dwells at length on the following principles. It is sufficient at this juncture to state these; the interested reader is encouraged to refer to this document :-

12.3.1.1.5 Code of Conduct- As a Guide

This section places emphasis on the following matters :-

1. The guidelines are intended to serve as a guide for; the promotion of proper standards of conduct, and establishing sound and prudent business practices amongst life insurance companies. 2. It is not the intention of the guidelines to restrict or replace the matured judgment of employees in conducting their day-to-day business. 3. When in doubt as to the implications of the Code of Conduct, employees are to seek guidance from their respective heads of department, who may, if, necessary seek guidance from their company's management or from Bank Negara Malaysia.

To avoid conflict of interest.

To avoid misuse of position.

To prevent misuse of information.

To ensure completeness and accuracy of relevant records.

To ensure confidentiality of communication and transactions between the life insurancecompany and its policyowners and clients.

To ensure fair and equitable treatment of all policyowners and others who rely on or who are associated with the life insurance company.

To conduct business with the utmost good faith and integrity.

i.

ii.

iii.

iv.

v.

vi.

vii.

12.3.1.2 Part II – Life Insurance Selling

This part deals with the following aspects relating to selling of life insurance :-

Introduction.

General Sales Principles.

Explanation.

Disclosure of Underwriting Information.

Accounts and Financial Aspects.

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12.3.1.2.1 IntroductionThe following generalities are introduced :-

i. The term 'life insurance' used in the Code of Ethics and Conduct covers all types of

Home service life insurance.

Ordinary life insurance.

Annuities.

Pension Contracts.

Investment-linked insurance; and

Permanent Health Insurance.

The Code applies to intermediaries, i.e. all those persons, including employees of a lifeinsurance company, selling life insurance. Registered insurance brokers are specifically excluded, as they are subject to a separate professional code of conduct.

The onus is placed on the member companies of LIAM to enforce the code and to use their best endeavours to ensure compliance with the various provisions of the code, by all those involved in selling their policies.

The audit/disciplinary committee of the insurer is responsible for monitoring compliance of the life insurance intermediaries. The committee is also responsible for the submission of the quarterly report to Bank Negara Malaysia on breaches observed in a quarter and the corrective or punitive actions taken.

In the case of complains from policyowners that an intermediary has acted in breach of the Code, the intermediary shall be required to cooperate with the life insurancecompany concerned in establishing the facts. The complainant shall be informed that he can refer the complain to relevant life insurance company, if not so referred.

It is stressed that an overriding obligation of an intermediary is to conduct business at all times with utmost good faith and integrity.

ii.

iii.

iv.

v.

12.3.1.2.2 General Sales Principles

This and the following sections are reproduced from the Code of Ethics and Conduct of LIAM to maintain the full spirit of the Codes.

1. The intermediary shall :-

When he makes contact with the prospective policyowner, make it known that he is an agent of which insurance company and produce his Registered Intermediary Authorisation Card to identify himself;

i.



Ensure as far as possible that the policy proposed is suitable to the needs and not beyond the resources of the prospective policyowner;

Give advice only on those matters in which he is competent to deal with and seek or recommend other specialist advice if this seems appropriate;

Treat all information supplied by the prospective pol icyowner as completelyconfidential to himself and the life office which he represents;

In making comparisons with other types of policies or other forms of investment,make clear the different characteristics of each policy/investment;

Render continuous service to the policyowner.

ii.

iii.

iv.

v.

vi.

Make inaccurate or unfair criticisms of any insurers;

Attempt to persuade a prospective policyowner to cancel any existing policies unless these are clearly unsuited to the policyowner's needs.

2. The intermediary shall not :-

i.

ii.

It has been agreed by all member companies of the Life Insurance Association of Malaysia (LIAM) that all the agents are made fully aware that it is against the interests of a policy-owner and the life insurance industry to practise 'twisting'. The member companies have also agreed to co-operate to eliminate 'twisting'. Appropriate action will be taken if 'twisting' is proved.

'Twisting' is a form of misrepresentation in which a policyowner is induced to discontinue an insurance policy or to have an insurance policy made paid-up in order to purchase a new policy with another company or the same company, without clearly informing the policy-owner of the differences between the two policies and of the financial consequences of replacing the original policy.

The detriments that arise from twisting are :-

Every time a policyowner moves his basic insurance from one life office to another, he must commence again the qualifying period (usually two or three years) before this insurance will become eligible for a surrender value and come under the non-forfeiture system (i.e, the protection he is afforded against lapse of his policy and loss of its death cover should he accidentally or deliberately fail to pay a premium within the days of grace).

The amount of the annual premium under an existing policy may be lower than that called for by a new policy having the same or similar benefits. Any replacement of the same type of policy will normally be at a higher premium rate based upon the insured's then attained age.

Since the initial costs of life insurance policies are charged against the cash value in the earlier policy years, the replacement of an old policy by a new one results in the policyowner sustaining the burden of these costs twice.

i.

ii.

iii.

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The suicide clause and incontestible clause (if any) begin anew in a new policy being denied by the insurance company which would have been paid under the policy which was replaced.

12.3.1.2.3 Explanation of the Contract

Explain all the essential provisions of the contract, or contracts, which he is recommending so as to ensure as far as possible that the prospective policy owner understands what he is committing himself to; Draw attention to any restrictions including exclusions applying to the policy; Draw attention to the long term nature of the policy and to the consequent effects of early discontinuance and surrender;Draw attention to whether the policy qualify for tax relief or otherwise.

i.

ii.iii.

iv.

The intermediary shall

Where a policy offers participation in profits, or otherwise depends on variable factors such as investment performance, descriptions of the benefits shall distinguish between fixed and projected benefit. In the case of a collateral policy where maturity proceeds are for loan settlement, which are dependent on non-guaranteed benefits, thesales illustration should mention that "there is no guarantee that the full loan amount will be available on maturity".

Where projected benefits are illustrated, it should be made clear where applicable, that they are based on certain assumptions, for example, future bonus declarations, and hence are not guaranteed, and these benefits declared in the future may be lower or higher than those presumed, (past performance may not necessarily be repeated in the future). In the case of investment-linked policies, it should be made clear that unit values may fluctuate up or down depending on the value of the underlying investments.

When an intermediary has been supplied with an illustration by the life office, he shall use the whole illustration in respect of the contract which he is discussing with the prospective policyowner, and no other, and shall not add to it or select only the most favourable aspects of it. The Sales illustrations shall be prepared in accordance with the recommendations for bonus/interest/dividend/yield illustrations outlined in Appendix 1 of the Code.

1.

2.

3.

4.

iv.

12.3.1.2.4 Disclosure of Underwriting InformationThe intermediary shall on receiving the completed proposal form or any other material :-

Avoid influencing the proposer and make it clear that all the answers or statements are the proposer's own responsibility;

Ensure that the consequences of non-disclosure and inaccuracies are pointed out to the proposer by drawing his attention to the relevant statements in the proposal form and by explaining them himself to the proposer.

1.

2.



12.3.1.2.5 Accounts and Financial Aspects

The intermediary shall :-

12.3.1.3 Part III- Statement of Life Insurance Practice

This part deals with the following aspects :-

Introduction.

Claims.

Proposal Forms.

Policies and Accompanying Documents.

Sales Materials/Advertisements.

12.3.1.3.1 Introduction

The aim of this part is to reduce the formalities involved in the issue of new policies and payment of a claim. In addressing these, the guidelines recognise the problems posed by non-disclosures and improper-claims; albeit by a few policyowners. Due to these and possibly other reasons, the Statement of Practice is not made mandatory.

The audit/disciplinary committee of the insurer is responsible for monitoring compliance to the guidelines by the insurer. It is also responsible for submitting reports to Bank Negara Malaysia on the breaches and the corrective or punitive actions taken.

Acknowledge receipt (which unless the intermediary has been otherwise authorised by the life office shall be on his behalf) and maintain a proper account of all money’s received in connection with an insurance policy and shall distinguish the premium from any other payment included in the moneys.

Forward to the company without delay any moneys received for life insurance.

1.

2.

12.3.1.3.2 Claims

The guidelines require that an insurer may not unreasonably reject a claim. In particular, an insurer may not reject a claim on grounds of non-disclosure ormisrepresentation of a matter that was outside the knowledge of the proposer. The exceptions to this are those circumstances mentioned in the policy provisions or the provisions of the Insurance Act, 1996 and Regulations.

If there is a time limit for notification of a claim, the claimant will not be expected todo more than to report a claim and subsequent developments as soon as reasonablypossible.

a.

b.

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12.3.1.3.4 Policies and Accompanying Documents

On the claimant proving the insured event and the right to receive the claim, the claim has to be settled without undue delay

The insurer shall not collect any claim processing fees from the policyowner or the beneficiary.

12.3.1.3.3 Proposal Forms

The design of the proposal forms shall conform with Part III of the Code of Good Practice for Life Insurance Business.

Insurers will continue to develop clearer proposal forms and policy documents taking into consideration the legal nature of insurance contracts.

The policy and accompanying documents must indicate whether there are rights to a surrender value. If the policy carries a right to a surrender value then this right must be indicated.

In respect of a proposal for whole-life or endowment, the sales literature should bring out the following features of these contracts;

These are long-term contracts; Surrender values, especially in the early years, are often less than the total premiums paid. The Policy will not have a cash value on termination until policy owner has paid premium for three years or more.

c.

d.

If the proposal form calls for the disclosure of material facts a statement should be included in the declaration, or prominently displayed elsewhere on the form or in the document of which it forms part :-

drawing attention to the consequences of failure to disclose all material facts. warning that if the signatory is in any doubt about whether certain facts are material, these facts should be disclosed.

A life insurer shall provide a copy of the proposal form relating to the policy owner together with the policy

a.

i. ii.

b.

a.

b.

i.ii.

12.3.1.3.5 Sales Materials/Advertisements

Insurers wil l ensure that information contained in the sales materials/ advertisements is correct and truthful and thus not misleading to the public.

Read also chapter 10 ( 10.3.1.12 Disclosure of Information ) of this study text on the guidelines provided by the regulatory authority, BNM in respect of sales material / illustrations of Investment-Linked life insurance.

.




Planning and control. Market identification.Product development. Undercut slow agents with productive ones.

i.ii.iii.iv.

Generally, a market-oriented insurance company should undertake the followingfunctions;

CHAPTER 12

1.

A sales plan includes the following :-2.

a. i,ii,iv.b. i,ii,iii.c. i,iii,iv.d. ii,iii,vi.

Sales strategy.Hard selling techniques.Sales goal.Objectives - these can be in terms of a target market.

i.ii.iii.iv.

a. i,iii,iv.b. ii,iii,iv.c. i,ii,iv.d. i,ii,iii.

An agent can potentially get prospects effectively by utilizing the following methods.3.

Approaching his natural market.Taking out advertisement in newspapers and magazines to promote himself.Asking for qualified referrals from his satisfied clients.Obtain a list of existing clients from a rival company to replace their plans with his company’s ones.

i.ii.iii.iv.

a. i,ii,iii.b. ii,iii,iv.c. i,iii.d. ii,iv.

A truly professional person makes the following commitments;4.

Proudly announce about the quality of his clients and drop names to impress others.Shares intimate knowledge of his clients to fellow agents.Maintain a very high ethical standards when it comes to any information pertaining his clients.Conduct himself in a professional and honourable way whilst carrying out his work.

i.ii.iii.

iv.

a. i,ii only.b. ii,iii, only.c. i,iii only.d. iii,iv only.

120 CEILLI



To avoid conflict of interest. avoid misuse of position. To prevent misuse of information. To ensure completeness and accuracy of relevant records. To ensure confidentiality of communication and transactions between the life insurance company and its policyowners and clients. To ensure fair and equitable treatment of all policyowners and others who rely on or who are associated with the life insurance company.To conduct business with utmost good faith and intergrity.

i.ii.iii.iv.

The following are included in the Code of Ethics and Conduct for agents. It is known as;5.

Sebastian is very unhappy with the policy that was given to him. He wants to make a complaint. To whom can he complain to help him correct the situation?

6.

Bank Negara’s Insurance Mediation Bureau.LIAM.The particular Insurance Company.The Newspaper.

i.ii.iii.iv.

a. i,iii,iv.b. i,ii,iii.c. ii,iii,iv.d. i,ii,iv.

v.

vi.

vii.

The seven principle underlying guidelines.Bank Negara’s guidelines on good agent governance.The international standards set for agents.The leading criteria for the awarding of LIAM’s national award.

a.b.c.d,


121CEILLIA N S W E R S T O S E L F - A S S E S S M E N T Q U E S T I O N S

ANSWERS TO SELF-ASSESSMENT QUESTIONS

CHAPTER 1Answers : 1-C, 2-D, 3-D, 4-A, 5-A, 6-D

CHAPTER 2Answers : 1-B, 2-C, 3-B, 4-C, 5-A, 6-B

CHAPTER 3Answers : 1-A, 2-D, 3-C, 4-C, 5-D, 6-B

CHAPTER 4Answers: 1-C, 2-D, 3-B, 4-C, 5-D, 6-B

CHAPTER 5Answers : 1-D, 2-B, 3-B, 4-A, 5-C, 6-B

CHAPTER 6Answers : 1-D, 2-D, 3-C, 4-A, 5-C, 6-B

CHAPTER 7Answers : 1-B, 2-A, 3-B, 4-D, 5-A, 6-D

CHAPTER 8Answers : 1-B, 2-A, 3-D, 4-D, 5-B, 6-B

CHAPTER 9Answers : 1-D, 2-B, 3-C, 4-C, 5-C, 6-B

CHAPTER 10Answers : 1-B, 2-B, 3-C, 4-D, 5-A, 6-A

CHAPTER 11Answers : 1-B, 2-B, 3-B, 4-B, 5-C, 6-A

CHAPTER 12Answers : 1-B, 2-A, 3-C, 4-D, 5-A, 6-B