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CEILLI

CE RT I F I CAT E E XAMI NAT I ON I N I NVE S T ME NT - L I NKE D L I F E I NS URANCE


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 undergone
tremendous 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 how
investment-linked life insurance works and how to market it to the public. This course
also introduces the agent to the world of Investment-Li nked Li f e Insurance sal es and
it is also hoped that the agents will not stop wi th this course but empower themselves
with higher qualifications in the coming future.
The Chapters in this course are designed in such a way, that a new person will get a clear
picture 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.
CEILLI
CE RT I F I CAT E E XAMI NAT I ON I N I NVE S T ME NT - L I NKE D L I F E I NS URANCE
CERTIFICATE EXAMINATION IN
INVESTMENT-LINKED LIFE INSURANCE
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
CEILLI
CE RT I F I CAT E E XAMI NAT I ON I N I NVE S T ME NT - L I NKE D L I F E I NS URANCE
CERTIFICATE EXAMINATION IN
INVESTMENT-LINKED LIFE INSURANCE
Copyright The Malaysian Insurance Institute 2010
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, 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 Insurans
Am 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 Lumpur
Website : www.insurance.com.my
ISBN 978-983-2432-02-9
Pages
1
1.1 Introduction
2
3
CONT E NT S
The Malaysian Insurance Institute
I NTRODUCTI ON TO I NVESTMENT - LI NKED
LI FE I NSURANCE
KEY CONSI DERATI ONS I N I NVESTMENT
2.1 Introduction
2.2 Investment Objectives
2.3 Funs Available
2.4 Risk Or Security
2.5 Investment Horizon
2.6 Acessibility Of Funds
2.7 Taxation Treatment
2.8 Performance Of The Investment
2.9 Diversification
Self-assessment Questions
TYPES OF I NVESTMENT ASSETS
3.1 Introduction
3.2 Investment Choices
3.3 Cash And Deposits
3.4 Fixed Income Securities
3.5 Shares
3.6 Unit Trusts
3.7 Investment Trusts
3.8 Properties
3.9 Derivatives
3.10 Exchange Traded Funds
3.11 Sukuk Bonds
3.12 Capital Guaranteed Fund
Self-assessment Questions
CERTI FI CATE EXAMI NATI ON I N
I NVESTMENT - LI NKED LI FE I NSURANCE
Self-assessment Questions
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CONT E NT S
The Malaysian Insurance Institute
I NVESTMENT - LI NKED LI FE I NSURANCE PRODUCTS
A WORLD SCENARI O
4.1 Introduction
4.2 In The United Kingdom
4.3 In The United States Of America
4.4 In Singapore
4.5 In Malaysia
Self-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 Guidelines
Self-assessment Questions

TYPES OF I NVESTMENT - LI NKED
LI FE I NSURANCE PRODUCTS
STRUCTURE OF I NVESTMENT - LI NKED 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 Switching
Self-assessment Questions

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CERTI FI CATE EXAMI NATI ON I N
I NVESTMENT - LI NKED LI FE I NSURANCE
Pages
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9
CONT E NT S
The Malaysian Insurance Institute
BENEFI TS AND RI SKS OF I NVESTI NG I N
I NVESTMENT - LI NKED FUNDS
8.1 Introduction
8.2 Benefits
8.3 Risks Of Investing In Investment - Linked Funds
Self-assessment Questions
COMPARI SONS BETWEEN I NVESTMENT - LI NKED
LI FE I NSURANCE AND TRADI TI ONAL WI TH
PROFI T LI FE I NSURANCE 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 - Transparency
Self-assessment Questions
7

HOW I NVESTMENT-LI NKED LI FE
I NSURANCE 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 Benefit
7.8 Regular Premium Policies
Self-assessment Questions
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CERTI FI CATE EXAMI NATI ON I N
I NVESTMENT - LI NKED LI FE I NSURANCE
Pages
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CONT E NT S
The Malaysian Insurance Institute

10
TAXATI ON AND LAW COVERI NG
I NVESTMENT - LI NKED LI FE I NSURANCE PRODUCTS
10.1 Introduction
10.2 Taxation Of Investment - Linked Life Insurance
10.3 Law Covering Investment - Linked Life Insurance
10.4 Other Legal Requirements
Self-assessment Questions
I DENTI FYI NG AND ESTABLI SHI NG 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 Portfolio
Self-assessment Questions
MARKETI NG AND AFTER SALES SERVI CES, ETHI CS
AND CODE OF CONDUCT
12.1 Introduction
12.2 Marketing
12.3 Ethics And Conduct
Self-assessment Questions
ANSWERS TO SELF - ASSESSMENT QUESTI ONS
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INTRODUCTION TO INVESTMENT - LINKED
LIFE INSURANCE
I NT R ODUCT I ON T O I NVE S T ME NT - L I NK E D L I F E I NS U R ANCE
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 Negaras 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 Negaras 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 selling
their 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 insurance
company. 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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INTRODUCTION TO INVESTMENT - LINKED
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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 countrys 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-Li nked policies must realise that
they ar e also responsi bl e to monitor the performance of their policy to ensure a
reasonable return.
The chances that the policy values going to zero is impossible because the Fund
Managers, companies and agents will ensure that the policy is profitable at all times.
I nsurance compani es, Fund Managers wi l l wash their hands off the policy once
the policy is taken and leave it solely to the agents and pol i cy hol ders to monitor it.
Agents are responsible to the clients only and must ensure that they monitor the policy at
all times.
a.
b.
c.
d.
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INTRODUCTION TO INVESTMENT - LINKED
LIFE INSURANCE
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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INTRODUCTION TO INVESTMENT - LINKED
LIFE INSURANCE
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KEY CONSIDERATIONS
IN INVESTMENT
K E Y CONS I CE R AT I ONS I N I NVE S T ME NT
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 and
industries 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 for
sound 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 of
how, 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 that
the 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 investment
vehicle can be easily categorised according to 3 fundamental characteristics i.e.;
a) Safety.
b) Income.
c) Growth.
1. Investment Objectives
2. Availability of Funds
3. Risk or Security
4. Investment Horizon
5. Accessibility of Funds
6. Taxation Treatment
7. Performance of the Investment
8. Diversification
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KEY CONSIDERATIONS
IN INVESTMENT

K E Y CONS I CE R AT I ONS I N I NVE S T ME NT

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. Lets look at the 3 fundamental characteristics
mentioned 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 Government
issued bonds or sukuk bonds and also from those found in the money market such as Treasury
Bills 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
RETURNS
BONDS/FD EQUITY/SHARES
c) GROWTH
Some i nvestors seek growth i n thei r i nvestments. This is ideally done when they invest in
growth based investments such as common stocks, commodities and other share based
investment. The objecti ve 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 seek
the possibility of longer-term growth.
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KEY CONSIDERATIONS
IN INVESTMENT
K E Y CONS I CE R AT I ONS I N I NVE S T ME NT
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 ascertai n, 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 onl y wi ns the conf i dence 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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KEY CONSIDERATIONS
IN INVESTMENT
K E Y CONS I CE R AT I ONS I N I NVE S T ME NT
A) SIMPLE MONTHLY CASH FLOW ANALYSIS
No Income (A)

RM Expenditure (B) RM
1 Salary- 5,000.00 Rental/Housing Loan Payments
2 Rental- 500.00 Groceries and Ulies -
3 Commissions- 1,000.00 Childcare/Parents allowance -
4 Others- 1,000.00 Educaon Expenses -
5 Loans (Car,Credit Cards etc) -
6 Insurance Premiums -
7 Savings -
8 Misc -
TOTAL 7,500.00
1,000.00
750.00
500.00
250.00
2,000.00
500.00
500.00
1,000.00
6,500.00
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 ANALYSIS
NO ASSETS ( Present Value) AMOUNT LIABILITIES AMOUNT
1 House 220,000.00 Housing Loan Balance 200,000.00
2 Car 30,000.00 Car Loan Balance 35,000.00
3 EPF 20,000.00 Credit Card Balance 5,500.00
4 Savings Account 1,500.00 Personal Loan Balance 10,000.00
5 Ins. Cash Value 20,000.00 Others 15,000.00
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 bal anci ng our i ncome 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, reti rement and your childrens
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
wi l l then be abl e to assi st the client to make sure that they have enough money to put
asi de for i nvestments and that they will be able to follow through with the investments
fi nanci al obl i gati on. It wi l l be usel ess i f 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 Fl ow and Net Worth
analysis but a simple method can be utilized as illustrated below;
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KEY CONSIDERATIONS
IN INVESTMENT
K E Y CONS I CE R AT I ONS I N I NVE S T ME NT
2.4 RISK OR SECURITY
There is a trade-off between expected return and risk that should prevail in a rational
environment. Investors unwilling to assume risk must be satisfied with the risk-free rate of
return. 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 of
investor 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 i nvesti ng in may cost you financially. For example, if an 80 year old is
found to own very aggressi ve funds, or a single person in their twenties has invested
purely in bonds, shows that a risk profiling exercise has not been done. Not having the
stomach or r i ght di sposi ti on may make you cut i n and out of i nvestments, that i s
detri mental 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.
Whats 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 promi se of a better reward: much better than simply stuffing your money in a
hidden 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 fl uctuati ons, the higher the risk. This is
because you stand to make and also lose more money, compared to a fund that doesnt
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 clients
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 money f or
i nvestments bef or e thi nki ng about spending it. You dont 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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KEY CONSIDERATIONS
IN INVESTMENT
K E Y CONS I CE R AT I ONS I N I NVE S T ME NT
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 investor
expects to hold a security or a portfolio. The investment horizon is used to determine
the investor's income needs and desired ri sk exposure, whi ch i s then used to ai d i n
security 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 accessibility
of funds into 3 clear components;
Risk profiling test and many others like i t 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 its
historical average prices and will tend to be quite stable.
If a client needs the fund in a short per i od of time, the cl i ent woul d 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 term
investments like real estate or long term bond funds. When he decides to take the
money back, he might not be abl e to real i ze 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 obj ecti ves. Thus it is important to make sure that the
funds can be taken out without having to pay hefty penalties.
The thi r d consi der ati on i s how much i s i t goi ng 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 i nvestment account and i ts 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 di fferent types of investments
before 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 bef or e the i nvestment 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) Countrys 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 companys level of costs.
2.9 DIVERSIFICATION
Diversification in investment is the process of investing across different asset classes and
across different market segments. Diversification is a strategy used by professional fund
managers that has proven effecti ve, i n reduci ng 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 putti ng 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 di scuss these areas i n detai l and illustrate the various options available in
investments for the clients.
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SELF-ASSESSMENT QUESTIONS
Why do you think, clients 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 childrens 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.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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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 si gn of success when we see Fi nanci al I ns t i t ut i ons and the man on the street
responding positively to the new i nvestment choi ces. 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 BILLS
The Government plays a very important part in the life of its citizens. It has to make sure
that the country has adequate ameni ti es and uti l i ti es that will serve the people well.
Roads, schools, hospitals, securi ty i nsi de and outsi de 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 government
expenditure cannot be ful l y funded by taxes al one, 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 Deposit
Malaysia 2005 to protect you agai nst, the l oss of your deposits in the unlikely event of a
bank failure, and promote financial system stability.
PIDM was set up to protect Isl ami c and convent i onal depos 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 not
related 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 established
under 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 systemby 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 protection
for 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 PIDMs 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 countrys
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 government
rai ses capi tal to fund i ts devel opment 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 companys property or some of its assets such as trading stock. If the company
defaults on the loan, the investor can take over the sai d 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 woul d mean that this could be sold to repay the
capital, but a f or ced sal e mi ght not r ai s e enough money to cover the capital.
Interest rates for corporate bonds tend to be hi gher than government bonds as the
security is lower.
3.4.2.2 LOAN STOCKS
These are uns ecur ed l oans t o 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 companys per f or mance. 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
3.4.2.4 ADVANTAGES AND DISADVANTAGES
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 ordi nary 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 enti tl ed to a share of its profits through dividends declared.
The decision to convert depends on whether di vi dend income and capital appreciation
in share price are better than the fixed interest given.
In general, corporate bonds tend to gi ve a hi gher return than government bonds. For
some investors, they are also mo r e mar k e t abl e an 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 basi cal l y each share carries
one vote at company meetings. The sharehol ders 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 sharehol der 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 avai l abl e to ordi nary investors. Public limited company
shares can be quoted in the Stock Exchange if they meet the Exchanges requirements.
Shares of listed companies are easy to buy and sel l 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 markets 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 countrys economy is
doing in the overall sense, the general l evel of i nterest rates, inflation rate, companys
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 al so af f ect the per f or mance of the l ocal stock exchange.
A share can thus, be a volatile investment. A shareholder must therefore realise that he
could lose all his money i n the i nvested share. In theory, the chances of this happening
should be reduced by investing i n shares of large, wel l established, well managed and
reputable companies, but events l i ke the Asi an Fi nanci al 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 buyi ng and sel l i ng shares i ncl ude stockbrokers 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 ordi nary share i n a company i s a part owner of the company and is
entitled to share in its profi ts i n the form of di vi dends . Di vi dends are paid out of the
companys 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 companys track record can be inspected to judge
whether profits are likely to be made and dividends paid.
Dividends are usually paid bi -annual l y, and provi de i ncome 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 companys 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 companys shares. A portfolio of shares in
different companies is thus more advisable than havi ng al l ones eggs i n 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 di rectl y 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 val ue can go bel ow 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 ri ght 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 professi onal i nvestment
management, access to a diversified range and spread of investments which is not
readily available to them individually. The i nvestment i n uni t trusts coul d generate
income in the form of dividends, interest and capital gains.
In Malaysia, unit trusts ar e author i sed and supervised by the Securi ti es Commi ssi on.
A unit trust is a pool of funds contri buted by many i nvestors 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 investment
manager (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 hel d by the trustee for the benefi t 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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3.6.1 ADVANTAGES AND DISADVANTAGES
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
uni ts as i nvestors requi re and can cancel uni ts, i f 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,
i f too many i nves t or s cas h thei r uni ts, the trust wi l l have to sel l the funds assets.
The unit trust investments fl uctuate i n l i ne wi th 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 i nvestor 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 capi tal growth, or a combi nati on 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
ar e al so speci f i ed i n the obj ecti ves of the tr ust contai ned i n the tr ust 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 al so 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 uni t trusts from the Uni t 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 managers 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
3.7.1 ADVANTAGES AND DISADVANTAGES
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 investors share, if the
fund increases. If the trusts suffer losses then the investors 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 pri ce, whi ch i s effecti vel y a form of charge. There i s al so 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 nations propertys values are still behind many
developed countri es i n Asia. This emerges as an opportunity with average attracti ve
yi el ds between 6-8% whi ch is higher than other major developed countries.
As our nation propertys 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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3.8.2 ADVANTAGES AND DISADVANTAGES
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 securi ty outright, an investor can buy a derivative of the security
instead. Derivatives are financial instruments whose values are linked to the price of underlying
instruments in the cash markets. For example, a stock i ndex future is linked to the
performance of a speci fi ed stock market. Stock opti ons 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.
3.9.1.1 ADVANTAGES AND DISADVANTAGES
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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3.9.2.1 ADVANTAGES AND DISADVANTAGES
Warrants typi cal l y have maturi ti es of at l east several years, and their terms are not
standardised. 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 addi ti on, 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 fi nanci al i nstruments 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 cash
prices 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, traceabl e to at l east the ancient Romans and
Greeks. Organised future markets, on the other hand, onl y 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 ar e, i n ef f ect, or gani sed and standar di s ed forward markets. An
organised futures exchange standardised the non-standard forward contracts, establishing
such f eatur es as contr act si ze, 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 speci fi ed future date. Stock i ndex futures are
futures contracts, based on a particul ar share pri ce i ndex, 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.

3.9.3.1 ADVANTAGES AND DISADVANTAGES
The futures market serves a val uabl e 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 neces s ar y bef or e an i nves t or ventures into
investing 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 pri ce 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 r om/to the f und manager, and then only in creation
units, 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 usual l y 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 i nvestors, 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. Securi ti es and Exchange Commi ssi on 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, commonl y referring to the Islamic
equivalent of bonds. Si nce fi xed i ncome, i nterest beari ng bonds are not permissible in
Islam, Sukuk securities are structured to compl y wi th the Islamic law and its investment
principles, which prohibits the charging, or paying of interest. Financial assets that comply
with the I sl ami c l aw can be cl assi fi ed i n accor dance wi th thei r tradabi l i ty and
non-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 bei ng managed accordi ng to Islamic investment principles. Such
principles form part of Shari'ah, whi ch i s of ten under stood 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 Persi an Gul f and Asi a, Standard & Poor
esti mates that 20 per cent of banki ng customers would now spontaneously choose an
Islamic fi nanci al product over a conventi onal one wi th a si mi l ar ri sk-return profi l e.
The Sukuk is similar to an obl i gati on backed by an asset but i s not i n 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 the
credit 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 di ffer from conventional bonds because they are based on tangible assets
instead 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 offering
institutions 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 investors
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 dont 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 i ni ti al i nvestment compared to other uni t trust fund. The minimum
amount normally starts at RM5,000.
Not so high entry fee. The service charge is 1.5% practiced by the industry at this
moment.
There is a redemption fee before maturity, range from 0.3% to 1.5% of NAV.
Capital preservation feature guaranteed.
If you missed the offer period, you cant invest in the CGF. You just have to wait for
another series to be launched.
OSK-UOB Capital Guaranteed Funds Series
RHB Unit Trust
Hwang-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 QUESTIONS
CHAPTER 3
All the following statements are TRUE, except 1.
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 EXCEPT 5.
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,iv
i,iii
ii,iii
iii,iv
a.
b.
c.
d.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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PRODUCTS-A WORLD SCENARIO
I NVE S T ME NT - L I NK E D L I F E I NS U R ANCE P R ODU CT S - A WOR L D S CE NAR I O
4.1 INTRODUCTION
The Investment-Linked life i nsurance 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 i ts presence i n 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 pol i cyowner total fl exi bi l i ty to alter his needs for investment and
protection 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 i nked 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 i nsurers 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 wri ti ng I nvestment-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.
Li fe i nsurance 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
i nvestment val ues, for those who were primarily interested in the investment aspect and
only regarded the life i nsurance el ement, as a necessity to obtain the substantial tax
relief on premiums.
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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 traditional
whole 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 published
mortality 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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4.4 IN SINGAPORE
4.3 IN THE UNITED STATES OF AMERICA
In the United States of America, investment-linked plans are known as Variable Life
i nsurance. It was offered to the general publ i c i n the US in 1976. This was after the
i nvestment-l i nked l i fe i nsurance products had been successful l y marketed i n 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 annui ty market. Whole Life, Universal Life
and Term Li fe made up the bal ance of the individual life market and fixed annuities
accounted for the balance of the individual annuity market.
Compared to the tradi ti onal products, vari abl e life insurance was more affected by
regulations in the US. Apart from state i nsurance l aws and regul ati ons, vari abl e l i fe
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
i nsurance pol i cyowners as i nvestment companies. This Act regulates the investment
companys 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 insurers business, how the premiums
are goi ng to be i nvested, fi nanci al i nformati on of the i nsurer, 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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4.5 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 Mal aysi a Sdn Bhd to the publ i c i n 1985. Ever since then, the investment-linked
insurance plans have taken a major platform in all major insurance and takaful companies
i n Malaysia. In fact, Bank Negaras 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 fi rst traditional insurance
company to launch the investment-linked life insurance product. Since then, most of the
traditional insurance compani es i n Mal aysi a 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 pol i ci es to meet their insurance and
i nvestment objecti ves, be they for child education planning or asset accumulation or
simply to have a good amount of insurance cover.
The Takaful Investment-Linked Li fe 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 thi s and they too have come up with investment-linked policies
that strictly comply with the Syariah laws.
Based on the devel opment i n the l ast 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 i t i s common to have non-Musl i ms subscribing to Syariah
based 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 (BI S) merged to form a new scheme known as Investment Scheme (IS). The
introductionof this scheme allowed more CPF members to i nvest i n a wi der range of
investment 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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PRODUCTS- A WORLD SCENARIO
I NVE S T ME NT - L I NK E D L I F E I NS U R ANCE P R ODU CT S - A WOR L D S CE NAR I O
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
choi ce to pi ck 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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I NVE S T ME NT - L I NK E D L I F E I NS U R ANCE P R ODU CT S - A WOR L D S CE NAR I O
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
SELF-ASSESSMENT QUESTIONS
CHAPTER 4
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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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 i nvestment
performance. 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-Li nked l i fe i nsurance pol i cies operate on si mi l ar principles as unit trust. In
Investment-Li nked l i fe i nsurance, a maj or porti on 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 mortal i ty protecti on 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 fal l s, so does the uni t pri ce. The pol i ci es therefore l ack the
smoothening process of the traditional with-profit life policies and instead refl ect, the
investment performance actually achieved with the policyowners money. Di fferent
generations of policyowners recei ve di fferent resul ts. 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 on
each i nvestment date. Uni ts ar e al l ocated on each investment date. Units are
allocated at the life offices 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 offices buyi ng pri ce (cal l ed bi d pri ce). I n 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 apporti onment of
investment-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 traditional
with-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, mortality
charges 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 policys holding
of investment units to cover investment management
charges 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-
UNALLOCATED
PREMIUMS
5.2.7 INITIAL UNITS
5.2.8 MORTALITY
CHARGES
5.2.9 SURRENDER
CHARGES
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 policyowners premiums to buy investment
units. The difference representing the life offices
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
policyowners entire premium to units. However, the
units allocated in the early years will be known as
initial units and will have a higher annual management
charges 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 vari ati ons and types of investment-linked life insurance
policies available in the overseas market, of whi ch the major types will be described
below, the basic types currently being sold in Malaysia are confined to single premium life
i nsurance pl ans (where a once-off contribution to the policy is made) and the regular
premi um l i fe i nsurance pl ans (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.
I nvestment- l i nked l i f e i nsurance policies can be used for i nvestments, regular
savings 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.
I nvestment-l i nked life insurance policies generally (although not necessarily) have
a l arger exposure to equi ty i nvestments than tradi ti onal with-profit and other
life insurance policies.
The cash value and protection benefits are determined by the investment perfomance
of the underlying assets and this performance is reflected by the prices of the units in
the investment-linked fund.
The protecti on cost are general l y met by expl i ci t 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 theymay be met by a flat initial charge.
Commi ssi ons and offi ce expens es are al so met by a variety of explicit charges,
some of whi ch wi l l normal l y be vari abl e but the life office must normally give a
six months notice prior to any change.
The cash value is normally the value of units allocated to the policyowner, calculated
at bid price.
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 combi nati ons of pol i ci es can be used as single
premium 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 of
investment-l i nked Li fe i nsurance pol i ci es avai l abl e. It is simple in design. The amount of
insurance 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 premi um i nvestment-linked whole life plan is normally on long
term 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 of
single 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.
Uni ts i n the i nvestment-l i nked or uni ti sed 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 devel opment saw the l atest i nvestment-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 pl ans are popul ar overseas as there are tax advantages for employees' own
contributions 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
i ncome benef i ts i s now avai l able 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 desi gn of thi s i nvestment-l inked permanent health insurance also has the
advantage of offeri ng cash val ue 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 childrens 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
policyowners 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 provi de takaful cover, which includes death and disability
benefits, and part of the contri buti ons wi l l be i nvested in a variety of Shariah-approved
investment funds of your choice. As a parti ci pant, 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 i ah- appr oved Secur i ti es Funds, whereby the i nvestments are
invested in Shariah-approved investment instruments whi l st the i nsurance 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 financial
circumstances.
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 financial
instruments) 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 management
fee, 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- Li nked Takaful, think about the risks
you are wi l l i ng to take and make sure you f ul l y under stand the risks involved
and be prepared to have your money tied-up for a certain period.
You can get professi onal advi ce 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 mechani sms i nvol ved 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 l i fe i nsurance pol i ci es grant l oans to policyowners. However,
because the cash values fluctuate on a daily basis, a loan of the entire cash value could
leave the life office wi thout securi ty, for some porti on 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 Mal aysi a
on the related topic. This is an important article and a good understanding of this is vital for agents.
Excerpt taken from Bank Negara Malaysias :-
Prudential Regulation and Supervisory Framework
www.bnm.gov.my/files/publication/fsps/en/2008/cp03_001_whitebox.pdf
Implementation of Risk-Based Capital Framework for Insurers
The 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 al i gn the regul atory capital requirements with the underlying
risk exposure of each individual insurer, improve the transparency of prudential buffers,
and al l ow gr eater fl exi bi l i ty for i nsur er s to operate at di fferent ri sk l evel s that
commensurate with risk management infrastructur e and pr acti ces. A new set of
valuation rules was also introduced to ensure that assets and l i abi l i ti es are val ued i n
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 i ndi vi dual i nsurers. To achi eve thi s, RBC r equires 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 ri sk and capi tal , together with
business strategies centered on sound risk management practices, will enable insurers to
achieve sustainable profitability whilst safeguarding policyholders interests.
Under RBC, capi tal adequacy requi rements are more granular and risk-sensitive
compared 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 solvency
regime. 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 diversified
portfolios 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 capi tal adequacy requi rements are also
based on explicit capital charges for market, credit, insurance and operational ri sks,
thereby enhanci ng transparency and improving insurers 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 reduci ng the overal l l evel of risk
exposure or injecting additional capital. Throughout the parallel run, the Bank has required
these insurers to submit capi tal management pl ans wi th speci f i c 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 insurance
liabilities and the related assets to be valued on a realistic basis, using market values
or market value proxies, which reflect the prevai l i ng condi ti ons i n the busi ness and
economic 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 i ndi vi dual portfolios.
Similarly, life insurers must hold reserves based on actual experience of mortality, morbidity,
expenses, and persi stency, i nstead of using a standardised mortality table with a fixed
margin for prudence. In addition, insurers who underwrite innovative products with financial
guarantees must hold additional reserves to ensure that those guarantees can be met
even in adverse market conditions.
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On the asset si de, the introduction of market values has resulted in a more realistic
bal ance sheet in accordance with the requirements of the relevant accounting standards.
I n r es pons e, many i ns urers 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 resul ted i n an i ncreased l evel of assets of higher quality,
whi ch has ser ved to support insurers well in the light of ongoing uncertai nti es in the
capital markets.
The introduction of RBC has also provi ded the i nsurers management teams with an
additional quantitative tool to analyse and monitor the risks inherent in insurance activities.
This shift of focus t owar ds r i s k and i ts rel at i ons hi p wi t h 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 i mprovi ng the qual i ty of ri sk sel ecti on and underwriting, and
by reducing volatility in loss exper i ence thr ough better claims management. Li fe
i nsurers are also pl aci ng greater emphasis on product design and pricing, particularly
to enhance the capital efficiency of their product range.
A survey of i nsurers al so r eveal ed posi ti ve changes to the intensity and breadth of
oversight and discussion by Boards and Board Commi ttees as a result of additional
information arising from RBC. The same survey al so reveal ed that many insurers are
exploring other avenues to complement existing risk mitigants or increase available capital
resources, such as reinsurance to transfer out excess insurance risks, derivatives to hedge
asset-related risks or by the use of hybrid capital instruments.
Another posi ti ve devel opment i n the insurance industry arising from the introduction of
RBC i s 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 insurers technical competency through knowledge
from such engagements. Furthermore, the increased proficiency of insurers in areas such
as fi nanci al modeling will also support more effective risk management by enabl i ng
i nsurers 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 recogni se the need for devel opi ng such expertise internally or by obtaining the
required 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
reporti ng brought on by RBC has al so enhanced Bank Negara Malaysias 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 they
remain 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 insurers 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
i nvestment strategy and proper ri sk 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; and
an 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
oversi ght. There should be i n pl ace 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 investment
policies 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 insurers
investment activities.
The Bank may i mpose requi rements on an i ndi vi dual i nsurer to i nvest 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 Banks assessment
of an insurers risk profile and investment risk management function.
To have in place rigorous audit procedures that include full coverage of the
investment activities to ensure ti mel y i denti fi cati on of i nternal 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 position
to 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 market
conditions;
To undertake regular stress testing for a range of market scenarios and changing
investment and operating conditions in order to assess the appropriateness of asset
allocation 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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SELF-ASSESSMENT QUESTIONS
Investment-Linked Life insurance products are similar to Unit Trusts EXCEPT 1.
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 for
investments.
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.
Whi ch of the fol l owing will qualify as an investment vehicle in an Investment-Linked
Takaful Policy?
4.
A Government Bond 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 Cor por at e Bond i ssued 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.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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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 pol i cy 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 i nvested i n any f i nancial instrument. Currentl y, the
following 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 mai nl y i n 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 ri sk i n nature. Pri ces of equi ty 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 Bond
Fund.
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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SELF-ASSESSMENT QUESTIONS
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 i n cash i nstruments l i ke fi xed deposi ts, 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 fund
Specialised 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 Bonds
Fixed income instruments
Cash funds
Specialised 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 securities
In a bank deposit and cash fund.
i,ii,iii.
i,ii.
i,iii,iv.
iii,iv.
a.
b.
c.
d.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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HOW I NVE S T ME NT - L I NK E D I NS U R ANCE P R ODU CT S WOR K
7.1 INTRODUCTION
Over the past few years, the insurance companies in Malaysia have made investment-
l i nked 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
secondaryneeds 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 val ue of thi s i nvestment-l i nked 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 a
number 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
hi gh i nvestment gai ns (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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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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HOW I NVE S T ME NT - L I NK E D I NS U R ANCE P R ODU CT S WOR K
Under an investment-linked life insurance policy, a policyowner pays either a lump sum
(for si ngl e premi um pl ans) or a r egul ar payment (for regul ar 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 the
premium 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 minimum
amount. 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 purchase
additional 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 di fference i n the bi d and offer pri ces i s 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 the
time 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 premi um al l ocated by the policyowner to buy the
investment,
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 Methods
Under 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 PREMIUM
To calculate the annual yield on gross premium for single premium plans, the return on
gross premium must first be obtained. Onl y 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 premium
Ending 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 withdrawal s i n term of number of units or fixed monetary
amount through cancellation of units. Usually a minimum and maximum withdrawal limit is
imposed. The amount of money that a pol i cyowner wi l l get i s the number of units
withdrawn multiply by the unit price for the single pricing method, and multiply by the
bi d pri ce 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 Beneft
----------- 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 l evel 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 of
his regular premiums. Increasing in sum assured would normally require further medical
Under 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 i nterested i n the techni cal i ti es but having a sound knowledge
of this will allow the agent to do a better job when presenti ng hi s sal es pi tch. 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.
Tans 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 i s not covered by hi s company f or any eventualities as he is new. He will be
eligible to parti ci pate i n the companys 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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Agents Recommendation;
a) Tan cannot afford to buy a brand new car ri ght now as i t will take away at least
RM 700.00 by way of i nstalment payments, road tax, insurance, fuel, toll, parking and
mai ntenance cost. It woul d be prudent to advise him to buy a fairly new and good
s econd hand 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 al s o s houl d i mpr es s upon hi m to save a porti on 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 i n mi nd that the total premi um outl ay per month cannot exceed
RM 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
Norzakiahs elderly mom and assisted by an Indonesian maid. They live in a house that is
under a bank loan, under Alimudins 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 incenves)
1,000.00 Clothes and Accessories 250.00
5 Hand Phone Bill 150.00
6 Personal Loan (both) 700.00
7 Moms Medicaon and Care 400.00
8 Family Holidays and Night outs 150.00
9 Credit Card (both - sele in full) 1,200.00
10 Maid 450.00
11 Housing Loan 600.00
12 House Ulies and Maintenance 350.00
13 Tuion 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
Al i mudi n and hi s wi f e have a Group I nsur ance Cover with his company that
includes Personal Accident Cover, Medical Insurance and A Term Cover.
Alimudin and Norzakiahs 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.
75
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 Di sease rider be included in an Investment-Linked policy for
every one wi th pr emium waivers. Please ensure that the policy should concentrate
on the coverage part as both Alimudin and his wife will need a good cover to offset the
liabilities that they have.
Wor k out t he pol i ci es wi th 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.
Agents Recommendation;
a)
A medi cal 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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SELF-ASSESSMENT QUESTIONS
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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 childs 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-linkedpolicies. 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 existing
account.
The company opens a new account and deposits the converted top-up units into this
account.
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 policyowners 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.
.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
78
8.1 INTRODUCTION
An investment-linked insurance plan is a life i nsurance that combines investment and
protection. 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, al l ocate your i nsurance 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 resul t, a pol i cyowner can easi l y 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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8.2.3 EXPERTISE
Investment-linked funds are managed by professional fund managers who have the investment
expertise 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.
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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 ADMINISTRATION
The policyowner is relieved of the day-to-day administration of his investments, which can
be a compl i cated affai r. He j ust 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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8.3 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 i nvestment-l i nked l i fe i nsurance pol i ci es (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 CHARGES
The 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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SELF-ASSESSMENT QUESTIONS
CHAPTER 8
1. 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 companys professional management
team 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 premiumpayment 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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Cash values that use investment vehicles are not immune to risk. This means that the
val ue of the cash val ue account can i ncrease 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.
Cl i ents i nvesti ng i n an i nvestment-l i nked product are at a disadvantage and
should 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 ones 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.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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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 i nsured di es wi thi n the term of assurance. Whole l i fe pol i ci es are similar to
endowment policies except that in most cases 'whole life' is defined to be 80, 90 or 100
years. Under such tradi ti onal without-profit life insurance products, the amount payable
does not depend on the i nvestment 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 l i fe i nsurance 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.
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COMPARISON BETWEEN INVESTMENT-LINKED
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PROFIT LIFE INSURANCE PRODUCTS
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COMPARISON BETWEEN INVESTMENT-LINKED
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COMP AR I S ON B E T WE E N I NVE S T ME NT - L I NK E D L I F E I NS U R ANCE AND
T R ADI T I ONAL WI T H P R OF I T L I F E I NS U R ANCE P R ODU CT S
9.2.3 DEATH BENEFIT
Under traditional without-profit life insurance products; the death benefit (i.e. the sum
assured) i s determi ned and fixed at inception and is stated in the policy. As in the case
wi th premi um, 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 i s made when a term
i nsurance pol i cy i s surrendered. Under endowment and whol e life policies, as these
policies earn interests which build-up cash values, an amount is payable at the surrender
of 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 fi ve-year level term i nsurance 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.
9.3.1 INVESTMENT RETURNS AND RISKS
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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COMPARISON BETWEEN INVESTMENT-LINKED
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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 ei ther 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.
9.3.2 PREMIUM COMPUTATION
As wi th the tradi ti onal wi thout-profit life insurance policy, the premium for a with-profit
pol i cy i s determi ned 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
pol i ci es; the onl y di fference i s 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
9.3.4 SURRENDER VALUE
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.
85
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.
9.4.1 INVESTMENT RETURNS AND RISKS
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
pol i cy val ues vary accordi ng 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.
9.4.2 PREMIUM COMPUTATION
As mentioned earlier, the premium charged and the benefi t under t raditional life
insurance 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 premi um 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.
I n i ts i ni ti al pri ci ng exerci se, the life office will make certain assumptions about future
condi ti ons 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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COMPARISON BETWEEN INVESTMENT-LINKED
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9.4.3 DEATH BENEFIT
Under the i nvestment-l i nked l i fe i nsurance 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 mi ni mum sum assured or the val ue 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 regul ar pr emi um i nves t ment - 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 si ngl e pri ci ng pol i cy, 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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COMPARISON BETWEEN INVESTMENT-LINKED
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9.4.4 SURRENDER VALUE
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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COMP AR I S ON B E T WE E N I NVE S T ME NT - L I NK E D L I F E I NS U R ANCE AND
T R ADI T I ONAL WI T H P R OF I T L I F E I NS U R ANCE P R ODU CT S
SELF-ASSESSMENT QUESTIONS
CHAPTER 9
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 paying
too 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
companys 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 the
invesment 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 practised
by all successful people.
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COMPARISON BETWEEN INVESTMENT-LINKED
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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-linked
policies?
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.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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10.1 INTRODUCTION
Investment-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
i ts Regul ati ons, the Compani es 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 insurance
premiums. 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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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
i nvestment i n a uni t trust are exempted from tax. Therefore, any distributions from this
exempt account are al so exempt i n 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 si nce the sur pl uses 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 i nto a pol i cy but there is no constructive receipt unless distributed.
When a pol i cy matures, or when i t 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 ensuri ng that i nsurers, i nsurance 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.
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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
Secti on 7(l )(b) of the Act pr ovides 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
submi t a detai l ed busi ness pl an to enabl e 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.
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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 l i censed i nsurer' s margi n of sol vency i s not appl i cabl e 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 capital
of the i nvestee company or not more than 5% of the total value of the assets of
the fund whichever is lower; and
ii. Investments in l oans 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 benefi ts for i nvestment-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 requi rements of the Insurance Act, 1996, an annual actuarial
val uati on certi fyi ng the l evel 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 attai ned 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 confi ne the sal e of such policies to individuals who are mature enough to
make an evaluation of the investment risks involved and make sound investment decisions.
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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 mi ni mum death benefit of RM 5,000
or 125% of the single premium whichever is higher. The minimum death benefit will ensure
that i nvestment-l i nked l i fe i nsurance 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 l east have a mi nimum 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 Information
A. 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. Pol i cy benefi ts wi l l be based on the performance of the funds and the factors
affecti ng the pol i cy benefi ts. Wherever possible, provide hypothetical illustrations to
guide policyowners on the policy benefits;
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Pol i cyowners must be cl earl y i nformed that the investment risks under the policy
are to be borne solely by the policyowners;
A maxi mum amount of i ni ti al charge, management fee, mortality cost and any
other charges to be borne by policyowners must be stated;
The basi s of computati on of all policy benefits, bid and offer prices of the units,
units al l ocati on and the procedure for creating and cancelling of units must be
stated;
The basis and frequency of valuation of assets underlying the fund;
Al l guar ant ees t o pol i cyowners, including the guaranteed minimum death
and mat ur i t y benef i t s , and mi ni mum 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 promi nentl y pl aced and clearly worded warning that the value of policy may
rise or fal l , the resul ts shown are for i l l ustrati ons onl y, 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;
Char ges e. g. i ni ti al char ge, management f ee, mortal i ty 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
Any other information that BNM may from time to time deem necessary.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
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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 i nsurabl e i nterest, 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 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 statement on changes i n the i nvestment objecti ve, ori entation, restrictions
and limitations, during the year consistent with the original intent; and
Any other information that BNM may from time to time deem necessary.
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SELF-ASSESSMENT QUESTIONS
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 feel s 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 Governments 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.
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'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 i n securi ti es i n 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.
Al l sal es materi al s 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.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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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11.1 INTRODUCTION
In the wake of the changi ng fi nanci al 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 doesnt 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 i n for an agent. Identifying and establishing a customers
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 customers needs.
In order to provi de effecti ve advi ce 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 convi nce the cl i ent 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. I t i s i mportant that this step is done properly because this is
where the agent wi l l be abl e to do a pr el i minary screening of the clients financial
objectives and goals.
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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 clients financial situation and also to
establish the clients 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 customers present situation and help
him formulate recommendations to achieve the customers financial goals and objectives. The CFF
addresses the following areas;
a) Customers 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 with
an analysis that will help establish the clients 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 clients need in
areas like;
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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 clients 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 pl an that has been developed for his client. Remember, every client is different, so if
an agent thi nks he can dupl i cate one strategy or plan for multiple clients, then he is
wrong. A pl an 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 abl e to mi ti gate 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 cl i ent has agreed to the recommendations, the agent will now put into
effect al l the recommendati ons 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
Moni tori ng the cl i ents policies is a very important function in an agents scope of work.
We must make sure that regular monitoring is done and the client should also be informed
of the progress of hi s pol i ci es. 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 cl i ent 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 childrens education.
Retirement Planning.
Asset Accumulation.
Estate planning.
a)
b)
c)
d)
e)
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Agents must commi t themsel ves 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 there
is a major change that might have happened to the clients 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 pl ace to do cross selling of other insurance related products whilst conducting
these reviews.
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SELF-ASSESSMENT QUESTIONS
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 customers needs?
CHAPTER 11
1.
To submit a comprehensive picture to the company.
To allow the agent to build up a clear understanding of the customers circumstances.
To make sure that the clients information is used to design future and more effective
policies.
To only comply to Bank Negara Malaysias new requirements.
a.
b.
c.
d.
What is the use of the Customer Fact Find? 2.
Customers 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.
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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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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 I nstitute of Marketing as the management process
responsible for identifying, anticipating satisfying customers requirements profitably.
In the past, insurance companies tended to be sal es-ori entated. In a sal es-ori ented
environment, the sales and marketing departments' role is strictly to sell company's
product 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 pol i ci es 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-orientedinsurance companies, the role of the sales and marketing
department i s to determi ne 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
Pl anni ng i s needed to devel op the marketi ng pl an whi l e control ling involves
the measur i ng of r esul ts agai ns t t h e pl an and maki ng necessary changes. A
marketing plan is a document whi ch sets out the companys marketing objectives,
and sales goal for each product or product line.
Market identification
This involves the sel ecti on of segments of the market which have needs that can be
met by the products that can be devel oped or have been developed by the
insurance company. A market segment is a group of customers with similar needs.
Product development
Af t er mar k et s egment s ar e i de n t i f i e d, t he i ns urance company would
develop appropriate policies to meet the needs of the segment.
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Selection of distribution channel
This involves the i denti fi cati on and selection of suitable channel s 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,
pri ci ng and promoti on, 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-ori ented i nsurance company must be complemented with a
market-oriented agency force.
12.2.1 A MARKET ORIENTED AGENT
As has been menti oned earl i er, i nsurance 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
pol i ci es wi th the objecti ve 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
pl an, where sal es goal s, 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 knowl edge of t he cons umer buying decision process is i mportant to an insurance
agent becaus e i t hel ps 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 per cei ved, consumer searches for information
shops 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 policies
From the informati on obtai ned, the consumer wi ll evaluate the product based on
a set of criteria. The cri teri a are char acteri sti cs or features that are desired (or
not desired) by t he cons umer . T he cons umer t hen deci des on which seller
to buy from. S t udi es conduct ed i n t he U. S . A. i ndi cate that the most
important factors for the selection of an insurer are;
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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 eval uate hi s purchase.
The agent who del i ver s a pol i cy pr omptl y k eeps in contact with his customers,
and provides important information of risk eval uati on will have a better chance of
securing the loyalty of his customer at the time of renewal.
Purchase
After eval uati ng the al ternati ve products based on criteria and factors set by the
cons umer hi ms el f , whi ch are of ten i nf l uenced by personal public and
mar keter -domi nated sources, the consumer makes the decision to purchase one
of 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 customers
must 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
Thesales presentation is the promotional message an insurance agent delivers to a prospect
to 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, 1996
provides 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 the
prospect'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.
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12.2.4 AFTER SALES SERVICES
The successful sale of an insurance contract does not free the agent from further interaction
wi th hi s customers. I n fact, i nsurance contracts require an insurance agent to provide
af ter - sal es ser vi ces on a continuous basis. The follow-up stage helps ensure that the
customer s r emai n sati sf i ed with the purchase. After-sales calls on customers also help
reduce the customers cognitive dissonance. Cognitive dissonance a psychological state
i n whi ch customers feel uncer tai n and of ten questi on 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 i nsurance compani es 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 cogni ti ve di ssonance by reassuring the policyowner and other
family members about their decision to buy the policy;
Pr ovi de a basis for future sal es by remi ndi ng the policyowner about any currently
unmet or future financial needs or expectations;
Re-emphasi ze 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 CONDUCT
An important aspect of professionalism that makes for success of, an insurance agent and
al so (sad to say) exposes those that fail to maintain their professional standards, is the
ethical aspect of the job that is done.
Rul es 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
goi ng beyond the speci fi c rules in establishing and maintaining a set of personal ethics
and conduct.
Atruly professional person makes an uncompromising commitment to maintain an absolute
ethi cal standard. It is, thus, not a matter of rules but of behaviour and attitude. Customers
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
'Integri ty' means uni formi ty, consi stency, strai ghtforwardness, di rectness 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 ascer tai n what i s best practice and to follow it in all cases is demanding, but is
also highly rewarding. To follow the l etter of the law i s 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 ti me for an insurance agent to be proven to be honourable, but a reputation
for honour can be l ost qui ckl y, i f there i s a l apse. A mai ntained reputation for
honourable conduct i s, however, sti l l the best competi ti ve 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 practi ce, 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.
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12.3.1 LIAMS 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 obj ecti ves 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
i nvestment-l i nked l i fe insurance should be conducted in a responsible and professional
manner wi th a hi gh degree of i ntegri ty. Thi s 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
thei r affai rs i n a responsi bl e 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 desi re, are f ree to formul ate 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;
Requi re al l i ntermedi ari es (exi sti ng and upon appointment in the case of new
intermediaries) to sign a declaration to observe the guidelines;
Assign responsibility to the heads of department to ensure compliance with the
guidelines 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
submi t quarterl y reports to Bank Negara Malaysia, the supervisory authority for
i nsurance compani es, 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.
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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. I t is not the intenti on 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 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 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 Introduction
The 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 life
insurance 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 vari ous 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 compl ai ns from policyowners that an intermediary has acted in
breach of the Code, the intermediary shall be required to cooperate with the life insurance
company 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.
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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 i n whi ch he is competent to deal with and
seek or recommend other specialist advice if this seems appropriate;
Treat al l i nformati on suppliedby the prospecti ve pol i cyowner as completely
confidential to himself and the life office which he represents;
In maki ng compari sons wi th 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 el i mi nate ' twi sti ng' . Appropri ate 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 ti me a pol i cyowner moves hi s basi c i nsurance 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
hi s pol i cy and l oss of i ts 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 wi l l 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 sui ci de cl ause and i ncontestible 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
Expl ai n al l the essenti al provi si ons of the contract, or contracts, whi ch he is
r ecommendi ng 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 otherwi se 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, the
sales 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
cl ear that uni t val ues may fl uctuate 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 Information
The 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.
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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-di scl osures and i mproper-cl ai ms; 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 gui del i nes by the i nsurer. 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 moneys
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 gui del i nes requi re that an insurer may not unreasonably reject a claim. In
parti cul ar, an insurer may not reject a claim on grounds of non-disclosure or
misrepresentati on 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 to
do more than to report a cl aim and subsequent developments as soon as reasonably
possible.
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
i ncl uded i n 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 wi l 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.
.
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SELF-ASSESSMENT QUESTIONS
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 following
functions;
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
companys 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.
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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 Negaras 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 Negaras guidelines on good agent governance.
The international standards set for agents.
The leading criteria for the awarding of LIAMs national award.
a.
b.
c.
d,
YOU WILL FIND THE ANSWERS AT THE BACK OF THE BOOK.
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ANS WE RS T O S E L F - AS S E S S ME NT QUE S T I ONS
ANSWERS TO SELF-ASSESSMENT QUESTIONS
CHAPTER 1
Answers : 1-C, 2-D, 3-D, 4-A, 5-A, 6-D
CHAPTER 2
Answers : 1-B, 2-C, 3-B, 4-C, 5-A, 6-B
CHAPTER 3
Answers : 1-A, 2-D, 3-C, 4-C, 5-D, 6-B
CHAPTER 4
Answers: 1-C, 2-D, 3-B, 4-C, 5-D, 6-B
CHAPTER 5
Answers : 1-D, 2-B, 3-B, 4-A, 5-C, 6-B
CHAPTER 6
Answers : 1-D, 2-D, 3-C, 4-A, 5-C, 6-B
CHAPTER 7
Answers : 1-B, 2-A, 3-B, 4-D, 5-A, 6-D
CHAPTER 8
Answers : 1-B, 2-A, 3-D, 4-D, 5-B, 6-B
CHAPTER 9
Answers : 1-D, 2-B, 3-C, 4-C, 5-C, 6-B
CHAPTER 10
Answers : 1-B, 2-B, 3-C, 4-D, 5-A, 6-A
CHAPTER 11
Answers : 1-B, 2-B, 3-B, 4-B, 5-C, 6-A
CHAPTER 12
Answers : 1-B, 2-A, 3-C, 4-D, 5-A, 6-B

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