FINAL Ceilli English 20142015

7 th Edition
w w w.insurance.com.my
7 th Edition
w w w.insurance.com.my
7th EDITION 2014
2014 The Malaysian Insurance Institute

The study text for the Certificate Examination In Investment-Linked Life Insurance is
published by The Malaysian Insurance Institute (35445-H), also known as the MII.
The study course book is produced for aspiring insurance agents sitting
for the Certificate Examination in Investment-Linked
Life Insurance conducted by the MII.
This 7th edition printed in 2014 replaces the previous (6th) edition printed in 2010.
ALL RIGHTS RESERVED
Material published in this study text is copyrighted and may not be reproduced in whole
or in part including photocopying or recording, for any purpose without the written
permission of The Malaysian Insurance Institute.
Such written permission must also be obtained before any part of this publication
is stored in a retrieval system of any nature. This study course book
is supplied for study by the original purchaser of the
book only and must not be sold, lent,
hired or given to anyone else.
Every attempt has been made to ensure the accuracy of this text; however, no liability
can be accepted for any loss incurred in any way whatsoever by any person
relying solely on the information contained in this publication.
This text has been produced solely for the purpose of
examination preparation and should not be taken
as definitive of the legal position.
APPRECIATION
The Malaysian Insurance Institute would like to thank the Life Insurance Association of Malaysia
(LIAM) for their invaluable contribution, support and assistance rendered in making the
publication of this new edition possible.
Our thanks also to Fok Seong Tuck,

Datin Veronica Selvanayagy, Yap Wai Teck
and Yap Hong Chiew.
Perpustakaan Negara Malaysia Cataloguing-in-Publication Data
CERTIFICATE EXAMINATION IN INVESTMENT-LINKED LIFE INSURANCE

(CEILLI) - 7th Edition
ISBN 978-983-2432-09-8
1. Life insurance--Examinations, questions, etc. 2. Life insurance agents--
Examinations, questions, etc. 3. Life insurance--Finance.
I. Institut Insurans Malaysia.
368.32009595
TABLE OF CONTENTS
Chapter 1: Introduction to Investment-Linked Life Insurance 1
1.1 Introduction 1
Self-Assesment Questions 5
Chapter 2: Mechanisms and Features of Regular Premium

Investment-Linked Life Insurance 9
2.1 Introduction 9
2.2 Minimum Regular Premium 9
C E RT I F I C AT E E X A MI N AT I O N I N I NVES T MEN T-LI NK ED LI FE I NS UR A NCE

2.3 Allocated and Unallocated Premium 9
2.4 Regular and Ad Hoc Top-Up Premium 11
2.5 Sum Assured Multiple Rule 11
2.6 Optional Riders 13
2.7 Account Value 13
2.8 Partial Withdrawal, Surrender and Charge 14

2.9 Fund Switching and Switching Fee 14
2.10 Premium Holiday 15
2.11 Free-Look Period 15
2.12 No-Lapse Guarantee Period 16
2.13 Death Benefit Mechanism 16
2.14 Dual Pricing and Single Pricing 17
2.15 The Long Horizon 17
2.16 Dollar Cost Averaging 18
iii
2.17 Spread-Out Risk among Varied Assets 19
2.18 Retirement Plan, Medical Plan and Education Plan 19
Chapter 3: Mechanisms and Features of Single Premium Investment-Linked 27

Life Insurance
3.1 Introduction 27
3.2 Main Objective for Owning Single Premium

Investment-Linked Life Insurance 27
3.3 Minimum Basic Single Premium 27
3.4 One-Time Unallocated Premium Charge 27
3.5 Sum Assured Formula 28
3.6 Death Benefit Formula 28
3.7 Cost of Insurance Deduction and Sum at Risk Mechanism 28
Chapter 4: Considerations for Purchasing an Investment-Linked Policy 33

CERTI FICAT E EX A M INAT I O N IN I NVES T ME N T- L I N K E D L I F E I N SU R A N C E
4.1 Introduction 33
4.2 Benefits 33
4.2.1 Pooling and Diversification 33
4.2.2 Flexibility 33
4.2.3 Expertise 34
4.2.4 Access 34
4.2.5 Administration 34
4.2.6 Transparency 34
4.3 Risks and Uncertainties 38
4.3.1 Investment Fluctuations 38
4.3.2 Charges 39
4.4 Regular Premium Investment-Linked Plans vs Whole Life Participating

Plans 39
iv
Chapter 5: Investment Considerations 45
5.1 Introduction 45
5.2 Investment Objectives 46
5.3 Funds Available 48
5.4 Risk or Security 51
5.5 Investment Horizon 51
5.6 Accessibility of Funds 52
5.7 Taxation Treatment 52
5.8 Investment Performance 52
5.9 Diversification 53
Chapter 6: Types of Investment Vehicles and Potential Risks 57
6.1 Introduction 57
6.2 Cash and Deposits 57
C E RT I F I C AT E E X A MI N AT I O N I N I NV ES TM ENT- LIN KED LIF E I NS UR ANCE

6.2.1 Treasury Bills 58
6.2.2 Bank Accounts 58
6.2.2.1 Perbadanan Insurans Deposit Malaysia 59
6.3 Fixed Income Securities 60
6.3.1 Government Bonds 60
6.3.2 Corporate Bonds 61
6.3.2.1 Debenture Stocks 62
6.3.2.2 Loan Stocks 62
6.3.2.3 Convertible Stocks 62
6.3.2.4 Advantages and Disadvantages 63
6.4 Shares 63
6.4.1 Ordinary Shares 64
6.4.2 Preference Shares 64
6.4.3 Advantages and Disadvantages 65
6.5 Unit Trusts 65

v
6.6 Properties 67
6.6.1 Real Estate Investment Trusts 68
6.6.2 Advantages and Disadvantages 68
6.7 Sukuk 69
6.8 Capital Guaranteed Funds 70
6.9 Commodities 70
Chapter 7: Common Types of Investment-Linked Funds 75
7.1 Introduction 75
7.2 Fixed Income/Cash and Money Markets Funds 75
7.3 Equity Funds 75
7.4 Property Funds/REITs 75
7.5 Managed Funds 76
7.6 Balanced Funds 76

CERTI FICAT E EX A M INAT I O N IN I NVES T ME N T- L I N K E D L I F E I N SU R A N C E
7.7 Specialised Funds 76
7.8 Sukuk 76
7.9 Risks vs Returns of Investment-Linked Funds 76
Chapter 8: Pertinent Guidelines on Investment-Linked Business 83
8.1 Guidelines on Investment-Linked Business 83
Chapter 9: Agents Professional Approach and Guidelines 89
9.1 Introduction 89
9.2 Marketing 89
9.3 Consumer Buying Decision Process 90
9.4 The Selling Process 92
9.5 After-Sales Services 94
9.6 LIAM Guidelines on the Code of Conduct 97
vi
9.6.1 Part 1 Guidelines on the Code of Conduct 97
9.6.1.1 Statement of Philosophy 97
9.6.1.2 Coverage 98
9.6.1.3 Monitoring Devices 99
9.6.1.4 The Seven Principle Underlying the Guidelines 99
9.6.1.5 Code of Conduct- Only a Guide 100
9.6.2 Part II Life Insurance Selling 100
9.6.2.1 Introduction 101
9.6.2.2 General Sales Principles 102
9.6.2.3 Explanation of the Contract 104
9.6.2.4 Disclosure of Underwriting Information 105
9.6.2.5 Accounts and Financial Aspects 105
9.6.3 Part III Statement of Life Insurance Practice 105
9.6.3.1 Introduction 105
C E RT I F I C AT E E X A MI N AT I O N I N I NV ES TM ENT- LIN KED LIF E I NS UR ANCE

9.6.3.2 Claims 106
9.6.3.3 Proposal Forms 106
9.6.3.4 Policies and Accompanying Documents 106
9.7 Guidelines on Minimum Standards for Treating Customers Fairly 107
Answers to Self-Assessment Questions 111
Index 113
vii
CHAPTER 1 Introduction to
InvestmentLinked
Life Insurance
1.1 INTRODUCTION The insurance industry in Malaysia has experienced

steady growth in the last 20 years. Part of this growth is
due to insurance companies in Malaysia designing and
offering plans that continue to meet customers needs.
The introduction of investment-linked insurance and its
increasing popularity and demand have also fuelled this
growth.
Investment-linked insurance was first introduced in Malaysia

in December 1999 although it has been available in a number
of other countries before then. Since then, it has seen very
steady growth in terms of annual premiums, based on Bank
INTRODUCTION TO INVESTMENTLINKED LIFE INSURANCE

Negara Malaysias reports.
It is also to be noted 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
indicating that Malaysians are becoming more discerning
and want to make sure that they are in control of the kinds
of investments they select. Investment-linked insurance
policies allow them to do this. Investment-linked policy
owners can choose the amount of coverage they need with
their selected annual premium. They can select the minimum
sum assured as set by the relevant regulator based on age
at the time of policy inception or opt for higher coverage
1
amount if more protection is needed. At the same time, they
may accrue returns on their contributions in the form of
long-term savings.
The Life Insurance Association of Malaysias (LIAM)

statistics reveal that the annualised premium (AP) and sum
insured per capita for investment-linked insurance grew
between 2012 and 2013. This is shown below.
Individual Lives Mix (%)

NEW AP (MILLION) 2012 2013 2012 2013
Traditional 2,133 1,800 51.6 44.8

Investment-Linked 1,998 2,218 48.4 55.2
Individual
Growth
Lives Sum 2012 2013
(%)
Assured (RM)
Traditional 369,580,838,849 361,371,434,382 -2.2
Investment- 248,305,252,495 284,679,163,295 14.6
CERTI FICAT E EX A M INAT I O N IN I NVEST ME N T- L I N K E D L I F E I N SU R A N C E
Linked
As for Total In-Force Premium (individual business),

traditional insurance products still dominated the scene due
to their longer presence. However, the gap was narrowed.

Total In-Force Premium of Traditional in RM16.4 billion
2013
Total In-Force Premium of Investment- RM 9.5 billion
Linked in 2013
Gap between both in 2013 RM 6.9 billion
Gap between both in 2012 RM 7.3 billion
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, it also provides that a
2 portion of the premiums paid is used to purchase funds in one
or an array of investments offered by the insurance company.
The policy is directly linked to investment performance. The
insurer may appoint an external fund manager to tailor and
manage certain funds on its behalf. The value of the policy is
translated into units in a chosen fund or funds operated by the
insurer. Thus, these funds are exposed to market fluctuations.
This policy is designed to shift the uncertainty of investment
gains or losses to the policyholder and it does not provide any
guarantee of either interest rates or minimum cash values.
Theoretically, the value of the investment account can go
down to zero, or to a level insufficient to cover the cost of
protection and other related charges. If so, the policy will
terminate. It is vital that policy owners must be adequately
informed and be made aware that their investment-linked
policy is directly linked to the investment performance of
the relevant funds. So, investment-linked products offer life
insurance policies with values directly linked to investment
performance. This is done by linking the value of policies
to units in a special unitised investment account offered by
the respective life insurer. An investment-linked policy thus
combines investment and protection in the policy.
Investment-linked plans allow an individual to invest

in a diversified portfolio with a minimum of RM1,200
a year (regular premium) or a one-time single payment
(single premium) of RM5,000. This is possible as a special
investment pool is created by the insurer concerned from

collected premiums contributed by policy owners. The
pool is sufficiently large to be spread over varied stocks or
securities in the market on behalf of all policy owners. Each
policy owner accumulates units in his selected fund as his
share of the overall accrued value.
An average income earner may not possess ready financial

resources to invest in a spread of assets in the open market.
To illustrate, assume that an ordinary individual is very keen
to buy 5 blue chip stocks on the stock market. Also assume
that the average price is RM10 per share. It is stock market
norm that any investor must buy at least 1 lot or 1,000 shares
per stock. For this intended portfolio mix, the individual
investor will have to fork out at least RM50,000 upfront 3
(RM10 X 1,000 shares X 5 stocks). But he may not have
RM50,000 for this kind of investment. However, if there
is an investment-linked plan that has a fund investing in
stocks of companies with large capitalization, this individual
can own cumulative units of such investment spread over
progressive stages by paying affordable regular premiums.
The investment-linked funds of an insurer can acquire a wide

array of assets like equities or stocks, bonds, fixed interest,
foreign funds, real estate, currency and so on. Thus, policy
owners are offered a range of funds in which they can acquire
units out of the premiums paid by them.
In some countries, investment-linked life insurance is known

as unit-linked life insurance.
In the USA, it is called variable life insurance.

4
SELF-ASSESSMENT QUESTIONS
1. What are the factors that have contributed to the steady growth of the life insurance industry
in Malaysia since 2000?
I The Malaysian Government granting more flexibility to life insurance companies to

run business operations based on their own management philosophies and at their
own prudent discretion
II Malaysias dynamic economic growth experience
III Life insurers designing and offering customer-centric plans
IV The introduction of investment-linked insurance and the steady growth of this product
a) I and II
b) II and III
c) III and IV
d) II
2. Which of the following is the correct description of an investment-linked life policy?
a) A participating policy offering lifetime coverage
b) A capital guaranteed policy
c) An endowment policy which provides minimum returns
d) A policy offering protection while also investing in funds which form the basis for
returns to the policy owner

3. An investment-linked life insurance policy is also known as the following in some parts
of the world:
I Mutual fund-linked policy.
II Unit-linked policy.
III Variable life policy.
IV Universal life policy.
a) I, II, III and IV
b) I, II and III
c) II, III and IV
d) II and III 5
4. Investment-linked funds are managed by
I the insurers own professional managers in its internal investment department.
II fund managers/fund houses appointed by the insurer through outsourcing.
III outsourcing to the funds of unit trust companies since investment-linked funds are
similar to unit trust funds.
IV the insurers board of directors who can make special decisions on the types of
investment vehicles to offer to policy owners.
b) I
c) I and II
d) I and IV
5. Since investment-linked insurance has an investment element, a prospective policy owner

is allowed to opt for
I a nominal amount of sum assured of his selection.

II no life protection at all.
III at least the minimum amount of sum assured according to age, basic premium paid
and a formula set by the relevant regulator.
IV the sum assured offered by the insurer concerned based on its internal underwriting
guidelines in relation to the financial status and circumstances of the intended policy
owner.
a) I
b) I and II
c) III
d) IV
6. Which of the following statements are correct?
I Policy owners of investment-linked plans should be made to understand that they

wholly bear the gains or losses from the investment portion of their policies.
II As responsible corporations, life insurers are obliged to be partly responsible for any
drastic drop in prices of funds under their custody; thus, they have to bear part of the
6 losses suffered by policy owners if such incidents occur.
III For investment-linked policies, an individual can invest in a diversified portfolio with
a sum as low RM1,200 per year. This is possible as the overall collected premiums
contributed by investment-linked policy owners form a sufficiently large pool for
spreading over varied stocks or securities in the market.
IV An average income earner may not possess ready sufficient liquidity to invest in a
spread of assets if he wants to do it in the open market on his own.
a) I, III and IV
b) II and III
c) I and II
d) I, II, III and IV
7
CHAPTER 2 Mechanisms
and Features of
Regular Premium
Investment-Linked
Life Insurance
2.1 INTRODUCTION Investment-linked insurance products cater for more
flexibilities and transparencies. Hence, their structure is
slightly more complex than traditional insurance products.
All agents and other sales intermediaries must understand
MECHANISMS AND FEATURES OF REGULAR PREMIUM INVESTMENT-LINKED LIFE INSURANCE

well the mechanisms and features of regular premium
investment-linked insurance in order to explain the product
effectively to their prospective clients.
After understanding this chapter, candidates will understand

that the primary focus of the design for regular premium
investment-linked insurance is protection, with investment-
linked as the secondary focus.
2.2 MINIMUM Bank Negara Malaysias guidelines on investment-linked

REGULAR insurance do not stipulate a minimum premium amount.
PREMIUM This is left to the discretion of insurers. The current practice
is that generally, the minimum annual premium varies from
RM1,200 to RM1,800, depending on the product and the
marketing directions of an insurer.
2.3 ALLOCATED The money received by the insurer as regular premium

AND (either monthly, quarterly, semi-annual or annual mode)
UNALLOCATED is allocated to two accounts Allocated Premium Account
PREMIUM and Unallocated Premium Account. The allocated premium
account is the special account for buying units in vehicles
earmarked by the various funds offered by the insurer. In
addition, the monthly cost of insurance (COI), the annual 9
fund management fee (varying between 0.5% to 1.5% of the
accrued value in the fund, depending on the type of fund),
the one-time policy fee (usually about RM100) and other
relevant charges like the nominal monthly administrative/
service charge (usually RM2) are deducted from this account
while the value of the invested units called account value
continues to accrue in the policy as premiums are paid. The
unallocated premium goes to the insurer to meet agency
commissions and other management-related expenses.
The allocated premium ratio set by insurers normally

commences at 40% to 50% in the first year, and the rate
increases until the 7th year and from this time on, it will
be 100%. The overall ratios may differ slightly between
insurers. Some may offer higher ratios but also levy higher
relevant charges.
Since not all the entire premiums in the first 6 years are
channelled to the purchase of fund units, we can say that
protection takes greater priority over investment. This is the
reason why some industry players say that regular premium

investment-linked insurance (RP-IL) is more inclined towards
protection (as the primary element) than investment (as the
secondary element).
The diagram below shows how the allocated premium and

the unallocated premium are allocated.
INSURANCE PREMIUMS
ALLOCATED: UNALLOCATED:
FOR FOR
INVESTMENTS INSURER
Add Investment Less insurance charges, Less agents

Returns policy fee and fund commissions and
management fee management expenses
10
2.4 REGULAR AND In addition to the basic regular premium (RP), top-ups
AD HOC TOP-UP (TUs) of premium are also allowed. The purpose of TU is
PREMIUM to enhance the accumulation of units. After deducting an
upfront charge of about 5% from each TU, the rest is put
into the fund/s selected by the policy owner.
Most insurers allow TU of a certain minimum amount on a

regular basis together with the basic RP. The total amount is
incorporated into the billing. In other words, regular TU is
to be paid together with the basic RP at each due date.
Ad hoc TU is paid at any time, and not on a due date. No

limit to the amount and frequency is imposed. Ad hoc TU
may be needed to keep a policy in force when the account
value gets depleted due to the high COI at later ages of the
policy owner or due to substantial withdrawals made along
the way. Insurers have the discretion to set the minimum
amount for ad hoc TU.

Some policy owners make ad hoc TU when they sense
that the market is reaching the bottom of the trough and is
expected to pick up.
2.5 SUM ASSURED The Sum Assured Multiple (SAM) rule imposed by Bank
MULTIPLE RULE Negara Malaysia (BNM) stipulates the minimum amount
of life insurance coverage that can be purchased based on
the basic annual regular premium amount and age of a new
policy owner at the time of policy inception. It stipulates the
minimum multiple factors, depending on the age range of
the life insured when the policy is signed. In other words, the
SAM rule specifies minimum cover that must be provided,
measured as a multiple of annual premium. The SAM factor
for the youngest age range (1-16) is 60 while for the oldest
age range (56 and above), it is 15.
Lets say a 56-year-old wants to insure himself by paying

RM5,000 premium a year. He will have to be covered for
at least RM75,000 (5,000 X 15). For the same premium
amount covering the life of a minor who is 16 years old,
the minimum coverage is RM300,000 (5,000 X 60).
11
Regular TU premium is excluded from the multiple factor
for calculating the minimum sum assured.
The table below shows the SAM factors for the different
age ranges.
Age SAM Factor

1 to 16 60
17 to 25 55
26 to 35 50
36 to 45 35
46 to 55 25
56 and above 15
For a premium-paying rider (PPR) which involves paying

extra premium together with the basic premium, the
premiums shall be excluded for the purpose of SAM
calculation.
A unit-deducting rider (UDR) which does not involve extra

premium caters for the deduction of COI from the account
value. COI is lower than for the full rider premium. The
treatment depends on the two categories of UDRs:
1: Riders with Sum Assured (SA) payable on death.

Example: Enhanced Critical Illness Rider
2: Riders without SA payable on death.

Example: Hospital & Surgical Rider
The SAM formula for UDRs is as follows:
SAM = Total Sum Assured

(Total Annual Premium - Notional
Premium of Riders)
For 1, the Riders SA is to be included in the numerator

(i.e. total SA) of SAM formula. For example, if a person
aged 30 wants RM300,000 basic coverage and RM300,000
enhanced critical illness coverage that pays a separate
sum upon the detection of a dread disease, the total SA is
12 RM600,000. Based on the SAM factor of 50 for a 30-year-
old, the minimum annual premium will be RM12,000
(600,0000 divided by 50).
For 2, the notional premium is to be deducted. As the

formula for notional premium is complex, it is best for
agents to rely on the sales illustration system of the insurer
to identify the amount. Just to illustrate, let us say a young
working person aged 24 has decided to set aside RM3,600
a year for a basic plan with a hospital and surgical rider
that pays only hospitalisation bills. Let us assume that the
notional premium for the rider is RM200. The minimum SA
for the basic coverage will be: 3,400 (minus 200 Notional
Premium) X 55 (the multiple factor for this age), which will
then be RM RM187,000.
2.6 OPTIONAL Various types of supplementary coverage or riders are

RIDERS offered as options to the basic coverage. Some of the popular
ones are accident rider, medical rider, critical illness/dread
disease rider, waiver of premium rider, payor benefit rider,

disability income rider, etc.
A rider may be available in the form of a premium-paying

rider (PPR) or a unit-deducting rider (UDR), depending
on the product design for each rider. A PPR requires extra
regular premium to be paid for the rider concerned together
with the basic premium. No extra regular premium is
involved in a UDR but it entails the additional COI charge
for the rider to be deducted from the investment account
value of the policy owner, based on the same premium.
Agency commissions are payable from PPRs, but not from
UDRs.
With the benefit of policy owners in mind, the trend of

insurers is shifting to UDRs for new rider products design.
2.7 ACCOUNT This is the projected value of units at any particular point
VALUE in time that one may receive if one decides to surrender the
policy and it is net of tax and all applicable charges.
The value of the policy depends on 2 factors:

i) the value of each of the units, and
ii) the number of units the policy has accumulated to date. 13
The value of the policy should rise over a long period as the
number of units increase with every premium invested, and
also with the increase in value of each unit. However, the
value of the policy can decrease if the funds investments
fall in value
2.8 PARTIAL Policy owners may make a partial withdrawal from

WITHDRAWAL, their accrued account value when they need the money.
SURRENDER Most insurers do not limit the frequency of withdrawal
AND CHARGE or the maximum amount per withdrawal as long as the
remaining account value is not below a certain minimum
(e.g. RM1,000). A minimum amount per withdrawal is
normally imposed, say RM1,000. The policy owner should
bear in mind that a high depletion of account value due to
withdrawals may cause the balance to be insufficient to meet
the higher COI at an older age although premiums may be
continued to be paid. The policy owner should make ad hoc
TU for replenishing the units and the account value.
Total surrender is allowed without restrictions.

Insurers may impose an early withdrawal or surrender

charge, depending on the number of years a policy has been
kept in force before the cut-off point when the charge is
not applicable. For example, if the cut-off point for policy
surrender is the 6th policy year, a policy owner who wants
to cease his policy and cash in the account value at the 7th
year or later will not be subjected to the surrender charge.
Likewise, an insurer may impose a charge for early partial
withdrawal, say within 2 years. The discretion lies with an
insurer as to whether to impose such a charge, in line with
its marketing strategy and product structure.
2.9 FUND SWITCHING If a life insurance company sells investment-linked life

AND SWITCHING policies and it offers more than one investment-linked fund
FEE to its policy owners, it usually provides a switching facility
which allows policy owners to switch part or all of their
investment from one fund to another fund.
14
Switching practices vary. Switches between funds may
i) be offered free of charge, or
ii) 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 policy owner 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 his profile is aggressive investor,
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 an equity fund and 70% in a bond fund
as he reaches retirement age.
2.10 PREMIUM When a due premium is not paid and if the accrued account
HOLIDAY

value is sufficient to cover due premiums, premium holiday
(PH) comes into play to prevent the policy from lapsing.
At one time, some insurers catered for the PH mechanism
to deduct the full premium amount (which then allowed
the payment of agency commissions). However, for the
benefit of policy owners, the common practice now is to
deduct COI and other management charges, without agency
commissions being payable as COI is much lower than the
full premium. It is also common practice that policy owners
are allowed the option to pre-select whether PH should
apply to cover the basic sum assured (BSA) only (in which
case all riders will automatically lapse but the basic plan is
kept in force) or cover both the BSA and riders as long as
the account value is sufficient.
2.11 FREE-LOOK Similar to traditional policies, there is also a 15-day free-

PERIOD look period from the date of delivery of the policy. If you
decide to cancel your plan within this period, the insurer
shall refund:
i. the unallocated premiums,

ii. the value of units that have been allocated (if any) at
15
the unit price at the next valuation date, and
iii. any insurance charges and policy fee that have been
deducted, less expenses which may have been incurred
for the medical examination of the life insured.
2.12 NO-LAPSE This is an endorsement to the policy contract as practised

GUARANTEE by all, if not most, life insurers in Malaysia. The clause
PERIOD stipulates that the investment-linked (IL) policy will not
lapse in the first few years even though the account value is
not sufficient to cover the COI and other necessary charges,
provided certain conditions are met, for instance:
The regular premium has been paid without fail;
No premium holiday has been effected;
No changes have been effected to the policy, including
any partial withdrawal from the account value and
investment requests like fund switching.
Any unpaid COI and monthly administrative/service charge

will be deducted from the account value contributed by all
future premiums and TUs, if any, until fully repaid.
The no-lapse guarantee is only for the first few years.

Thereafter, if the account value is still insufficient to cover
the COI and other management charges, the policy will
lapse unless TU premium is made along with RP to make
up for the unpaid COI and charges.
2.13 DEATH BENEFIT The death benefit (DB) at any time is the basic sum assured
MECHANISM plus the accrued account value. Hence, the DB amount
should never be less than the basic SA at any point in time
as long as due premiums are paid faithfully. The chart below
shows this.
RM DB =SA +AV
AV AV
x y
Amount Amount
SA
AV
AV AV
x y
Amount Amount
16 YEARS
2.14 DUAL PRICING Dual pricing refers to the bid-offer spread, which is
AND SINGLE normally a 5% difference. The offer price per unit (unit
PRICING purchase price) and bid price per unit (unit sale price) are
validated by an insurer every working day. The bid price is
the lower figure in the spread. For example, assume that the
offer price for buying units of a fund is RM1 per unit today.
With the spread of 5%, existing unit holders who want to
redeem their units for cash will have to dispose of their
units at RM0.95 per unit.
Single pricing means the acquisition or disposal of units

in a fund is at the same price per unit. There is no bid-
offer spread. However, there may be a charge imposed at
the point of acquisition (upfront charge) or at the point of
disposal (back-end charge). This is at the discretion of the
insurer concerned, depending on its product design.
The trend in Malaysia is shifting to single pricing for new

policies.

2.15 THE LONG Policy owners are encouraged to adopt the long-term view
HORIZON to leverage the cumulative effect both from the protection
and investment perspectives. The overall protection amount
in the form of death benefit increases over the years as
the original sum assured is coupled with the cumulative
account value. Regarding the investment, the account value
in the first 6 years rises gently as part of the premiums is
unallocated. In the longer run, the Dollar Cost Averaging
phenomenon creates a positive impact on the cumulative
effect on the account value (how Dollar Cost Averaging
works is explained later in this chapter).
Let us remember that each investment-linked fund

comprises a spread of assets. As the population increases,
trading volumes in the markets will rise in tandem with
this increase in the long run. Just to prove the point, let
us look at the local benchmark index chart over 10 years
below.
17
MALAYSIA STOCK MARKET (FTSE KLCI)
2000 2000
1800 1800
1600 1600
1400 1400
1200 1200
1000 1000
800 800
Jan/06 Jan/08 Jan/10 Jan/12 Jan/14
SOURCE: WWW.TRADINGECONOMICS.COM I FTSE
The graph which represents the overall performance of

stocks, shows a fluctuating trend over the years, ending
higher 10 years later.
Imagine that 10 years ago you had put money in an

equity index fund that tracks this index, i.e. invested in
the stocks represented by the index. If you had held on to
your investment for 10 years, and then you decided to cash
out, the value of your investment in the fund would have
appreciated much without your putting extra money into the
fund along the way.
2.16 DOLLAR COST Unit prices will rise and fall with market fluctuations;
AVERAGING however, the continued payment of premiums will bolster
the averaging effect. When prices go down, a policy owner
will be able to acquire more units at lower prices. When
prices go up, the units acquired at lower prices will appreciate
in value. Dollar Cost Averaging means leveraging price
fluctuations. The diagram below illustrates this based on the
assumption that the same amount of money is fully invested
each year.
18
Dollar Cost Averaging (DCA)
Invest Constant Dollar Amounts at Equal Interval over Long Period of Time
1st Yr. 2nd Yr. 3rd Yr. 4th Yr. 5th Yr. Totals
Investment 100 100 100 100 100 =500
Value / Unit 1.00 0.50 0.25 0.40 0.80
Unit purchased 100 200 400 250 125 =1075
On 5th Year Value / Unit = 0.80
Number of accumulated units = x1075
Toal value = 860
Toal investment for 5 years = 500
Gain = 360
Compounded annual return = 18.65%
You can see that even though the value per unit fluctuated
over the 5-year period, the compounded annual return
increased to 18.65%. This positive return was possible

because investments were made every year regardless of
the unit value.
2.17 SPREAD-OUT Not all assets in a fund have the same experience at any
RISK AMONG point in time. Some may perform better in a given short
VARIED ASSETS period; some may not. The overall impact is the averaging
effect on the price of the fund with the spreading out of
risk. As long as the assets selected by the fund manager are
sound and as long as the fund manager exercises prudence,
the fund price should end up higher in the long run despite
fluctuations.
2.18 RETIREMENT Some insurers in Malaysia have designed certain regular

PLAN, MEDICAL premium investment-linked (RP-IL) plans as retirement
PLAN AND products. For example, there are retirement savings plans
EDUCATION which provide monthly guaranteed income. These come
PLAN with the TU facility.
The rising cost of medical treatment due to the inflationary

effect has resulted in a greater demand for medical and
critical illness products. Some insurers have packaged
19
RP-IL plans with such riders and termed them medical plans.
The tax relief for qualified medical plans is up to RM3,000 a
year, subject to approval by the Inland Revenue Board.
There are also limited term investment-linked plans sold as

education plans. The tax relief for qualified education plans
is up to RM3,000 a year, again subject to the approval of
the Inland Revenue Board.
The tax relief for both qualified medical and education

plans (combined) owned by a policy owner is also
RM3,000 a year.
Malaysians, especially the self-employed who do not

contribute to the Employees Provident Fund (EPF), should
take advantage of the personal income tax reliefs granted
for life insurance premiums.
Take the example below which is based on year 2013 tax

structure as a case study.
1. Mr A, aged 30, an active unit trust agent. Married.

Wife: bank teller (separate tax assessment). One son:
1 year old.
2. Not an EPF contributor. No life insurance at hand.
3. Chargeable/taxable income in 2013: RM50,000 (after

less personal and other reliefs/deductions).
4. On RM50,000 chargeable income, the tax rate

structure for 2013 and tax payable would be
RM 2,850 as shown below:
Chargeable
Structure Rate (%) Tax Payable (RM)
Income (RM)
35,000 50,000 1st 35,000 1,200
Next 15,000 11 1,650
*Total Tax Payable: 2,850
5. Mr. A should have taken up an investment-linked life

plan to complement his future retirement income, a
20 medical plan to cover unforeseen medical expenses
and an education plan to supplement savings for his
young childs future education needs. He should have
done the following:
Paid RM6,000 a year for a regular premium

investment-linked plan to take advantage of the
maximum relief of RM6,000 allowed for life insurance
premiums and/or EPF contributions. With the Sum
Assured Multiple of 50 times for his age, he would
have been initially protected for RM300,000, which
would definitely increase over time since the formula
for death benefit is sum assured plus accrued investment
account value while the policy is in force. At the same
time, he would have been accumulating units in an
investment fund and creating a supplementary savings
account for the long run. He could decide to liquidate
the account value upon reaching retirement age.
Paid RM1,500 a year for a qualified investment-

linked medical plan. This would take care of any
unexpected hospitalization expenses.
Paid RM1,500 a year for a qualified investment-

linked education plan on the life of the child, with a
payor benefit rider covering Mr A. The education plan
normally matures when the child is aged 25 years. The
maturity sum may come in handy as part of the ready
liquid resources available for the childs future higher
education.
6. If Mr A had leveraged a total of RM9,000 tax relief

based on the purchase of the three investment-linked
plans, his chargeable income would have been
RM41,000 instead of RM50,000. The tax amount
payable would have been RM1,860 as shown below:
Chargeable
Structure Rate (%) Tax Payable (RM)
Income (RM)
35,000 50,000 1st 35,000 1,200
Next 6,000 11 660
*Total Tax Payable: 1,860
21
7. End Result: Mr A would have paid almost
RM1,000 less tax in 2013 and also enjoyed the
benefits of sound financial planning for a better future.
He would continue to be entitled for the tax reliefs on
the three insurance plans in future years as long as he
continues to pay the premiums.

22
1. Which options are open to policy owners of a regular premium investment-linked plan?
I A policy owner may opt for higher a sum assured than the minimum amount
stipulated by the Sum Assured Multiple rule.
II A policy owner can pay top-up premium to accelerate the accumulation of the
account value in the policy.
III A prospective policy owner can apply to combine a single premium plan with a
regular premium plan into one policy.
IV A prospective policy owner can select the death benefit based on either the sum
assured or the account value, whichever is higher.
a) I and II
b) I, II and III
c) II and III
d) I, III and IV

I Top-up premiums can either be paid on a regular basis or at any time.
II Most insurers impose a minimum amount for both regular top-ups and ad hoc top-
ups.
III Most insurers allow ad hoc top-ups once a year and impose a maximum amount.
IV An upfront charge, normally around 5 per cent, is deducted from each top-up.
a) II, III and IV
b) I, II and IV
c) I and IV
3. A female, aged 30 years, has budgeted to set aside RM3,000 a year for a basic regular
premium investment-linked plan with a Unit-Deducting Hospitalization Rider. According
to the SAM formula, the multiple factor for her age is 50 times. How would you calculate
the minimum sum assured for the basic plan?
23
a) RM3,000 minus the notional premium for the rider, multiply by 50.
b) RM3,000 multiply by 50.
c) RM3,000 multiply by 55 times.
d) RM3,000 minus the notional premium, then multiply by 55 times.
4. Which of the statements below are correct?
I All life insurers impose an early partial withdrawal charge and an early surrender
charge.
II High partial withdrawals may cause the future account value to be insufficient to
cover the higher cost of insurance at older ages. Therefore, it is prudent for a policy
owner to make ad hoc top-ups to replenish the units and the account value.
III Depending on the practices instituted by individual life insurers, all fund switches
may be processed free of charge, or be free for the first switch or first few switches
within a policy year and a fee is charged for subsequent switches.
IV The investment risk profile of a young investor or policy owner may likely change
from the aggressive category to the conservative category as he advances in age;
hence, he may want to progressively shift more of his equity assets to fixed income
or bond fund until he gets close to retirement age.
b) II and III
c) I, III and IV
d) II, III and IV
5. Identify the correct statements from those given below.
I The free-look period is 15 days commencing from the date of delivery of policy
contract to the policy owner.
II The no-lapse guarantee clause stipulates that as long as premiums are paid without
fail by the grace period and there was no previous premium holiday or partial
withdrawal, the regular premium investment-linked policy will never lapse over the
entire policy tenure although the account value may be insufficient to cover the cost
of insurance at any point in time.
III The no-lapse guarantee clause stipulates the regular premium investment-linked
24 policy will not lapse in the first few years (e.g. 2 years) even though the account
value is not sufficient to cover the cost of insurance, provided:
All premiums were paid during the period.
No premium holiday was exercised during the period.
There was no partial withdrawal or fund switching during the period.
IV As the basic death benefit of a regular premium investment-linked policy is basic

sum assured plus account value, the life insurer will continue to deduct the cost of
insurance for the basic coverage as long as the policy remains in force.
a) I, III and IV
b) II, III and IV
c) II and III
6. Select the correct statements from the following.
I The Dollar Cost Averaging phenomenon leverages the long term or the acquisition
of more fund units when prices are down and the appreciation of units already
acquired when prices go up.

II Some assets in a fund may perform well in a given short period while some may not,
but the overall impact is the averaging effect due to the spreading out of risk. With
prudent management by fund managers, the unit price is likely to be higher in the
longer run.
III The maximum tax relief for a qualified regular premium investment-linked medical
plan and an education plan is RM3,000 a year. If a policy owner has both, the
combined limit is also RM3,000.
IV Whether a policy owner has a qualified regular premium investment-linked medical

plan or an education plan, or both, he qualifies for a tax relief of up to RM6,000 a
year.
a) I, II and IV
b) I, II and III
c) I and III
d) II and IV
25
CHAPTER 3 Mechanisms
and Features of
Single Premium
Investment-Linked
Life Insurance
3.1 INTRODUCTION Single premium investment-linked (SP-IL) life insurance
has almost the same characteristics as regular premium
investment-linked (RP-IL) life insurance with regard to
the sum assured (SA) and death benefit (DB) mechanisms,
allocated premium/unallocated premium ratio, COI
MECHANISMS AND FEATURES OF SINGLE PREMIUM INVESTMENT-LINKED LIFE INSURANCE

deduction mechanisms and the objective for purchasing
this product.
3.2 MAIN OBJECTIVE While the main objective of regular premium investment-
FOR OWNING linked policy owners is protection, the priority for policy
SINGLE PREMIUM owners of single premium investment-linked life insurance
INVESTMENT- (SP-IL) would presumably be investment first and protection
LINKED second.
INSURANCE
3.3 MINIMUM BASIC Setting the minimum basic single premium (SP) is at the
SINGLE PREMIUM discretion of individual insurers and the current range is
RM5,000 to RM20,000.
3.4 ONE-TIME Since only one premium is paid, the unallocated premium
UNALLOCATED charge or upfront charge is a one-time payment which is
PREMIUM unlike the regular premium model whereby the unallocated
CHARGE portion spans over the first 6 years in reducing ratios. The
normal charge is around 5%, depending on the structure
adopted by an insurer. Top-ups, if any, will also bear the
same charge. Hence, the balance of 95% (if 5% is the upfront
27
charge) will be channelled to acquire units in the selected
fund/s.
3.5 SUM ASSURED The basic sum assured (BSA) is 125% of the single premium
FORMULA (SP) paid. For example, for RM10,000 SP, the BSA is
RM12,500. However, BNM allows insurers the discretion
to lower it to RM5,000 or 105% of SP, whichever is higher,
for older age groups and sub-standard lives.
3.6 DEATH BENEFIT All TUs are excluded from the BSA formula as such
FORMULA additional remittances are meant for investment.
3.7 COST OF The minimum protection amount is the BSA. Once the
INSURANCE account value exceeds the BSA, the DB will be the account
DEDUCTION AND value. In other words, the formula is either the BSA or
SUM AT RISK account value, whichever is higher.
MECHANISM
In the initial few years, the accrued account value is expected
not to exceed the BSA. When the account value is still below
the BSA, the COI will be deducted.
CERTI FICATE EX A MI NATI O N IN I NVEST ME N T- L I N K E D L I F E I N SU R A N C E
Deduction of COI is not for the full BSA but to cover the
shortfall between the account value and the SA. The shortfall
difference is called the Sum at Risk (SAR). Hence, as the
account value progressively increases, the COI reduces.
When the account value reaches or exceeds the basic SA
amount, the COI will cease. If the account value drops again
below the BSA, the COI deduction will resume.
The chart below illustrates this.
Sum At Risk (SAR)

Account
Value
125k
SAR BSA
100k
SP
28
How long the account value will take to increase over the
BSA depends on the performance of the fund selected by the
policy owner and market conditions. If after policy inception
there is a market downturn, the account value will most likely
decrease or take a longer time to accumulate in value, thus
causing the SAR to prolong unless there is a top-up.
Policy owners are encouraged to make ad hoc top-ups in

order to increase the account value, and not just to rely on
the one-time single premium payment.
29
1. Single premium investment-linked insurance is said to be more inclined towards investment

than protection because
a) generally, about 95% of the single premium is allocated for investment in fund units.
b) the policy owner has the discretion to opt out of any protection coverage so that no
cost of insurance will be deducted from the account value.
c) the usual sum assured is 25 per cent above the single premium outlay and may be
lowered to 5 per cent above the premium for older age groups, i.e. RM125,000 for
SP of RM100,000, RM105,000 for senior ages with the same premium.
d) once the account value exceeds the basic sum assured, the death benefit will be the
account value, not inclusive of the sum assured.
2. Mrs A, aged 45, signs up for a single premium investment-linked plan by paying an
initial RM100,000. Six months later, she pays another RM100,000 as top-up. The total
sum assured in her policy after payment of the top-up is
a) RM250,000.
b) RM125,000.
c) RM205,000.
d) RM210,000.
3. Which of the statements below are correct regarding single premium investment-linked
insurance?
I Most insurers set their minimum basic single premium as ranging from RM5,000 to
RM20,000, depending on product design.
II All insurers set the minimum basic single premium at RM5,000.
III Top-up premiums, if any, also bear the same normal upfront or unallocated premium
charge ratio of around 5% as the basic single premium.
IV Cost of insurance will be deducted regardless of whether the account value is above
or below the basic sum assured at any point in time.
a) I, III and IV
b) I and III
c) II and IV
30 d) II, III and IV
4. Which statement/s relate(s) to the application of cost of insurance (COI) in single premium
investment-linked insurance?
I COI is based on the sum assured or account value, whichever is higher.
II When the account value of a single premium investment-linked policy is still below
the sum assured, the shortfall gap between the two levels is called sum at risk.
III Deduction of COI is based on the shortfall amount from the account value level to
the sum assured level.
IV COI is based on the difference between the sum assured and account value at any
point in time.
a) I
b) III
c) II and III
d) IV
5. Top-ups for single premium investment-linked plans are encouraged when

I the market is on the upturn and unit prices are rising.
II a market downturn sets in not long after policy inception, thus causing the sum at
risk to prolong longer than expected, based on the initial premium outlay.
III the nation is experiencing a period of strong economic or GDP growth.
IV the policy owner believes in the impact of Dollar Cost Averaging and wants to leverage
that to boost the account value instead of relying on just one single outlay.
b) I and III
c) II and IV
d) I, II and III
6. The few mechanisms and features of single premium investment-linked plans which differ
from regular premium investment-linked plans are:
I The sum assured formula for single premium plans is different than that for regular
premium plans.
II The death benefit formula for single premium plans is not guided by the same
minimum Sum Assured Multiple rule applicable to regular premium plans. 31
III The allocated premium ratio for single premium plans is different from that for regular
premium plans.
IV While the policy is kept in force, the cost of insurance deductions for single premium
plans may not be continuous because the formula is based on sum at risk, unlike
regular premium plans which are based on sum assured.
a) I and IV
b) I, II, III and IV
c) II, III and IV
d) I, III and IV
32
CHAPTER 4 Considerations
for Purchasing an
Investment-Linked
Policy
4.1 INTRODUCTION An investment-linked insurance plan is a life insurance

that combines protection and investment. Premiums paid
provide not only life insurance cover, but a part of the
premiums are also invested in specific investment funds of
the policy owners choice. Policy owners must consider the
benefits and the risks of purchasing this form of insurance
policy, just as they should for any other financial instruments.
4.2 BENEFITS
4.2.1 Pooling and Like unit trust funds, investment-linked funds offer the
CONSIDERATIONS FOR PURCHASING AN INVESTMENT-LINKED POLICY

DiversificationN policy owner access to a pooled and diversified portfolio
of investments. The funds normally consist of a wide range
of equity assets and fixed income securities. On their own,
individual policy owners with a small sum of money are
unable to construct such a diversified portfolio. A well-
diversified fund has better risk characteristics than a less
diversified one.
4.2.2 Flexibility Investment-linked products have simple product design

with a clear structure that caters separately for investment
(unit-driven) and insurance protection (charge-based).
A policy owner may change the level of his premium or

protection as long as it is within the minimum Sum Assured
Multiple (SAM) guidelines, take a premium holiday, make
premium top-ups, make partial withdrawal and apply for
fund switching. 33
Traditional with-profit life insurance products are sum
assured driven and they are very inflexible with regard to
allowing major changes in product features. For example,
a change of plan from a whole life insurance policy to an

endowment policy involves complicated calculations;
a traditional life insurance policy does not allow policy

owners the option of choice of investment portfolio.
4.2.3 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.
Many policy owners, on the other hand, do not normally

have good knowledge of financial markets to invest their
money wisely.
4.2.4 Access A policy owner can gain access to well diversified investment-
linked funds managed by professional investment managers
with proven track records.
4.2.5 Administration Policy owners are relieved of the day-to-day administration

of their investments, which can be a complicated affair.
They just have to keep track of their investment through
the unit statements provided regularly by the insurance
company and the unit prices published in the financial pages
of major newspapers.
4.2.6 Transparency Regular premium investment-linked insurance promotes full

transparency relating to official sales materials presented at
the point of sale. The sales quotation script of any insurer
in Malaysia contains great details. Agents and other sales
intermediaries must understand well their respective official
point-of-sale materials in order to effectively handle queries
raised by their prospective clients.
For example, the illustration quotation material of an insurer

may be over 13 pages for a proposal which incorporates
critical illness and medical riders attached to the basic
coverage. Some of the pertinent transparent details are as
34 follows:
Proposal summary: Name of basic plan, names of
riders, coverage amounts, overall premium.
Descriptions of the benefits for the basic plan and riders.
A statement specifying that the cost of insurance

(COI) will be levied monthly and deducted from the
fund/s up to the maximum tenure as long as the policy
is maintained. A footnote that highlights that COI
increases along with attained age is also included.
A list with descriptions of excluded risks from the cover

provided by riders.
A statement specifying that premium holiday (PH) will

be applied whenever a due premium is not received,
provided the account value remains sufficient to cover
the COI and other necessary charges.
A statement that investment returns are based on

assumed rates of return for the high and low scenarios
for the selected fund/s.
Special Advisory Highlights:

(a) Policy owner can maximise the investment
element by opting to pay the minimum basic
annual premium and the balance as regular

top-up, out of the overall minimum premium
amount. (For example: Minimum overall annual
premium is RM1,800. Minimum basic premium is
RM1,200. Instead of paying the full RM1,800
as basic premium, the policy owner can opt for
RM1,200 basic premium and RM600 top-up
to meet the overall minimum annual premium
requirement.)
(b) If the annual premium is above RM5,000, the

intended policy owner may want to consider
the alternative of a single premium investment-
linked plan which offers better allocation rates for
investment. However, the alternative caters for a
much lower insurance protection level compared
to a regular premium investment-linked plan.
35
(c) Policy owner can increase the sum assured without
a corresponding increase in annual premium,
subject to underwriting approval. However, the
policy may not be able to be maintained through
the intended tenure of coverage because of higher
COI charges.
(d) The policy may lapse if there is insufficient

account value for the deduction of the various
charges as a result of higher COI due to many
attached riders, or older ages, or uneventful
investment returns, or previous incidents of PH.
(e) Policy owner may need to add top-ups or reduce

the basic sum assured (within the minimum Sum
Assured Multiple rule) at older ages in the later
years in order to maintain the policy.
(f) The projected investment returns are for

illustrative purpose only, and should not be
deemed likely returns of the selected fund/s or
guaranteed values. The projections are not based

on past performance.
(g) All charges, including COI, shown are of current

levels and not guaranteed. They may change (to
not more than a maximum limit) by the insurer
giving 3 months notice. (Note: A list concerning
the maximum COI amount according to age that
can be charged by the same insurer is endorsed
in its issued policy contract.)
(h) COI increases with attained age.
(i) All investment risks are borne by the policy

owner.
Some of the pertinent elements contained in the table

of illustrated values and benefits are:
(a) Breakdown of annual premium and coverages;
(b) The selected fund/s and selected proportion ratio,

36 if more than 1 fund (in %);
(c) Amount of allocated premium and unallocated
premium according to policy years. Definitions
of allocated premium and unallocated premium
are also provided, supported by a table showing
the specific allocated premium ratio (in %) from
year 1 to year 6 before reaching 100% in year 7
and thereafter.
(d) Basic sum assured;
(e) COI amount for the basic sum assured and riders
according to policy years;
(f) Amount of other charges according to policy

years;
(g) Amount of annual fund management fee based

on projected cumulative account value - one list
for the high scenario and another list for the low
scenario;
(h) Projected cumulative account value one list

for the high scenario and another list for the low
scenario;
(i) Projected cumulative death benefit amount,

both in high and low scenarios;
(j) The commission amount (to agents/intermediaries)

for each year of the first 6 years.
The assumed rates of return (in %) of the various

available funds in accordance with the high and low
scenarios for the first 20 years, and after 20 years,
according to guidelines set by Bank Negara.
The actual historical returns of the various available

funds in the past 5 years, also with reference to the
historical returns of the relevant benchmark indices in
the past 5 years.
Short descriptions of the underlying assets of each

available fund.
37
The Policy Disclosure Sheet (PDS) segment: This
contains a list of important questions and answers
(Q&As) for the attention of the prospective policy
owner. There is a preliminary statement emphasising
the need to read the PDS and the general terms and
conditions closely before deciding to take up the plan.
Finally, the requirement for the intended policy

owner to sign as confirmation he has received and
understood the contents of the sales quotation and
PDS. The soliciting agent/sales intermediary must also
provide his signature to confirm having presented the
documents and explained the non-guaranteed elements
in the sales quotation.
4.3 RISKS AND
UNCERTAINTIES
4.3.1 Investment The death and disability benefits of a regular premium

Fluctuations investment-linked (RP-IL) plan are based on the sum
assured and the value of units. However, its account
or maturity value is equal to the value of units only at the

point of policy surrender or maturity.
The sum assured is always guaranteed but the value of

units is not guaranteed because it is directly linked to the
investment performance of the underlying assets of the
fund. That is why most insurers emphasise that the primary
focus of an RP-IL plan is protection and its secondary focus
is investment.
In times of a volatile stock market, the account and maturity

values of an investment-linked life insurance policy (with
units invested in an equity fund) will rise and fall. It shows
that the potentially higher return of an 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 policy owners who can tolerate the risks of
short- term fluctuations in their investment account. The
policy owner can, however, expect to achieve higher return
38 than from a traditional whole life product over the long term.
Investment-linked life insurance policies (with high equity
investment) are not suitable for policy owners who are risk
averse and want to have a life insurance policy with high
protection together with guaranteed cash and maturity
values. In this case, it would be better that they buy a
traditional non-participating product to meet their insurance
needs.
4.3.2 Charges The administration fee, insurance charge, fund management

fee, etc. of an investment-linked life insurance policy are
usually not guaranteed. These are subject to review and can
be changed by the insurance company after giving three
months written notice. Except for the insurance charge or
COI which gradually increases yearly according to attained
age, insurers in Malaysia have not so far been known to revise
their fund management fees and nominal administrative
charges unnecessarily or frequently.
4.4 REGULAR Invariably, agents tend to compare regular premium

PREMIUM investment-linked plans with whole life participating plans
INVESTMENT- as both are designed for the long term and also have inherent
LINKED PLANS investment elements apart from the basic sum assured. Both
vs WHOLE LIFE incorporate the investment returns to the SA for the payment
PARTICIPATING of benefit upon death. However, the business models are

PLANS distinct from each other. Let us look at a comparison of both
as shown below:
No. Regular Premium Investment-Linked Whole Life Participating Plan

Plan
1 Whole life coverage up to age 100 Whole life coverage up to age 100
2 Account value is not guaranteed as it Cash value (CV) is guaranteed and incorporated
depends on fund performance in the policy contract
3 Surrender value is based on an accrual in Surrender value is based on cash value plus
the account value payable vested bonus or dividend
4 Death benefit is payable from the sum Death or maturity benefit is payable from the
assured plus account value. Maturity sum assured plus vested bonus or dividend
benefit is payable from the account value.
5 Policyholder can choose from an array of Investment instruments are decided by insurer
funds
6 Policyholder can choose a higher sum Premium amount is based on sum assured
assured with the same premium 39
7 Policyholder can add rider/s via cost of Policyholder has to pay extra premium for the
insurance deduction from account value. rider/s chosen
This means that no extra premium is
required
8 Top-up premium is allowed at any time Top-up is not allowed
9 Partial withdrawal from the account value No partial withdrawal is allowed from the cash
is allowed value but withdrawal can be made from the
surrender value of bonus or vested dividend
10 There is no policy loan feature Policy loan is available with interest chargeable
11 Policy holder can choose to request There is an automatic premium loan (APL)
premium holiday if he does not have the feature with interest chargeable to cover the
means to pay the premium. The cost of premium in default, if there is sufficient cash
insurance will still be deducted from the value
account value if it is sufficient
12 Same tax relief as accorded to a whole life Same tax relief as accorded to a regular
participating plan premium investment-linked plan
13 Minimum age of 18 years to apply on own Minimum age of 10 16 can apply on own
life life. Age 10 15 will require parental consent.
Parental consent is not required for age 16.
40
1. The benefits of an investment-linked policy are:
I It provides access to a diversified investment portfolio. Thus, it has better risk

characteristics than a non-diversified portfolio.
II It offers flexibilities.
III Fixed nominal charges are levied on the policy.
IV The life insurer insulates the policy owner against market risks.
a) I and II
b) II and IV
c) I and III
2. When an investment-linked policy reaches maturity, the maturity value will be
a) the basic sum assured and the account value.
b) the account value.
c) the account value plus terminal/ maturity bonus.
d) the basic sum assured and the account value plus terminal/maturity bonus.

3. What are two similarities between a regular premium investment-linked plan and a whole
life participating plan?
I Both plans provide lifetime coverage up to maximum age 100.

II Both plans allow the addition of riders without additional premium.
III Both are entitled to the same income tax relief treatment for premiums paid.
IV The minimum age for an individual to apply on own life, and not as juvenile
application arrangement, is age 16 for both products.
a) I and II
b) II and III
c) I and III

41
I The minimum age for applying a regular investment-linked policy on own life is age
18 last birthday.
II A minor aged 16 last birthday who is applying for an investment-linked policy on

own life needs parental consent.
III A minor aged 16 last birthday can apply for a whole life participating policy without
parental consent.
IV Minors aged 10 to 15 last birthday can apply for a whole life participating policy
with parental consent.
b) I, II and III
c) I and III
d) I, III and IV
5. As the sales illustration document printed by any life insurer is meant for reference and
view by a prospect, a sales intermediary is expected to observe certain rules. These are:
The sales intermediary must
I get the new policy owner to sign the illustration as acknowledgement of having
understood the contents.
II get the new policy owner to sign the policy disclosure sheet and also to sign it himself
to declare that proper presentation has been carried out and the non-guaranteed
elements have been explained.
III highlight that all investment risks are borne by the policy owner, that all fees and
charges may be changed by the insurer giving 3 months notice, and that the cost of
insurance increases with attained age.
IV explain that the projected returns may be deemed likely returns of the selected funds
based on the past 5 years historical performance.
b) I, II and III
c) I, III and IV
d) I and III
42
6. Which of the following statements regarding a life insurers sales illustration/quotation
document are correct?
I The projection of future returns is based on the past 5 years performance experience
of a specific fund or funds proposed to the prospect.
II Projected returns are based on assumed rates for the high and low scenarios of the
specific fund/s.
III Normally, the actual historical returns of the various offered funds in the past 5 years
are also shown for the purpose of transparency.
IV Projection of values is based on assumed rates of return up to 20 years.
a) I and III
b) II, III and IV
c) I, III and IV
d) II and III
43
CHAPTER 5 Investment
Considerations
5.1 INTRODUCTION Over the years, an increasing number of clients have become
more inclined to investing. There is therefore a greater need
for sound and appropriate advice as generally, very few
clients do some investment research and analysis.
The main aim of this chapter is to provide agents with the

basic knowledge of investing. Agents owe their clients a
moral obligation to educate them with the basic principles of
sound investment so that clients will be able to make sound
investment decisions.
Some fundamental considerations must be taken into account

when making an investment decision. As such, the following
key considerations must be made known to the client. A good
understanding of these considerations is important before we
make an investment. The key considerations are as follows:
1. Investment Objectives
2. Availability of Funds
INVESTMENT CONSIDERATIONS
3. Risk or Security
4. Investment Horizon
5. Accessibility of Funds
6. Taxation Treatment
45
7. Investment Performance
8. Diversification
5.2 INVESTMENT The objectives for investing our savings are continually
OBJECTIVES increasing; however, all investment vehicles can be
categorised according to three fundamental characteristics,
i.e.
a) Safety
b) Income
c) Growth.
While it is possible for an investor to have more than one of

the objectives stated above, the success of one must come at
the expense of the others. Lets look at the three 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 (Islamic bonds) and
also from those found in the money market such as Treasury
bills or fixed deposit accounts.
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, for example fixed deposit
accounts in banks. If clients want 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. Clients must be
told that there is a RISK RETURN trade-off and they must
be able to accept this before venturing into such vehicles.
46 The following graph illustrates this fact.
c) Growth
Some investors seek growth in their investments. This is

ideally done when they invest in growth-based investments
such as common stocks, commodities and other share-based
investment. The objective of the client to be involved in
these types of investment is to realise capital gains and also
to hold the stocks for a long time to derive profits from the
growth of the investments. Investors seeking capital gains
are not likely to be those who need a fixed, ongoing source
of investment returns from their portfolio, but rather those
who seek the possibility of longer-term growth.
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.
d) Other Investment Objectives
While 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 focused for specific needs. The
specific objectives of the investor can fall under the following
headings:
a) Ensuring a comfortable standard of living
b) Providing funds for their dependents

47
c) Providing funds for the education and upbringing of
their children
d) Improving their financial position
e) Hedging inflation
f) Liability cancellation
g) Retirement income
h) Achieving a state of financial freedom
i) Funds for paying necessary expenses and taxes upon

death.
Depending on the objectives identified above, the person

would need to choose between investing in income-
producing instruments or growth-weighted instruments. The
client must be made to understand the risk factors involved
and that different types of investments produce different
combinations of income.
The agent now has to ascertain the correct mix of objectives

that the client has and the agent has to also analyse the risk-
return factors, to realise the completion of these objectives.
It is by no means an easy task but it is not impossible either.

Making sure that 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, agents not
only win the confidence of their clients but they are also in
a position to offer sound advice that can be accepted by the
clients.
5.3 FUNDS It is very important for clients to know how much funds are
AVAILABLE available for them to invest. The level of funds available
will ultimately affect the investment decision. To do this, it
is important for everyone to draw up a personal budget. The
biggest challenge many of us face regarding investments
is finding enough surplus funds. Most of the time we are
48
engrossed in balancing our income and expenses, and we
often forget the need to make a proper budget. Drawing up a
personal budget allows a person to take control of spending
and find enough money to save and invest for vacations,
retirement and childrens education.
It is important that all clients know the fact that they would
have to do a cash flow and net worth analysis before making
any investment decisions. This analysis will then be able to
assist them to make sure that they have enough money to
put aside for investments and that they will be able to follow
through with the financial obligation of the investment. It will
be useless if the client agrees to an investment plan purely
based on the enthusiasm created by the agent and the
prospects of making money. Therefore, having a cash flow
and net worth analysis done is important. For the purpose of
this course, we will not discuss the method of cash flow and
net worth analysis in detail but provide a simple method for
each that can be utilized, as illustrated below:
a) Simple Monthly Cash Flow Analysis
No Income (A) RM Expenditure (B) RM
1 Salary 5,000.00 Rental/Housing Loan Payments 1,000.00
2 Rental 500.00 Groceries and Utilities 750.00
3 Commissions 1,000.00 Childcare/Parents allowance 500.00
4 Others 1,000.00 Education Expenses 250.00
5 Loans (Car, Credit Cards, etc.) 2,000.00
6 Insurance Premiums 500.00
7 Savings 500.00
8 Misc. 1,000.00
TOTAL 7,500.00 6,500.00
Thus, with this simple analysis, we can identify that this

client has RM1,000 a month as surplus fund and this can be
utilized to fund an investment plan.
49
b) Simple Net Worth 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 Insurance Cash Value 20,000.00 Others 15,000.00
TOTAL 291,500.00 265,500.00
Based on the example above, we can say that the client

has a positive net worth position after we subtract
the LIABILITIES from the ASSETS, i.e. RM291,500
RM265,500 = RM26,000. Based on this analysis, we can then
offer a viable and simple plan that will meet the clients net
worth objectives. The client should first consider how much
immediate net worth he wants to create and increase now.
For example, the client may decide to upgrade his net worth
to at least RM300,000. He understands he has a leeway of
up to RM1,000 a month at the moment to insure himself for
RM274,000 (RM300,000 minus RM26,000), which will
immediately fulfil his new net worth goal for his family in
the event of an early untoward demise.
Let us presume his age is 30 years. At the Sum Assured

Multiple factor of 50 times for his age, he only needs to pay
RM457 per month (or RM5,480 annual premium) to own a
regular premium investment-linked policy of RM274,000
sum assured. Since he still has about half of his RM1,000
monthly surplus based on his simple monthly cash flow
analysis (a), he can also acquire, if he so wishes, a simple
term or mortgage policy to cover the liabilities portion of
RM265,500. Such a consideration will elevate his net worth
even higher for his family in the event of his early untoward
demise.
Based on the availability of funds, the client can then decide

which fund/s should be chosen and invested in regularly. If
50 he survives up to his retirement age of 60, he may cash out
the account value of his investment-linked policy and the
cash amount will be counted as part of his personal assets.
5.4 RISK OR There is a trade-off between expected return and risk that
SECURITY 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 investing in the stock market is to know

what the clients investor risk profile is. In so doing, we can
determine how best to advise them to allocate their savings
amongst various asset classes.
For example, if an 80-year-old is found to own very

aggressive funds, or a single person in his twenties has
invested purely in bonds, it shows that a risk profiling
exercise may not have been done.
Risk profiling tests tend to concentrate on finding out the

age, strength of income, family situation, current financial
picture, overall tendencies and investment disposition.
These are important elements in determining where your
clients stand as investors, how sophisticated they are in terms
of investment and what kind of experience they have with
investing. Ultimately, their overall background and attitude
towards investing will affect how an agent should proceed
to advise them.
5.5 INVESTMENT The investment horizon can be defined as the length of time
HORIZON a sum of money is expected to be invested. An individuals
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 investors
horizon, the less risk he should be willing to accept.
Basically, the 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 investors income needs and desired risk exposure,
which is then used to aid in security selection.
51
5.6 ACCESSIBILITY We should understand that a client will invest with the
OF FUNDS objective to make money and he will need the money to
settle a specific event. With this in mind, we can categorize
the accessibility of funds into 3 as below:
a) If a client needs the funds in a short period of time,

the client would not want to place his money in an
investment that will not allow him to unlock it in a short
time frame. It would be meaningless for him to place
his investments in long-term investments like real estate
or long-term bond funds. When he decides to cash in
the money, he may not be able to realize the expected
returns and may have to pay a penalty for exiting early.
b) The second element is the cost or penalty that the client

has to pay if he exits early. This is important because
if the cost is going to be very big, then it defeats
the purpose of the investment objectives. Thus it is
important to make sure that the funds can be taken out
without having to pay hefty penalties.
c) The third consideration is how much it is going to cost

the client to get into an investment. It is important for
the agent to tell the client the exact amount of money
that is needed to set up the investment account and its
cost. It would be very helpful if the agent can clear this
upfront with the client before the investment is set up.
5.7 TAXATION A client should consider the different tax treatment for
TREATMENT different types of investments before making a decision on
what to invest in. The different types of investment portfolios
attract or enjoy a wide range of tax treatment. Knowing
the tax treatment for the particular investment portfolio is
important before investment decisions are made.
As far as investment-linked insurance is concerned, there

are no specific tax laws regarding this and investment-linked
plans enjoy the same tax treatment as traditional plans.
5.8 INVESTMENT The performance of an investment depends on the following

PERFORMANCE factors:
52
a) The countrys economic, regulatory and political
factors
b) Regional and global economic factors
c) The competencies and capabilities of the management

team
d) The invested companys level of costs
e) Past experience of the investment
f) The history of the invested company
g) The life cycle of the investment.
These are some of the considerations that must be taken into

account when we make an investment decision.
5.9 DIVERSIFICATION Diversification in investment is the process of investing

across different asset categories and across different market
segments. Diversification is a strategy used by professional
fund managers and that has proven effective in reducing risk
without sacrificing returns. Investors should also try to invest
in a range of investment vehicles when they decide on their
investment portfolio.
Diversification can substantially reduce risk with small

reductions in return. It involves the spreading of risks
by putting the money under management into several
categories of investments such as shares, bonds, money
market instruments and real estate investment trusts (REITs).
Diversification can also be achieved by buying shares in
different countries and by choosing different types of shares.
53
1. An example of investment in Money Markets is
a) 5-Year Bond.
b) Currencies and Forex.
c) Treasury Bills.
d) Savings account.
2. People generally want to invest
I to lead a comfortable lifestyle.
II to be comfortable during retirement.
III to amass great wealth.
IV to provide adequate funding for their childrens education and their upbringing.
a) II, III and IV
b) I, II and III
c) I, II and IV
d) II, III and IV
3. Which statement below explains what a simple (current) net worth analysis involves?
a) The forecast of a persons future net wealth and financial status (e.g. middle income,
upper middle income, etc.)
b) A calculation of the sum of assets in current monetary terms that a person presently
owns, not including any future inheritance
c) The total sum of all assets owned by a person in present value minus the existing
total sum of all liabilities he is obliged to settle. The balance, if any, is his present
net worth to his family in the event of his early demise.
d) A personal plan outlining the targets for values of current and future assets to be
achieved at a certain time in the future.
54
4. The main purpose of an agent conducting a risk profile on his potential client is
a) to assess whether the potential client is willing to use a major portion of his savings
or liquid assets to purchase a large investment-linked plan.
b) to help the potential client understand his own risk profile, i.e. whether he has
conservative, aggressive or balanced risk characteristics, and also to consider the
type of asset categories suitable for his profile.
c) to assess whether the potential client will be attracted to the product/s being offered.
d) to assess whether the potential client is willing to forego some of his existing liquid
assets in order to buy an investment-linked product.
5. Which of the statements below are true?
I A persons investment horizon is the length of time that he is prepared to hold a

particular asset before he liquidates it.
II The investment horizon of an individual, among other factors, also depends when
he needs liquidity in the future date for specific objective/s.
III The cost or penalty that an investor has to pay in the event he needs to liquidate
the asset earlier than expected also has a bearing on his choice of investment
horizon.
IV It is pertinent for an agent to strike a clear understanding with a potential client

as to how much the latter is willing to set aside or commit for acquiring an asset.
b) I, II and III
c) II, III and IV
d) I, II and IV
6. Which of the following statements is correct?

a) Diversification means spreading out investment in different asset categories

or fund types.
b) Diversification not only means spreading out investment in different asset

categories or fund types, but also acquiring various assets of the same category
or fund type.
55
c) Investment-linked funds in Malaysia confine the investment diversification to
assets in the country as a way of discouraging the outflow of funds.
d) When the stock market shows signs of going up, an investor should give key
focus to leverage the market trend and switch all fixed income or bond assets
to equities.
56
CHAPTER 6 Types of Investment
Vehicles and
Potential Risks
6.1 INTRODUCTION In this chapter, we will look at the range of investment

choices available to individual Malaysian investors.
The common investment instruments available include:
Cash and Deposits
Fixed Income Securities
Shares
Unit Trusts
Properties
TYPES OF INVESTMENT VEHICLES AND POTENTIAL RISKS

Real Estate Investment Trusts
Sukuk
Bonds
Capital Guaranteed Funds
Commodities
6.2 CASH AND The term cash and deposits refers to all liquid instruments
DEPOSITS that carry little or no risk.
Strictly speaking, however, cash cannot be considered an

investment. Cash is, ultimately, used as a means only to
finance investments. The capital value of cash will not 57
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
6.2.1 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
amenities and utilities that will serve the people well. Roads,
schools, hospitals, and the security of the country have to be
taken care of. This list is not exhaustive. To a large extent,
the Malaysian Government finances these amenities using
the taxes collected. However, total government expenditure
cannot be fully funded by taxes alone; thus, the government
has to obtain funds through borrowing on a short-term basis.
One of the methods used by the Government to borrow

money from its citizens is by the issuance of Treasury bills.
These are short-term government funding vehicles issued
on a regular basis with repayment, normally within a year.
Treasury bills are issued by Bank Negara Malaysia to the
discount market, i.e. sold at a discount, at a price lower than
the par value (also known as redemption value) which is
payable at the end of the short tenure. The difference between
the discounted price and the par value represents the yield.
Institutional investors are the main buyers of Treasury bills.
These are time or fixed deposits placed with banks for fixed
6.2.2 Bank Accounts
periods with fixed interest rates for that period. Time Deposit
and Fixed Deposit refer to the same asset type. They are
also referred to as Term Deposit. Generally, the longer the
deposit period, the higher 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

58 follows:
Funds available for investment
The time the funds can remain in the account
Whether there will 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).
6.2.2.1 Perbadanan PIDM is a Government agency established under Akta

Insurans Deposit Perbadanan Insurans Deposit Malaysia 2005 to protect
Malaysia against the loss of deposits in the unlikely event of a bank
(PIDM) failure and to promote financial system stability. The current
maximum protection limit granted by PIDM is RM250,000
per depositor per bank.
PIDM was set up to protect Islamic and conventional

deposits, provide incentives for promoting sound risk
management and to promote and contribute to the stability
of the financial system in Malaysia.
Only banks which are member institutions of PIDM are

covered by the protection scheme. All commercial banks
and Islamic banks licensed under their respective Acts
are member institutions. Examples of non-members are
investment banks and international Islamic banks. Coverage
is not extended to branches and subsidiaries of domestic
banks operating outside Malaysia as the host countries may
have their own scheme.
PIDMs role is to protect not only bank depositors in relation

to their savings, but also to protect owners of insurance
policies and holders of takaful (Islamic insurance) certificates
in the event of the failure of a member insurance/takaful
institution. The maximum protection for insurance/takaful
coverage (per insured/covered person) is RM500,000. 59
Examples of insurers/takful operators which are non-member
institutions of PIDM are reinsurance companies and retakaful
operators, international takaful operators and offshore
insurance companies.
A levy is imposed on all member institutions for the

protection coverage.
For more details, please refer to the PIDM website:

www.pidm.gov.my
6.3 FIXED INCOME A group of investment vehicles that offer a fixed periodic
SECURITIES return is known as Fixed Income Securities. These are
securities or certificates 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
promissory notes issued by companies or the government to
raise funds. The details of repayment and the consequences
of failure to do so are spelt out in the papers.
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 any time before maturity. This marketability gives
the investor the opportunity to realise capital gains since
prices of fixed income securities may rise if interest rates fall.
However, if the secondary market is inactive, the investors
money is locked up for the full lifespan of the security.
The types of fixed income securities include:
a) Government Bonds
b) Corporate Bonds
c) Preference Shares (please refer to 6.4.2)
6.3.1 Government Bonds Government bonds are effectively financial instruments

used by the government to borrow money from the public.
Government bonds are the safest type of investments,
carrying almost no default or credit risk, since the government
60
guarantees interest payments and repayment of the principal.
The key difference between government bonds and Treasury
bills is the tenure. Treasury bills are issued with very short-
term maturity of not more than 1 year, for example 1 month,
3 months, 6 months, 12 months. Government bonds are of
longer tenure, say 5 to 10 years, or even as long as 15 to 20
years.
Government bonds can be classified according to their

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.
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 that
in times of high inflation, capital invested in this type of
investment can be eroded. While being the safest as an
investment vehicle, the return potential is comparatively

lower than for other assets, including corporate bonds.
6.3.2 Corporate Bonds Companies can also issue bonds or loan stocks to raise
capital. Just as the Government raises capital to fund its
development programmes, companies also raise these
instruments to fund the growth of their operations. Corporate
bonds can be classified into three categories:
Debenture stocks
Loan stocks
Convertible stocks
61
6.3.2.1 Debenture Debenture stocks are effectively, secured loans to a company.
Stocks 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
said assets and sell them to get his money back.
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. A company can become insolvent and
be unable to pay the interest due. Hopefully, the charge on
property would mean that this could be sold to repay the
capital, but a forced sale might not raise enough money
to cover the capital.
Interest rates for corporate bonds tend to be higher than for

government bonds as the security is lower.
6.3.2.2 Loan Stocks These are unsecured loans to a company. Both the interest
rate and the 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. Investors may or may not get back their capital,
depending on the companys performance. Compared to
debentures, loan stocks are much less secure and therefore
they carry a higher interest rate.
6.3.2.3 Convertible The difference between convertible stocks and debenture

Stocks stocks and loan stocks is that convertible stocks can be
converted to ordinary shares of a company on a fixed date
at a discount to the market price at the time of conversion.
On that date therefore, the investor can convert his investment

from a fixed interest loan to being a part-owner who is then
entitled to a share of its profits through dividends declared.
The decision to convert depends on whether dividend income
and capital appreciation in share price are better than the
fixed interest given.
62
6.3.2.4 Advantages and In general, corporate bonds tend to give a higher return than
Disadvantages government bonds. For some investors, they are also more
marketable and can be sold for capital gains. However, they
are more risky than government bonds.
6.4 SHARES The term shares may be used interchangeably with the term
stocks. However, stocks normally refers to a portfolio of
shares in listed companies acquired through the stock market,
whereas shares refers more to capital stakes put in by an
individual directly in a particular company. A company is a
separate legal entity, i.e. it is owned by all of its shareholders.
The shareholders control the company through the fact that
basically each share carries one vote at company meetings.
The shareholders can then decide on major issues and vote in
new directors to run the company if they wish. Shareholders
are not liable for the debts of the company. The other term
used to refer to shares is equities.
Each company maintains a register of shareholders and each

shareholder gets a share certificate as evidence of ownership.
Companies can be public or private. Private companies

operating in Malaysia are not listed on Bursa Malaysia
and are not available to ordinary investors. Public Limited
companies can be quoted on this stock exchange if they
meet the requirements. Shares of listed companies are easy
to buy and sell through stockbrokers. Stocks or shares can

be bought and sold on any working day at fluctuating prices.
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. If it is faring otherwise, the
price will tend to fall.
Share prices are also influenced by other factors such as the

general performance of the countrys economy, the current
interest rates, inflation rates, the specific companys earnings
and the prevailing currency performance. Since we are living
in a globally connected era, adverse events in other regions
and adverse performance of other major stock markets will
sometimes also affect the performance of the local stock
market. 63
Shares or stocks can thus be a volatile investment.
The costs of buying and selling include stockbrokers

commission as well as the difference between the buying
price and the selling price.
In this section we will look at the following:
a) Ordinary Shares
b) Preference Shares.
6.4.1 Ordinary Shares The holder of an ordinary share in a company is a part-owner

of the company and is entitled to share in its profits in the
form of dividends. Dividends 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 examined to judge
whether profits are likely to be made and dividends paid.
Dividends are usually paid bi-annually as income to

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.
6.4.2 Preference Shares These are shares which give the holder the right to a fixed
dividend provided enough profit has been made. This right
takes precedence over the right of ordinary shareholders to
dividends. Although the dividend from this asset is fixed,
it is not interest payment and may not be paid if profits are
not made.
Dividends of preference shares are usually lower than

common dividends granted to common shareholders. The
dividends will never be more than the fixed rate even if
64 profits are more than enough to warrant so. Preference shares
are slightly more secure than ordinary shares but with less
return potential. These assets are like a hybrid containing the
structures of both an equity and a debt instrument or fixed
income combined into one. In the event the company winds
up, preferred shareholders have the right to be compensated
from the company assets first after holders of debt papers
and before normal shareholders or stockholders. Preferred
shareholders do not have voting rights.
6.4.3 Advantages and By investing in shares, investors participate directly in the

Disadvantages future of the company. Shares may provide potential good
dividends and capital appreciation. Shares are also very
liquid as they can be traded in the open market. However,
they have risks too as values can go below the price the
shares were originally bought for, especially in times of
market downturns.
6.5 UNIT TRUSTS Unit trusts are useful vehicles for small private investors.
In Malaysia, unit trusts are authorised and supervised by the

Securities Commission Malaysia.
A unit trust is a pool of funds contributed by many investors,

kept in trust by a trustee (usually a bank) and managed by
a professional fund manager or a team of fund managers.
Unit trust investment, comprising an array of funds ranging

from equity, bond, fixed income, balanced fund, etc. 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 administers the
buying and selling of shares in the unit trust. A unit trust is
essentially a four-way arrangement among investors, the unit
trust operating company, the trustee and the fund manager.
The investments of unit trusts, though selected and managed

by the fund managers, are held by the trustee for the benefit
of the investors (who are the unit-holders). The trustee must
ensure that the fund managers adhere to the provisions of the
trust deeds and act accordingly to protect the unit-holders. 65
It is important that the types of unit trusts chosen should
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 understand it before buying into the unit
trust. The types of assets that may be bought by the fund
manager are also specified in the objectives of the trust
contained in the trust deed.
The advantage of a unit trust is the spread of assets contained

in a unit trust fund. The risk is spread out over the assets;
thus, the risk is lower than for investment in assets or shares
of a single company. Furthermore, investment services are
provided by professional fund managers. Dividends can be
reinvested into the selected fund in the form of additional
units to unit-holders. Malaysians who contribute to the
Employees Provident Fund (EPF) are allowed to utilize a
portion of their EPF account to invest in funds offered by
approved unit trust operating companies. Withdrawals from
EPF may be made on a regular basis provided all the required
terms and conditions are met.
Some investors may find the large array of various funds in

the unit trust industry a bit overwhelming for comprehension
and selection.
Some people tend to compare single premium investment-

linked (SP-IL) life insurance with unit trusts (UTs) because of
similarities in the investment approach. However, there are a
few variations or slight differences too. The key similarities
and differences are shown in the table below.
Similarities and Differences between UTs And SP-IL
UTs SP-IL
1. Regulator Securities Commission (SC) Bank Negara Malaysia (BNM)
2. Investment * Acquisition of units in funds * Acquisition of units in funds
Approach entailing a spread of assets entailing a spread of assets
* Wide array of funds available * Array of funds available for
for selection selection, although array offered
by insurers may generally be
less than that offered by a UT
66
company
3. Fund Price Daily validation Daily validation
Validation
4. Life Protection No sum assured on investors life Minimum sum assured of 125% of
Element Not an inherent feature of UT initial Single Premium, 105% for
products senior ages and sub-standard cases
5. Cost of Insurance Nil Both are chargeable
& Policy Fee
6. Top-Up Allowed at any time Allowed at any time
7. Fund Switch Allowed Allowed
8. Sales Charge Charge imposed by some UT Usually 5%
schemes may be slightly higher
than 5%.
9. Trustee *Must be appointed * Trustee appointment not
*Small trustee fee is charged compulsory. At the discretion of
the board of directors
* If no trustee, then no trustee fee
10. Fund Management Usually up to 1.5% of account Usually up to 1.5% of account
Fee value charged annually, depending value charged annually, depending
on fund category on fund category
11. EPF Withdrawal Can make withdrawal from EPF to Cannot make withdrawal from EPF
buy to buy
6.6 PROPERTIES Real estate has always been an investment vehicle. There
are basically three types of real estate investments. These are
agricultural property, residential property and commercial/
industrial property, in Malaysia and overseas.
The price of an agricultural property depends on the

following factors:

Quality of the land as reflected by the quality and
profitability of the crops grown
The location of the land
The type of crops grown, for example rubber, oil palm,

fruits
Existing facilities on agricultural property, for example

processing mill, storage house, power supply
On the other hand, the price of residential and commercial/

industrial properties generally depends on the location
and types of buildings on the land. The availability 67
of infrastructure may also be a factor influencing the
demand and price of such properties, for example public
transportation like LRT or MRT. The reputation of the
developer of a residential scheme may also lend weight to
the demand and prices.
Besides investing in the original form of real estate properties,

i.e. land, building, houses, etc. there is now a popular form
of real estate investment available to the Malaysian public,
known as Real Estate Investment Trust (REIT).
6.6.1 Real Estate The concept of a REIT or Real Estate Investment Trust
Investment Trusts is similar to that of a unit trust as the money is invested
by many investors. Apart from investing in and managing
(REITs)
properties, REITs distribute rental income as dividends back
to the investors. REITs are traded on Bursa Malaysia like
equities.
Some REITs target at specific real estate like shopping malls

while others invest in a variety ranging from shopping malls,
office blocks, apartments and warehouses to hotels, etc. Some

invest in a specific region.
6.6.2 Advantages and Properties can provide good capital appreciation and a steady
Disadvantages flow of income. They are considered a low risk investment,
especially if you have good tenants. By mortgaging the
property, capital financing can be obtained. However, during
economic recession, property can be difficult to be disposed
of. Besides servicing mortgage loans if financed by a
financial institution and annual interest which may vary,
property owners need to pay the annual Assessment Tax
and the Land Tax (or Quit Rent). Owners of condominiums
or apartments also have to pay monthly service fees to the
appointed maintenance management.
At the time of the purchase of a property in Malaysia, the

initial fees that have to be paid are:
Legal fee for processing the purchase
Stamp duty
68
Mortgage loan agreement fee, if financing is provided
by a financial institution
Valuation fee to ascertain the value of the property.
For properties sold within 5 years after their purchase, the

Real Property Gains Tax (RPGT) on the gain (sale price
over acquisition price) will be imposed on the seller. The
latest rates vary, depending on how long the seller has been
holding the property, i.e. 30% if disposed of within 3 years,
and 20% and 15% if disposed of in the 4th year and 5th year
respectively. To really realize capital gains, owners should be
patient enough to hold on to their properties for the medium
to the long term.
6.7 SUKUK Sukuk is the Arabic term for financial certificates and
is commonly referred to as the Islamic equivalent of
bonds. Since fixed income, interest-bearing bonds are
not permissible in Islam, sukuk securities are structured
to comply with Islamic law and its investment principles
which prohibit the charging or paying of interest. Financial
assets that comply with Islamic law can be classified in
accordance with their tradability and non-tradability in
the secondary markets. Malaysia is the worlds largest issuer
of sukuk.
Sukuk is similar to an obligation backed by an asset but is

not really 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. Sukuk is
considered less risky than conventional bonds. In the event
of default, ownership of underlying assets of the issuer will
be transferred to the holders of the papers. This provides a
form of protection to holders.
Investors enjoy the division of the assets in proportion to

their investment and bear the credit risk of the issuer.
Sukuk papers are securities which have the following

characteristics:
69
1. They are issued by pooled funds (mutual funds).
2. They are based on hard assets that generate steady

income and expectations.
3. They may be guaranteed or not by their originators.
4. Investors receive a fee equal to the income of the

underlying assets.
5. These securities are issued by Special Purpose Vehicles

(SPVs), often subsidiaries of banks or trusts called
SPVs.
6. Sukuk may be issued in US dollars.
7. Sukuk papers differ from conventional bonds because

they are based on tangible assets instead of being based
on the debt.
6.8 CAPITAL A Capital Guaranteed Fund (CGF) is an investment vehicle

GUARANTEED offered by certain institutions that guarantee the investors
FUNDS initial capital from any losses. On the one hand, the fund
guarantees the invested capital while on the other, the return
is capped at a specific rate although the actual investment
experience may be higher. This is how the offering
institutions can afford to guarantee the principal investment.
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.
6.9 COMMODITIES Commodities, whether related to food, energy or metals,

represent an avenue for investors to venture out of stocks or
bonds with the objective of gaining from price movements.
A popular way to do so is by a futures contract, i.e. an
agreement to buy or sell in the future a specific quantity of a
commodity at a specific price. In other words, a commodity
futures contract, which is categorized a derivative product,
entails speculating future price movements. Apart from
deploying futures for hedging purpose, speculating on price
movements itself is a high risk exposure.

70
1. Malaysian Treasury bills are debt instruments that are considered safe because
I they are issued by the Government of Malaysia.
II they are short-term instruments.
III they are guaranteed by the World Bank.
IV their tenure is normally 12 months.
b) I, II and III
c) I and II
d) I, II and IV
I Normally, when interest rates fall, the prices of fixed income or bond assets may rise;
when interest rates rise, their prices may drop.
II Government bonds are safer than corporate bonds but their returns are comparatively
lower.
III The maturity period of short-term government bonds is usually less than 5 years;
for the medium-term ones, it is usually 5-10 years and for the long-term ones, it is
usually above 15 years.
IV Preference shares are hybrid securities with both equity and fixed income

characteristics. In the event the company concerned winds up, preferred shareholders
have the first right to be compensated from the company assets first before normal
shareholders.
b) II, III and IV
c) I, II and III
d) I and IV
71
3. The similarities and differences between unit trusts and single premium investment-linked
plans are:
I The investment approach of both are similar.
II The life insurance protection element is not part and parcel of unit trust products,
whereas for single premium investment-linked plans, it is.
III Unit trusts do not impose cost of insurance and policy fee charges since the life
protection element is absent.
IV A trustee must be appointed for unit trusts but this is not compulsory for single
premium investment-linked plans.
a) I and II
b) I, II, III and IV
c) II, III and IV
d) I and III
4. Which of the following statements about Real Estate Invest Trusts (REITs) is NOT true?
a) REITs operate in a way similar to unit trusts.
b) Rental income from the properties invested by a REIT is distributed to investors in

the form of dividend.
c) A REIT can invest in a wide range of properties like malls, office blocks, apartments,
commercial lots, hotels, etc.
d) REITs may acquire shares in property development companies.
5. Which of the statements below is incorrect?
a) Sukuk are like bonds but they are based on Shariah-compliant principles.
b) Malaysia is the worlds largest issuer of sukuk.
c) Sukuk securities are issued by Malaysia in Ringgit only.
d) Sukuk securities issued by Malaysia can be in USD.
72
6. The protection offered by PIDM on the deposits placed in banking institutions and policies
bought from insurance companies operating in Malaysia is granted
I to all banks, insurance companies, takaful operators, reinsurance companies and

retakaful operators which have business operations in Malaysia.
II only to banks, insurance companies and takaful operators which are member
institutions of PIDM.
III with a levy charged to all member institutions and non-member institutions at differing
rates.
IV with a levy charged to member institutions.
a) I and III
b) I and IV
c) II and IV
d) III and IV
73
CHAPTER 7 Common Types of
Investment-Linked
Funds
Just as for unit trust plans, the investment aspect of

7.1 INTRODUCTION
investmentlinked plans involves channelling a portion of
policy owners money to acquire units in funds administered
by professional fund managers. The investment mechanisms
and features, and the main fund categories offered by
investment-linked products are similar to the funds available
in unit trust schemes.
7.2 FIXED INCOME/ These funds target at assets which have already been
CASH AND MONEY elaborated earlier. Please refer to Chapter 6 (6.2 and 6.3) for
MARKETS FUNDS details of these assets.
7.3 EQUITY FUNDS This type of funds acquire units of stocks in companies. Most
fund managers design such funds to allow a minor portion
in cash/money markets for temporary hold after units of a
COMMON TYPES OF INVESTMENT-LINKED FUNDS

certain stock are sold and before channelling them to another
stock when the timing is right. Chapter 6 (6.4) gives you an
explanation of equities, a term used interchangeably with
stock and shares.
7.4 PROPERTY FUNDS These funds invest either in property development companies
AND REITs or in REITs. The key difference between the two is that
the former involves acquisition of stocks in development
companies while the latter invests in real estate. For more
details on REITs, please refer to Chapter 6 (6.6.1).
75
7.5 MANAGED FUNDS Managed funds invest in various asset categories such as in
equities, fixed incomes, properties, cash/money markets, etc.
The asset allocation depends on the fund managers views
of the future prospects of each asset category.
7.6 BALANCED FUNDS Also called hybrid funds, these comprise specified proportions
of specified asset categories, for example 70% in equities and
30% in fixed income. Usually, the fund does not change its
asset mix.
7.7 SPECIALISED These funds are designed with specific themes or regions in
FUNDS mind. Examples are investments in a particular geographical
region like Asia Pacific Fund, Asean Fund, Emerging Markets
Fund, etc. An example of a fund with a specific theme is
Global Green Energy Fund.
7.8 SUKUK Some life insurers also offer sukuk. This is because sukuk
is becoming more popular among Malaysians in view of
its positive historical performance and growth potentials.
With strong support from the Malaysian Government and
CERTI FI CAT E EX AM I NAT IO N IN IN VEST ME N T- L I N K E D L I F E I N SU R A N C E
mega corporations, especially local ones, sukuk is gaining

dominance in the Malaysian capital market and is gaining
ground in terms of transaction volumes.
7.9 RISKS vs RETURNS We have discussed these in Chapter 5 (5.2). However, the
OF INVESTMENT- graph in that section does not depict property funds/REITs
LINKED FUNDS and derivatives funds. If they are offered by a fund manager,
property funds should be positioned just before equities in
that graph. Derivatives will be placed at the highest point, i.e.
after equities. Examples of derivatives are Futures, Forwards,
and Options. As already stated in Chapter 6 (6.9), commodity
futures are agreements to buy or sell a certain underlying
commodity asset at a specified price and specified future
date. In short, the agreement entails speculating future price
movements.
Since the majority of investment-linked (IL) funds are of the

fixed income/bond (including sukuk) and equity categories,
let us examine in more detail their elements of risk versus
return.
76
The yields of bonds/money markets have been stable.
For example, the Ten-year Malaysian Government
Securities (MGS) have been holding out slightly above
4%. The average yield of Malaysian Treasury Bills with
6 months to 12 months term is around or slightly higher
than 3%. Corporate bonds, deemed as slightly riskier than
Government papers, have been experiencing yields around
5% to 6% on average.
Bonds are less volatile compared to equities. Malaysian bonds

are also less volatile than global bonds, with a volatility range
of 1% to 2%. As comparison, Malaysian equities experience
a volatility range of 5% to 20% on average.
Bond returns are stable. However, they provide lower return

potentials as compared to equities.
Return potentials for equities can be significantly higher,

especially during periods of market buoyancy. On the flip
side, equity prices can dip when the stock market faces a
downturn over an extended period. However, the risk of loss
facing investment-linked equity funds can be softened by the
mechanism of Dollar/Ringgit Cost Averaging via continuous
contributions and/or topping up to the fund concerned over
a long horizon, and the spread-out to various stocks in one
equity basket.
To show that risk potential correlates with return potential

with regard to investment vehicles, let us view an actual
local bond fund (equivalent to fixed income fund) offered
by a leading banking group and the FBM-KLCI (Equity)
Index (encompassing 30 top stocks) of the local stock
market. In line with ethics of not showing favour to or
promoting any product offered by any institution, actual
names are not used.
1. P Bond Fund of C Bank Group
(a) Current Average Volatility Factor @ July 2014:

0.89
77
(b) Calendar Year Performance (%):
2008: 2.35
2009: 8.43
2010: 5.84
2011: 5.69
2012: 3.87
2013: 3.51
Average Performance: 4.94
2. FBM-KLCI Index
(a) 1 Year Volatility (%): 6.5
(b) Total Return 2013 (%): 14.0
It is obvious the bond fund had low risk/volatility but the

expected returns were also on the low side. Comparatively,

the risk/volatility of the stocks under the umbrella of
FBM-KLCI was much higher but the return in 2013 was
correlatively higher and far surpassed that of the bond fund.
A fund investing in the 30 stocks identified by FBM-KLCI
would have inherited the same return and volatility ratios
in 2013. Bear in mind that an equity vehicle or asset with
significantly higher volatility will mean its price may head
for a steeper drop than a fixed income or bond fund when
the market faces a bear run (period of downturn).
Another advantage of IL funds is the services of professional

fund managers who manage the transactions on behalf of
policy owners. An ordinary person who is not an adept stock
market player does not know how to aim correctly (target at
the right stock which he is certain of making fast gains) and
time correctly (buy and sell at the right time). He may not
have the necessary knowledge, information and experience
to aim and time correctly. Neither does he have the time
to keep close watch on market trends. Policy owners of
78
investment-linked plans rely on professionals to manage for
them that is a key difference between investing directly in
the stock market on ones own and investing via IL, which
at the same time also caters for protection.
79
1. Sukuk is gaining ground in terms of transaction volumes in Malaysia, including for

investment-linked funds because
I this investment vehicle is becoming more popular among investors.
II of the strong support from the Government and mega corporations, especially
Malaysian ones.
III of its higher return experience compared to conventional bonds because of special
incentives provided by the Government.
IV it is traded only in Malaysian Ringgit.
a) I, II and III
b) I and II
c) II and III

2. The average yield of Malaysian Treasury bills with tenures of 6 to 12 months is
I around or slightly better than 3%.
II normally around 4 to 5 per cent.
III normally of very low volatility ratio but in periods when the Government embarks
on mass mega projects and needs funding, it may issue bills with yields as high as
corporate bonds.
IV with wide variance, depending on the type of bill.
a) I
b) II and IV
c) I, II, III and IV
d) IV
3. If is safer to rely on professional fund managers appointed for investment-linked funds

than to invest directly in the stock market because
I an ordinary individual is generally not equipped to identify the right stock that will
reap gain.
80
II the professional fund managers role is to ensure the assets and vehicles achieve a
certain minimum growth rate according to the various stages of time span; otherwise,
the fund managers and life insurer will be obligated to make up the shortfall.
III it is not easy for an ordinary individual to pick the right time to buy and the right
time to sell for optimising capital gains.
IV ordinary individuals, especially those occupied with work, do not have the time and
knowledge to properly monitor market trends.

b) I, III and IV
c) I, II and III
d) II, III and IV
4. Malaysian bonds are deemed to be
I more volatile than global bonds.
II less volatile than global bonds.
III rated at very high preference because the countrys economy is growing vibrantly.
IV experiencing better yields than global bonds for many years.
a) I and III
b) II
c) III and IV
d) IV

5. Compared to government bond funds, corporate bond funds have
I lower yields and lower risks.
II higher yields and higher risks.
III more or less similar yield and risk ratios.
IV a longer tenure.

b) II
c) III and IV
d) IV 81
6. If an insurer has an investment-linked fund tracking the FBM-KLCI index, it means
I the fund manager refers to the index as the benchmark for guiding the funds
investment strategy and also the return targets in the ensuing years.
II the insurer is obligated to grant the returns according to the ratios experienced by
the index. If the actual return of the fund in any period is lower than that shown by
the index, the insurer will top up the difference.
III the fund invests in the same stocks of the companies identified by the index.
IV the fund invests in stocks of companies in the same industries as the companies
identified by the index.
a) I and IV
b) II
c) I and II
d) III
82
CHAPTER 8 Pertinent Guidelines
on Investment-
Linked Business
8.1 GUIDELINES ON In addition to the SAM rule which has already been
INVESTMENT- summarised in Chapter 2, some of the pertinent points
LINKED BUSINESS regarding the Investment-Linked Guidelines issued by
Bank Negara (Ref. BNM/RH/GL 010-15) relevant to the
knowledge of agents are:
Agents must ensure professional and proper conduct

in the sales/marketing of investment-linked insurance
policies.
The valuation of units shall be carried out every

business day.
PERTINENT GUIDELINES ON INVESTMENT-LINKED BUSINESS

Insurers may undertake unit splits for any investment-
linked fund, provided the following conditions are met:
(a) A unit split/combination can only be done once

in a financial year.
(b) The unit split may only be exercised when there

is a sustainable appreciation in the NAV over a
six-month period preceding the split. This refers
to an increase in the average monthly NAV from
one month to another over the six-month period.
In the case of premium holidays, insurers are required to

explicitly seek policy owners consent before deducting
from the fund any charges for riders. 83
The requirement for minimum death benefits does not
apply to top-up premiums. As such, the whole of the
top-up premiums can be used to purchase units.
If a policy is cancelled with the 15 days free-look

period, the insurer shall refund:
(a) the unallocated premium;
(b) value of units that have been allocated (if any) at

the unit price at the next valuation date; and
(c) any insurance charges and policy fee that have

been deducted; less expenses which may have
been incurred for the medical examination on the
life insured.
Insurers shall provide a separate Fund Fact Sheet for

each of its investment-linked funds.
Insurers shall provide to each policy owner a statement

on the value of his/her policy at least once a year.
Insurers shall provide to each policy owner a report

on the performance of each investment-linked fund in
which the policy owner has units at least once a year.
Insurers shall publish the latest NAV per unit of all

investment-linked funds daily in at least one widely-
circulated English and one widely circulated Bahasa
Malaysia national newspapers, and on the insurers
website.
The initial offer period (of a new fund) shall not

exceed two months. Where the minimum required fund
size is not reached, the insurer shall refund monies
contributed with any interest/investment profits earned
on premiums received during the offer period.
The maximum gross rates for sales/marketing

illustrations (Projected Investment Return of Fund:
X% and Projected Investment Return of Fund: Y %)
for various types of funds should be within the limits
84
as follows:
Illustrated Return for Generic Funds X% Y%
Equity 2% 9%
Managed 3% 8%
Bond 4% 7%
The maximum period of projection for both single premium

and regular premium plans should not exceed 30 years to
avoid inappropriate expectations. For the projection period
beyond the 20th year, insurers shall continue to illustrate the
low scenarios using the current low rates whereas for the
high scenarios, rates of 5%, 5.5% and 6% shall be used for
bond, managed and equity funds respectively.
Note: The guidelines also apply to family takaful products

which are equivalent to investment-linked life insurance.
Agents who intend to sell family takaful products distributed
by takaful operators (companies) must possess the required
separate licence by passing the Takaful Basic Examination.
85
1. Valuation of units in an investment-linked fund must be done
a) six days in a week, including Saturdays (half day).
b) every business day.
c) every day.
d) seven days a week. For a day that falls on a weekend or a public holiday, valuation
processed by the automated system will be based on the same unit price as the previous
business day.
2. The guidelines stipulated by the regulatory authority in allowing a life insurer to

undertake unit splits for an investment-linked fund once a year is on the condition that
there is sustainable appreciation on net asset value (account value) over a six-month
period preceding the split. Which of the statements below is correct regarding the above
statement?
a) This means that appreciation over the 6-month period must be considered substantial
by reasonable standard compared to the previous 6 months.
b) This refers to an appreciation rate of at least 20 per cent at the end of the current 6
months over the previous 6 months.
c) This refers to an increase in the average monthly net asset value (account value)
consecutively for 6 months.
d) This means that the discretion to define sustainable appreciation may lie with the
life insurer as long as there is growth in the fund in the prevailing 6 months over the
previous 6 months, subject to the approval of the board of directors.
3. Since part of the initial premium of a regular premium investment-linked plan may already
have been allocated and invested to acquire fund units by the time the customer decides
not to take the plan within the 15 days free-look period, in what manner will the refund
be made?
a) Refund of full initial premium
b) Refund of full initial premium minus policy fee and medical examination expenses
(if any) incurred by the life insurer
c) Refund of unallocated premium + net asset value (account value) at next valuation
date + insurance charges and policy fee already deducted - medical examination
86
fees if any
d) Refund of unallocated premium + net asset value (account value) - cost of insurance
and policy fee-medical examination fees if any
4. Life insurers offering investment-linked insurance are obligated to provide certain

fundamental transparencies as required by regulatory guidelines. These are:
I a separate Fund Fact Sheet for each of the funds.
II a statement on the policy owners net asset value (account value) details at least once
a year.
III a performance report on each fund of the policy owner at least once a year.
IV publishing of fund unit prices daily in at least one national English newspaper and
one national Bahasa Malaysia newspaper, and on the insurers website.
a) II, III and IV
b) I, II and III
c) I and II
5. Which of the statements below regarding sales illustrations for investment-linked plans
are correct?
I The low and high projection for an equity fund should not be above 2% and 9%
respectively for the first 20 years.
II The low and high projection for a managed fund should not be above 3% and 8%

respectively for the first 20 years.
III The low and high projections for a fixed income/bond fund should not be above 4%
and 7% respectively for the first 20 years.
IV For projected illustrations beyond 20 years, insurers must abide by the low scenario
rates of 2%, 3% and 4% for equity funds, managed funds and bond funds respectively.
The high scenario rates for the same three funds are 6%, 5.5% and 5% respectively.
b) I, II and III
c) I and II
d) II, III and IV
87
6. What are the prerequisites for the launch of a new investment-linked fund?
I A minimum fund size can be set by the insurer.
II The initial offer period shall not be more than 2 months from the date of launch.
III If the minimum fund size is not reached by the end of the initial offer period, the
insurer can call off the fund and refund all premiums collected.
IV The insurer will also have to pay interest or profit from the premiums collected during
the initial offer period to the intended policy owners.
a) I and II
b) I, III and IV
d) I, II and III
88
CHAPTER 9 Agents Professional
Approach and
Guidelines
9.1 INTRODUCTION In this chapter, we shall look the process of marketing and
selling investment-linked life insurance and the guidelines
for agents in conducting investment-linked life insurance
business in Malaysia.
9.2 MARKETING Customers who have purchased policies should be buying

policies which they understand, which meet their needs and
which they can afford.
Insurance agents constitute an important channel of

distribution for insurance companies. Since insurance
agents are engaged by insurers to sell policies to customers,
agents need to sell policies with the objective of satisfying
customers requirements and needs while also earning an
AGENTS PROFESSIONAL APPROACH AND GUIDELINES

income.
Since an insurance agent distributes policies mainly through

personal selling, the objective of satisfying customers
requirements can be achieved through the use of financial
needs analysis, and knowing the customer tools, sales
illustrations and other materials approved and provided by
the insurance company.
Knowing the customer and a financial analysis of the

customer are important because they allow an insurance
agent to render proper advice to the customer.
89
An agent who engages in personal selling requires:
Product knowledge
Market knowledge
Knowledge of the buying process
Knowledge of the selling process
Selling techniques
9.3 CONSUMER Knowledge of the consumers buying decision process is

BUYING important to an insurance agent because it helps the agent
DECISION to adjust to different consumers needs.
PROCESS
There are five stages in the consumer buying decision
process:
Problem recognition
At this stage, the consumer becomes aware of the threat

of risks or a potential opportunity and feels the need for
the product to protect him from financial difficulties or

to satisfy his needs
The agents involvement to conduct a proper fact-find

process with the potential client is important before
moving to the product package identification stage.
Various tools for analysing the financial situation of a
prospective client are available, like the simple cash
flow format and simple net worth analysis format as
demonstrated in Chapter 5. However, all agents must
utilise their respective companys Customer Fact-Find
(CFF) form to officially document the important facts
pertaining to the individuals financial situation in
relation to himself and his family.
The minimum details required to be recorded in an

insurers CFF are
Personal details
Personal and family circumstances

90
Objectives with regard to various needs, i.e.
protection, retirement, childrens education,
savings and retirement
Risk appetite or tolerance
Elements identified in a financial needs analysis
Advice by agent/intermediary
Recommendation of appropriate product by the

agent/intermediary
If the intended new policy owner prefers to be

given specific product information only, he should
declare so in the form
Signature of the intended new policy owner as

evidence he has gone through the fact-find process
and documentation with the agent/intermediary
Signature of the agent/intermediary as evidence

and witness that the due process has been carried
out
Although a prospective policy owner may have the

option to either fully declare or partially declare his
financial status, or prefer product information only, he
should be encouraged to go through the entire process
with the agent/intermediary to ensure the product
package finally selected by him fits his needs well.

Information search
When the need has been perceived, the

consumer searches for information and shops
around. The intensity of these efforts depends on
factors such as:
a) the consumers experience in purchasing

the product;
b) the importance of the purchase (benefits

from the purchase);
c) the value involved. 91

Evaluation of alternative policies
From the information obtained, the consumer will

evaluate the product based on a set of criteria. The
criteria are the characteristics or features that are
desired (or not desired) by the consumer. The consumer
then decides on which seller to buy from. Studies
indicate that the most important factors for the selection
of an insurer are:
a) Reputation of the insurer (60%);
b) Quality of coverage and services provided (26%);
c) Policy benefits (14%).
Other factors which have influence on the consumer

buying decision are:
a) Agents personality and friendliness;
b) Agents professional capability;

c) Premium and other terms.
Purchase
After evaluating the alternative products based on

criteria and factors set by the consumer himself and
which are often influenced by personal, public and
market-dominated sources, he makes the decision to
purchase one of the alternative products.
Post-purchase evaluation
After the purchase has been made, the buyer begins

to evaluate his purchase. The agent who delivers a
policy promptly, keeps in contact with his customers,
and provides important information of risk evaluation
will have a better chance of securing the loyalty of his
customer at the time of renewal.
9.4 THE SELLING The process of personal selling involves five basic steps:
PROCESS
92 Locating the prospective customer
An insurance agents 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 agents success.
An agent is sometimes supplied with a list of prospects.

At other times, potential customers must be discovered
by agents themselves. The names of prospects can
come from many sources including:
i. Current and past customers
ii. Friends, relatives, and neighbours
iii. Business associates
iv. Social and professional contacts
v. Promotion and advertising activities campaigns
vi. Enquiries from internet home pages
vii. Seminars or education classes
viii. Newspapers and magazine articles or notices
ix. Mailing lists and directories
x. Company records and reports
The sales presentation

The sales 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. Many agents use visual aids (brochures,
charts or graphs) in their presentations as provided
or approved by their insurance companies. The
presentations are flexible so that they can be adapted
to various situations.
It is important to note that insurance agents must

use sales brochures or sales illustrations that are
authorised by the insurer. 93
Conducting the sales interview
An insurance agent must first gain the attention of

the potential customer. After gaining the prospects
attention, the sales presentation must develop the
prospects 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 prospects need.
Handling objections
The success of the sales interview hinges on the

effectiveness of the insurance agents 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
well to pave the way for successful completion of the
interview.
Closing the sale
At some point, the prospect will a 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, the insurance agent should try
to set a date for a follow-up interview.
9.5 AFTER- SALES The successful sale of an insurance contract marks the
SERVICES beginning of the relationship between the agent and the
customer. Insurance contracts require an insurance agent
to provide after-sales services continually. The follow-up
stage helps ensure that customers remain satisfied with the
purchase. After-sales calls on customers also help reduce
customers further questions and concerns, if any. Sometimes,
customers feel uncertain and often question whether they
should have purchased a product at all, or whether they
should have purchased an alternative, or another product
rather than the one they actually bought. In the after-sales
calls, the agent can address the customers concerns and
94
reinforce the customers original decision to buy the product.
Most insurance companies have rules and regulations
covering the activities that must be completed between the
time a policy is sold and the 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 proposers answers have been recorded accurately
and clearly;
b. Providing timely response to any applicants or

companys questions or requests.
The delivery of a policy is also an important aspect of

providing after-sales services. This important task gives the
agent an opportunity to perform the following:
Address any post-sales concerns that policy owners

may have and reassure them and other family members
about their decision to buy the policy;
Provide a basis for future sales by reminding the policy

owner about any currently unmet or future financial
needs or expectations;
Re-emphasize the insurance agents commitment to

providing the policy owner quality service;
Encourage the policy owner to call the agent if the

policy owner has any problems or questions that need

to be answered;
Explain the policys provisions, terms and conditions;
Obtain the names of referred leads and other prospects;
Strengthen the customer relationship and help

encourage persistency.
Agents are reminded of the responsibility to deliver approved

and issued policy contracts to their clients without delay.
After explaining the contractual provisions and recapitulating
the benefits during the delivery, they must then ensure new
policy owners sign the delivery acknowledgement slip and 95
indicate the date of receipt. Agents must return the signed
acknowledgement slip to their principal, i.e. the insurer
they represent, without fail, for recording and filing. This is
important because the 15 days free-look or cooling-off period
commences from the date of policy delivery acknowledged
by the new policy owner.
Agents selling investment-linked products should conduct

reviews on their clients investment profile and investment
progress periodically ideally once a year and discuss
alternative next steps for consideration by the client, if
necessary. A clients risk profile or financial objectives may
change over time; it is incumbent on the servicing agent to
help his client identify the new needs so that appropriate next
steps can be timely adopted.
An important aspect of professionalism that makes for the

success of an insurance agent is the ethical aspect of the job
that is done.
Rules for the conduct of the business and for setting

competency standards are required to ensure that the highest
standards required are present, especially in handling
investment-linked life insurance business where customers
need the confidence that their advisor is professional in
managing their financial choices.
Choices of advice can affect the quality of service that

is received by the customer. An insurance agent may not
actually break specific rules; yet, some advice may be less
than ideal for the customer. Thus, the insurance agent must
decide how meticulous he will be in going beyond the
specific rules in establishing and maintaining a set of personal
ethics and conduct.
A truly professional person makes an uncompromising

commitment to maintain an absolute ethical standard. It
is thus not just a matter of rules but also of behaviour and
attitude. A customers satisfaction is the best basis for the
professional insurance agents success and, therefore, it is
good business sense to be ethical.
96
9.6 LIAM In each business there are codes of good practice, rules,
GUIDELINES ON prescribed and recommended guidance notes, etc. that must
THE CODE OF be followed.
CONDUCT
Besides the guidelines provided by the regulatory
authority, Bank Negara Malaysia, 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) for self-regulating the life insurance
business apply to the investment-linked life insurance
business as well.
The LIAM 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
9.6.1 PART 1: This part deals with the following aspects concerning the
Guidelines Code of Conduct:
on the Code of
Conduct Statement of Philosophy
Coverage
Monitoring Devices

Seven Principles of the Guidelines
Code of Conduct
9.6.1.1 Statement of These guidelines hinge on the following statements of

Philosophy philosophy:
i. 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.
ii. It is a business based on trust and honesty, requiring

a high degree of responsibility and professionalism. 97
iii. The confidence of policy owners and members of
the public in the integrity and honesty of life insurers
shall be safeguarded and enhanced.
iv. Life insurers shall at all times see that their business is
soundly managed to ensure the safety of policy owners
savings and the credibility of their companies. Life
insurers shall maintain a policy of efficient and prompt
service to policy owners and, to assist and advise them
where necessary, with the aim of promoting goodwill.
In pursuance of the above objectives and philosophy, the

life insurance industry has endeavoured to codify the ethics
to provide guidance to those employed in the industry to
promote and maintain uniform ethical standards, and to
uphold the trust and welfare of policy owners at all times.
It is evident from the above statement of philosophy that

the life insurance business, particularly investment-linked
life insurance, should be conducted in a responsible and
professional manner with a high degree of integrity. This

then will enable the commitments to the policy owners, in
the various forms of financial guarantees provided, to be
met at all times. It is thus a natural requirement that those
involved, including the agency force, conduct their affairs in
a responsible manner so that any one insurer in particular and
the life insurance industry in general can meet the objectives
formulated in the Statement of Philosophy.
The sections that follow provide summaries of the codified

ethical rules which employees of an insurer are expected to
abide by at all times.
9.6.1.2 Coverage The guidelines cover all employees of a life insurer operating
in Malaysia. The guidelines set out the minimum standards
of conduct expected of all employees of an insurer. Insurers,
if they so desire, are free to formulate more comprehensive
sets of rules for maintaining ethical standards amongst their
employees.
98
9.6.1.3 Monitoring To ensure that the guidelines are abided by, the management
Devices of a life insurance company is required to establish the
following minimal procedures:
i. Require all employees (existing and upon appointment

in the case of new employees) to sign a declaration to
observe the guidelines.
ii. Require all intermediaries (existing and upon

appointment in the case of new intermediaries) to
sign a declaration to observe the guidelines.
iii. 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.
iv. Report breaches observed to an audit/disciplinary

committee which reports directly to the Board of
Directors. In addition, the committee is required to
submit quarterly reports to Bank Negara Malaysia
on breaches observed and the actions taken on
these.
v. Maintain centralised records of breaches.
vi. Report immediately cases of fraud to the police and

Bank Negara Malaysia.
9.6.1.4 The Seven The Code of Ethics and Conduct dwells at length on

Principles the following principles. It is sufficient at this juncture to
Underlying the state these; the interested reader is encouraged to refer to the
Guidelines original document available on www.liam.org.my
i. To avoid conflict of interest;
ii. To avoid misuse of position;
iii. To prevent misuse of information;
iv. To ensure completeness and accuracy of relevant

records;
99
v. To ensure confidentiality of communication and
transactions between the life insurance company and
its policy owners and clients;
vi. To ensure fair and equitable treatment of all policy

owners and others who rely on or who are associated
with the life insurance company;
vii. To conduct business with the utmost good faith and

integrity.
9.6.1.5 Code of This section places emphasis on the following matters:

Conduct Only
a Guide 1. The guidelines are intended to serve as a guide for
the promotion of proper standards of conduct, and
establishing sound and prudent business practices

amongst life insurance companies.
2. It is not the intention of the guidelines to restrict

or replace the matured judgment of employees in
conducting their day-to-day business.
3. When in doubt as to matters relating to the code of

conduct, employees are to seek guidance from their
respective heads of department, who may, if necessary,
seek guidance from their companys management or
from Bank Negara Malaysia.
9.6.2 PART II: This part deals with the following aspects relating to selling
Life of life insurance:
Insurance
Selling Introduction
General Sales Principles
Explanation of the Contract
Disclosure of Underwriting Information
Accounts and Financial Aspects
100
9.6.2.1 Introduction The following generalities are introduced:
i. The term life insurance used in the Code of Ethics

and Conduct covers all types of insurance including
ordinary life insurance,
all types of annuities,
pension contracts,
investment-linked insurance, and
permanent health insurance.
ii. 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.
iii. The onus is placed on LIAM member companies to

enforce the code and to use their best endeavours to
ensure compliance with the various provisions of the
code, by all those involved in selling their policies.
The audit/disciplinary committee of the insurer is

responsible for monitoring compliance by 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.
iv. In the case of complaints from policy owners 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 complaint to the relevant life insurance company,
if not so referred.
v. It is stressed that an overriding obligation of an

intermediary is to conduct business at all times with
utmost good faith and integrity. 101
9.6.2.2 General Sales This and the following sections are reproduced from the
Principles Code of Ethics and Conduct of LIAM to maintain the full
spirit of the Codes.
1. The intermediary shall:
i. when he makes contact with the prospective

policy owner, make it known that he is an agent
of which insurance company and produce his
Registered Intermediary Authorisation Card to
identify himself;
ii. ensure as far as possible that the policy proposed

is suitable to the needs and not beyond the
resources of the prospective policy owner;
iii. give advice only on those matters in which he is

competent to deal with and seek or recommend
other specialist advice if this seems appropriate;
iv. treat all information supplied by the prospective

policy owner as completely confidential to

himself and the life office which he represents;
v. in making comparisons with other types of

policies or other forms of investment, make
clear the different characteristics of each policy/
investment;
vi. render continuous service to the policy owner.
2. The intermediary shall not:
i. make inaccurate or unfair criticisms of any

insurers;
ii. attempt to persuade a prospective policy owner

to cancel any existing policies unless these are
clearly unsuited to the policy owners needs.
It has been agreed by all LIAM member companies that all

agents are made fully aware that it is against the interests of
a policy owner and the life insurance industry to practise
102 twisting. Member companies have also agreed to cooperate
to eliminate twisting. Appropriate action will be taken if
twisting is proved.
Twisting is a form of misrepresentation in which a policy

owner is induced to discontinue an insurance policy in order
to purchase a new policy with another company or the same
company, without the policy owner being clearly informed of
the differences between the two policies and of the financial
consequences of replacing the original policy.
The detriments that arise from twisting are:
i. Every time a policy owner moves his basic

insurance from one life office to another, he must
commence again the qualifying period (usually two or
three years) before this insurance will become eligible
for a surrender value and come under the non-forfeiture
system (i.e. the protection he is afforded against lapse
of his policy and loss of its death cover should he
accidentally or deliberately fail to pay a premium within
the days of grace).
ii. The amount of the annual premium under an existing

policy may be lower than that called for by a new policy
having the same or similar benefits. Any replacement
of the same type of policy will normally be at a higher
premium rate based upon the insureds then attained
age.

iii. 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 with a new one
results in the policy owner sustaining the burden of
these costs twice.
iv. The suicide clause and incontestable clause (if any)

begin anew in a new policy, being denied by the
insurance company and which would have been paid
under the policy which was replaced.
103
9.6.2.3 Explanation of the 1. The intermediary shall
Contract
i explain all the essential provisions of the contract,
or contracts, which he is recommending so as to
ensure, as far as possible, that the prospective
policy owner understands what he is committing
himself to;
ii draw attention to any restrictions including

exclusions applying to the policy;
iii draw attention to the long term nature of the

policy and to the consequent effects of early
discontinuance and surrender;
iv draw attention to whether the policy qualifies for

tax relief or otherwise.
2. Where a policy offers participation in profits

or otherwise depends on variable factors such
as investment performance, descriptions of the
benefits shall distinguish between fixed and

projected benefit.
3. Where projected benefits are illustrated, it should

be made clear where applicable, that they are
based on certain assumptions and hence are not
guaranteed, and that benefits declared in the future
may be lower or higher than those presumed.
In the case of investment-linked policies, it should
be made clear that unit values may fluctuate up or
down depending on the value of the underlying
investments.
4. Where an intermediary has been supplied with an

illustration by the life insurer, he shall use the whole
illustration in respect of the contract which he is
discussing with the prospective policy owner, and no
other, and shall not add to it or select only the most
favourable aspects of it.
104
9.6.2.4 Disclosure of The intermediary shall on receiving the completed proposal
Underwriting form or any other material:
Information
1. avoid influencing the proposer and make it clear that
all the answers or statements are the proposers own
responsibility;
2. 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.
9.6.2.5 Accounts and The intermediary shall:

Financial Aspects
1. Where authorized by the life insurer, acknowledge
receipt and maintain a proper account of all monies
received in connection with an insurance policy and
shall distinguish the premium from any other payment
included in the monies.
2. Forward to the company without delay any monies

received for life insurance.
9.6.3 PART III: This part deals with the following aspects:
Statement Introduction
of Life Insurance
Practice Claims
Proposal Forms

Policies and Accompanying Documents
9.6.3.1 Introduction The aim of this part is to reduce the formalities involved
in the issue of new policies and payment of a claim. In
addressing these, the guidelines recognise the problems
posed by non-disclosures and improper claims, although by
a few policy owners. 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 the insurers compliance with the guidelines.
It is also responsible for submitting reports to Bank Negara
Malaysia on the breaches and the corrective or punitive
actions taken. 105
9.6.3.2 Claims a. The guidelines require that an insurer may not
unreasonably reject a claim.
b. If there is a time limit for notification of a claim,

the claimant will not be expected to do more than to
report a claim and subsequent developments as soon
as reasonably possible.
c. Upon the claimant proving the insured event and the

right to receive the claim, the claim has to be settled
without undue delay.
d. The insurer shall not collect any claim processing fees

from the policy owner or the beneficiary.
9.6.3.3 Proposal Forms The design of the proposal forms shall conform to Part III
of the Code of Good Practice for Life Insurance Business.
a. If the proposal form calls for the disclosure of material

facts, a statement should be included in the declaration,
or prominently displayed elsewhere on the form or in
the document of which it forms part
i. drawing attention to the consequences of failure

to disclose all material facts;
ii. warning that if the signatory is in any doubt about

whether certain facts are material, these facts
should be disclosed.
b. A life insurer shall provide a copy of the proposal

form relating to the policy owner together with the
policy.
9.6.3.4 Policies and a. Insurers will continue to develop clear proposal forms
Accompanying and policy documents taking into consideration the
Documents legal nature of insurance contracts.
b. 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.
106
In respect of a proposal for whole-life or endowment
insurance, the sales literature should bring out the following
features of these contracts:
i. These are long-term contracts.
ii. 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 the policy owner
has paid premium for three years or more.
In summary, as the sale of investment-linked products

also relates to investment and imparting some levels of
understanding on the instruments or vehicles available, agents
are expected to adopt a professional approach in order to serve
as sound advisers on how the right plan and right funds can
help to suit customers risk profile, needs and goals.
9.7 GUIDELINES ON The guidelines, commonly known as TCF in short, were

MINIMUM issued by Life Insurance Association of Malaysia and the
STANDARDS FOR pertinent provisions are that agents should take note of the
TREATING following:
CUSTOMERS
Customers are fully informed about the key benefits,
FAIRLY
key risks and exclusions.
Agents should be well-trained, especially in investment

and savings products.
That products are sold based on customers suitability,

needs and risk appetite.
107

I Agents must utilise the sales materials and sales illustrations provided by their
respective principal in their sales process.
II Agents must utilise the sales materials and sales illustrations provided by their
respective principal in their sales process. However, they may have the discretion to
supplement these provided the facts do not deviate from those in the materials and
illustrations provided by the principal.
III Only the signature of the intended new policy owner must be obtained on an insurers
Customer Fact-Find (CFF) form.
IV The sales intermediary must also sign the CFF form as witness after the intended
new policy owner has signed.
a) I, II and IV
b) I and III
c) II and IV
d) II and III
2. As soon as a policy contract has been issued by a life insurer,

I the insurer is to mail (by registered mail) the policy contract to the correspondence
address of the new policy owner. The registered mail slip should suffice as evidence
that the contract has reached the policy owner.
II the agent should deliver the policy contract without delay.
III the delivery process should entail the explanation of the contractual provisions and
re-explaining the benefits. The agent then has to request the new policy owner to
sign the delivery acknowledgement slip. Finally, the agent must return the signed
acknowledgement slip to the insurer for recording and filing.
IV if the new policy owner is unavailable at the first time of personal delivery by the
agent, acknowledgement of receipt of the policy contract signed by a representative
of the policy owners household or office shall be deemed valid. The agent does not
need to follow up on this.
a) I and II
b) II and III
108 d) I, III and IV
3. Agents who have sold investment-linked plans should conduct reviews with their clients
ideally once a year. The purposes are
I to provide updates on the performance progress of fund/s selected by the clients.
II to discuss and ascertain whether the clients financial objectives might have changed
due to certain circumstances.
III to discuss and ascertain whether the original risk profile of the client has changed
due to certain circumstances.
IV to discuss alternative next steps where necessary.
a) I, II and IV
b) II, III and IV
d) III and IV
4. The Code of Conduct pertaining to life insurance selling applies to
I all agents.
II all employees of life insurers.
III insurance brokers.
IV agents and insurance brokers.

b) I and III
c) I and II

d) I, II, and IV
I Agents may design their own financial planning form to gather financial data and
financial information of their prospective clients for analysis. However, the format
must be approved by their principal.
II The Customer Fact-Find form of a life insurer officially documents important facts
concerning the financial data concerning a prospective policy owner and his family.
III Cancellation of a policy is allowed if the request by a new policy owner falls within
the 15 days free- look period. The period commences from the date the policy contract
is passed to the agent for delivery. 109
IV The free-look period commences from the date the client signs the acknowledgement
slip upon receiving the policy.
a) I, II and III
b) I, II and IV
c) II and IV
d) I and IV
6. The pertinent points highlighted by the Guidelines on Minimum Standards for Treating
Customers Fairly (TCF) for agents attention are:
I Agents should inform customers fully about the key benefits, key risks and exclusions.
II Agents must first be well-trained, especially involving the sale of investment and
savings products.
III Agents must guide the customers as to what details are necessary to declare and what
are not necessary so that the concise personal information captured in the application
documents will cater for a smooth underwriting process.
IV The product being proposed to a customer should be based on suitability, needs and
risk appetite.
a) I, II and IV
b) I, II and III
c) II and III
110
Answers to Self-Assessment
Questions
CHAPTER 1: CHAPTER 4:
1. (c) 1. (a)
2. (d) 2. (b)
3. (d) 3. (c)
4. (c) 4. (d)
5. (c) 5. (b)
6. (a) 6. (d)
1. (a) 1. (c)
2. (b) 2. (c)
3. (a) 3. (c)
4. (d) 4. (b)
5. (a) 5. (a)
6. (b) 6. (b)
ANSWERS TO SELF-ASSESSMENT QUESTIONS
1. (b) 1. (d)
2. (b) 2. (a)
3. (b) 3. (b)
4. (c) 4. (d)
5. (c) 5. (c)
6. (b) 6. (c) 111

1. (b) 1. (a)
2. (a) 2. (b)
3. (b) 3. (c)
4. (b) 4. (c)
5. (b) 5. (c)
6. (d) 6. (a)
CHAPTER 8:
1. (b)
2. (c)
3. (c)
4. (d)
5. (a)
6. (c)
112
Index
account value, 2.7 death benefit formula, single premium

investment-linked life insurance, 3.5
ad hoc top-ups, 2.4
death benefit mechanism, regular premium
after-sales service, 9.5
Agents Guidelines, 9
debenture stocks, 6.3.2.1
allocated premium, 2.3
disclosure of underwriting information,
annual fund management fee, 2.3 9.6.2.4
diversification, 5.9
balanced funds, 7.6 dollar cost averaging, 2.16
bank accounts, 6.2.2 dual pricing, 2.14
bonds, advantages and disadvantages, 6.3.2.4
education plan, 2.18
capital guaranteed fund, 6.8 equity funds, 7.3
cash and deposits, 6.2
cash funds, 7.2 fixed income funds, 7.2
claims, LIAM Code of Conduct, 9.6.3.2 fixed income securities, 6.3
Code of Conduct, 9.6 free-look period, 2.11
commodities, 6.9 fund switching, 2.9
consumer buying decision process, 9.3 fee, 2.9
contract, explanation of, 9.6.2.3
convertible stocks, 6.3.2.3 government bonds, 6.3.1
corporate bonds, 6.3.2 general sales principles, 9.6.2.2
cost of insurance, 2.3 guidelines, agents, 9
cost of insurance deduction, guidelines, investment-linked business, 8
regular premium investment-linked
insurance, 2.3 investment horizon, 5.5
single premium investment-linked investment-linked business, guidelines, 8
INDEX
insurance, 3.7 investment-linked life insurance,

customer fact-find form, 9.3 what is, 1 113
growth, 1 regular premium investment-linked life
insurance, 2
types of funds, 7
single premium investment-linked life
risks and returns, 7.9
insurance, 3
investment objectives, 5.2
medical plan, 2.18
investment performance, factors, 5.8
minimum basic single premium, 3.3
investment-linked plans and unit trusts,
minimum regular premium, 2.2
comparison, 6.5
monitoring devices, LIAM Code of Conduct,
investmentlinked policies
9.6.1.3
benefits, 4.2
money market funds, 7.2
risks and uncertainties, 4.3
monthly administration charge, 2.2
monthly cash flow analysis, 5.3
LIAM Code of Conduct, 9.6
accounts and financial aspects, 9.6.2.5
net worth analysis, 5.3
coverage, 9.6.1.2
no-lapse guarantee period, 2.12
disclosure of underwriting information,
9.6.2.4
one-time unallocated premium charge, 3.4
explanation of contract, 9.6.2.3
optional riders, 2.6
general sales principles, 9.6.2.2
ordinary shares, 6.4.1

life insurance selling, 9.6.2
monitoring devices, 9.6.1.3
partial withdrawal, 2.8
principles underlying guidelines, 9.6.1.4
Perbadanan Insurans Deposit Malaysia,
statement of life insurance practice, 9.6.3
6.2.2.1
claims, 9.6.3.2
preference shares, 6.4.2
policies and accompanying documents,
premium holiday, 2.10
9.6.3.4
premium-paying riders, 2.5
proposal forms, 9.6.3.4
properties, 6.6
statement of philosophy, 9.6.1.1
advantages and disadvantages, 6.6.2
twisting, 9.6.2.2
property funds, 7.4
life insurance selling, LIAM Code of Conduct,
9.6.2 principles of guidelines, LIAM Code of
Conduct, 9.6.1.4
loan stocks, 6.3.2.2
proposal forms, LIAM Code of Conduct,
long horizon, 2.15
9.6.3.3
policies and accompanying documents, LIAM
managed funds, 7.5 Code of Conduct, 9.6.3.4
marketing, agents guidelines, 9.2 policy fee, regular premium investment-
linked insurance, 2.3
mechanisms and features,
114
REIT funds, 7.4 tax relief, 2.18
REITs, 6.6.1 single pricing, 2.14
regular premium investment-linked life spread-out risk, 2.17
insurance, mechanisms and features, 2
sum assured multiple rule, 2.5
regular premium investment-linked plans and
surrender, 2.8
whole life participating plans, comparison,
4.4 charge, 2.8
regular premium investment-linked unallocated premium, 2.3
insurance, 2 allocation, 2.3
account value, 2.7 unit-deducting riders, 2.5, 2.6
ad hoc top-ups, 2.4 regular top-ups 2.4
allocated premium, allocation, 2.3 retirement plan, 2.18
allocated premium, ratio, 2.3 riders
annual fund management fee, 2.3 optional riders, 2.6
cost of insurance, 2.3 premium-paying riders, 2.5, 2.6
death benefit mechanism, 2.13 unit-deducting riders, 2.5, 2.6
dollar cost averaging, 2.16 risks and returns, investment-linked life
insurance, 7.9
dual pricing, 2.14
selling process, 9.4
tax relief, 2.18
shares, 6.4
free-look period, 2.11
advantages and disadvantages, 6.4.3
fund switching fee, 2.9
ordinary shares, 6.4.1
fund switching, 2.9
preference shares, 6.4.2
long horizon, 2.15
single pricing, 2.14
medical plan, 2.18
single premium investment-linked insurance,
minimum regular premium, 2.2
mechanisms and features, 3
monthly administration charge, 2.3
cost of insurance deduction, 3.7
no-lapse guarantee, 2.12
death benefit formula, 3.6
optional riders, 2.6
minimum basic single premium, 3.3
partial withdrawal, 2.8
one-time unallocated premium charge, 3.4
charge, 2.8
sum assured formula, 3.5
policy fee, 2.3
sum at risk mechanism, 3.7
premium holiday, 2.10
spread-out risk, 2.17
premium-paying riders, 2.5, 2.6
Statement of Life Insurance Practice, 9.6.3
regular top-ups, 2.4
INDEX
claims, 9.6.3.2
retirement plan, 2.18
115
policies and accompanying documents, treating customers fairly, 9.7
9.6.3.4
twisting, 9.6.2.2
proposal forms, 9.6.3.3
types of funds, investment-linked life
sum assured formula, single premium insurance, 7
sum assured multiple rule, 2.5
unallocated premium, 2.3
sum at risk mechanism, single premium
unit-deducting riders, 2.5
unit trusts, 6.5
sukuk, 6.7, 7.8
unit trust and investment-linked plans, a
surrender, 2.8
comparison, 6.5
tax relief
variable life insurance, 1
retirement plan, 2.18
withdrawal, partial, 2.8
treasury bills, 6.2.1
116
For information on this and other resources please contact
HEAD OFFICE
The Malaysian Insurance Institute (MII) MII City Centre
No. 5 Jalan Sri Semantan Satu, 6th Floor, Wisma Sime Darby
Damansara Heights, Jalan Raja Laut,
50490 Kuala Lumpur, MALAYSIA 50350 Kuala Lumpur, MALAYSIA
Tel : +603 20878882/8883 Tel : +603 26928828
Fax : +603 20937885 Fax : +603 26920898
Email : customercare@mii.org.my
Website : www.insurance.com.my
ISBN 978-983-2432-09-8
9 789832 432098

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7 th Edition

2014 The Malaysian Insurance Institute

ALL RIGHTS RESERVED

Our thanks also to Fok Seong Tuck,

Perpustakaan Negara Malaysia Cataloguing-in-Publication Data

CERTIFICATE EXAMINATION IN INVESTMENT-LINKED LIFE INSURANCE

Chapter 2: Mechanisms and Features of Regular Premium

2.2 Minimum Regular Premium 9

C E RT I F I C AT E E X A MI N AT I O N I N I NVES T MEN T-LI NK ED LI FE I NS UR A NCE

2.4 Regular and Ad Hoc Top-Up Premium 11

2.5 Sum Assured Multiple Rule 11

2.6 Optional Riders 13

2.7 Account Value 13

2.8 Partial Withdrawal, Surrender and Charge 14

2.10 Premium Holiday 15

2.11 Free-Look Period 15

2.12 No-Lapse Guarantee Period 16

2.13 Death Benefit Mechanism 16

2.14 Dual Pricing and Single Pricing 17

2.15 The Long Horizon 17

2.16 Dollar Cost Averaging 18

2.18 Retirement Plan, Medical Plan and Education Plan 19

Chapter 3: Mechanisms and Features of Single Premium Investment-Linked 27

3.2 Main Objective for Owning Single Premium

3.3 Minimum Basic Single Premium 27

3.4 One-Time Unallocated Premium Charge 27

3.5 Sum Assured Formula 28

3.6 Death Benefit Formula 28

3.7 Cost of Insurance Deduction and Sum at Risk Mechanism 28

Chapter 4: Considerations for Purchasing an Investment-Linked Policy 33

4.2.1 Pooling and Diversification 33

4.3 Risks and Uncertainties 38

4.3.1 Investment Fluctuations 38

4.4 Regular Premium Investment-Linked Plans vs Whole Life Participating

5.2 Investment Objectives 46

5.3 Funds Available 48

5.4 Risk or Security 51

5.5 Investment Horizon 51

5.6 Accessibility of Funds 52

5.7 Taxation Treatment 52

5.8 Investment Performance 52

Chapter 6: Types of Investment Vehicles and Potential Risks 57

6.2 Cash and Deposits 57

C E RT I F I C AT E E X A MI N AT I O N I N I NV ES TM ENT- LIN KED LIF E I NS UR ANCE

6.2.2 Bank Accounts 58

6.2.2.1 Perbadanan Insurans Deposit Malaysia 59

6.3 Fixed Income Securities 60

6.3.1 Government Bonds 60

6.3.2 Corporate Bonds 61

6.3.2.1 Debenture Stocks 62

6.3.2.2 Loan Stocks 62

6.3.2.3 Convertible Stocks 62

6.3.2.4 Advantages and Disadvantages 63

6.4.1 Ordinary Shares 64

6.4.2 Preference Shares 64

6.4.3 Advantages and Disadvantages 65

6.5 Unit Trusts 65

6.6.1 Real Estate Investment Trusts 68

6.6.2 Advantages and Disadvantages 68

6.8 Capital Guaranteed Funds 70

Chapter 7: Common Types of Investment-Linked Funds 75

7.2 Fixed Income/Cash and Money Markets Funds 75

7.3 Equity Funds 75

7.4 Property Funds/REITs 75