The Certificate Examination In Investment-Linked Life Insurance

Table of Contents
CHAPTER 1:

Introduction To Investment-linked Life Insurance

CHAPTER 2:

Key Considerations In Investment

CHAPTER 3:

Types of Investment Assets

CHAPTER 4:

Investment link Life Insurance Product : A World Scenario

CHAPTER 5:

Types of Investment-linked Life Insurance Products

CHAPTER 6:

Structure of Investment-linked Funds

CHAPTER 7:

How Investment-linked Life Insurance Products Work

CHAPTER 8:

Benefits And Risks Of Investing In Investment-linked Funds

CHAPTER 9:

Comparison Between Investment-linked Life

Insurance And Traditional With-Profit Life Insurance Products

CHAPTER 10:

Taxation And Law Covering Investmentlinked Life Insurance Products

CHAPTER 11:

Identifying And Satisfying Customers Needs

CHAPTER 12:

Marketing And After-Sales Services, Ethics

And Code Of Conduct

Objective
Prepare, guide and assist the potential agents to be and eventually excel in
the compulsory exam.
**Note: For another overview and more sample questions, please refer to the contents in the CD.

Chapter 1 : Introduction to Investment-Linked Life Insurance

Objective:
-To understand the nature of investment-linked life insurance.
Investment-linked insurance offers investors policies where:
Premiums are used to purchase funds
Value of policy linked to units in a special unitised fund
Value of units directly reflect the value of the underlying fund
Wide range of investment modes covering equity, fixed interest and money
market
Investment
linked
Value of Policy

Special
Unitised Fund

Pay premium to
purchase fund

Fund managed
by Insurer

Policyholder

Directly linked
Investment

Protection

Death
TPD
PA
Health

Investment-linked insurance offers investors policies where:

%
Premiums are used to purchase funds
%
Value of policy linked to units in a special unitised fund
%
Value of units directly reflect the value of the underlying fund
%
Wide range of investment modes covering equity, fixed
interest and money market

Summary of Key Points:

-Modus operandi of Investment-linked policy: Protection and Investment
- Protection:
(a) Death Benefits (Benefits receivable in the event the insured die)
(b) Total Permanent Disability; TPD (Benefits receivable in the event the insured
experience TPD. E.g: Full Body Paralysed)
(c) Personal Accident; PA (Benefits receivable in the event the insured
met with accident. E.g: Injury or hospitalisation incurred due to accident)
(d) Health (Benefits receivable in the event the insured being diagnosed with
health problem. E.g: Heart Attack)

Sample Questions
1. What is an Investment-Linked policy?
a. A participating Whole Life Policy.
b. A Capital and returns guaranteed policy.
c. An endowment policy only
d. A plan that offers clients coverage and investment returns.
2. All the following statements are TRUE, except;
a. The Investment- Linked policy is directly linked to investment performance.
b. Once the policy is in force, the clients investments will grow steadily.
c. Fund managers will make sure that the Investment Linked policy is shielded from market
fluctuations.
d. The Investment Linked policy only provides coverage and nothing else.
3. What was the main reason for the steady growth of the Insurance Industry in Malaysia?
a. The liberation of regulations by the Ministry of Finance and Bank Negara Malaysia.
b. The introduction of Investment-Linked policies.
c. The efforts by insurance companies to design and offer customer-centric and good plans.
d. The robust growth of the countrys economy.
4. The investment returns under an investment-linked life insurance policy
I are linked to the performance of the investment fund managed by the life office.
II fluctuate according to the rise and fall of market prices.
III are not guaranteed.
IV are assured.
a. I and III
b. III and IV
c. I, II and III
d. I, III and IV
**Note: For another overview and more sample questions, please refer to the contents in the CD.

Chapter 2 : Investment Objectives

Objectives:
-To understand the functions of investment-linked life insurance.
-To understand the factors affecting investment-linked life insurance.
-To understand the performance of investment-linked life insurance.
-To obtain a comprehensive introductory knowledge of the technical, taxation and
other aspects of investment-linked life insurance.
Investment Objectives
Why Do People Invest
1.
2.
3.
4.
5.

Comfortable standard of living

Fund for their dependants
Children - education fund
Financial position
Hedge inflation

6.

Liability cancellation

7.

Income in retirement.

8.

Financial freedom

9.

Paying necessary expenses and taxes

10.

Financial freedom

Why Should I invest? Depend on what I want?

To get Regular Income, e.g. Fixed Deposit or

To get Capital Gain, e.g. Share

Investment decision depends on :

Level/amount of fund
Source of the available funds
o Lump sum or
o Regular
4

Risk or Security
3 consideration in investment
Individuals need for Security

Risk of losing
initial investment
Rate of return is not up
to expectation

Attitude Towards Risk/

Risk tolerance

Type of Investment with

Certain Inherent Risk

Risk Adverse
Risk Neutral
Risk Taker

Higher risk & uncertainty

higher potential for capital &
income growth

Investment Horizon
How long will you lock into an investment depends on:

Age of investor
Current financial position
The needs

Accessibility Of Funds
1.
2.
3.

The time horizon of needs of the fund short term, medium or long term
investment.
The cost or penalty of realizing the investment before its maturity period.
I.e: Cost or penalty for early withdrawal of funds.
Initial cost in setting up or buying into the investment.

Tax Treatment
No special tax laws on investment-linked insurance. The tax status is the same as
traditional with profit life insurance products.

Performance of the Investment

Depends on:
1.
2.
3.
4.
5.
6.

Countrys economic factors

Competencies, capacity of the management team
The invested companys level of cost
The invested company past experience and history
Life cycle of the investment
Regional and Global economic factors

Key Considerations In Investment

a) Safety :
- depends on the risk appetite of the customer.
- relatively safe investment return more conservative, but client forego growth and
income stream.
b) Income
- Risk-Return trade (Higher risk, higher return and vice versa)
c) Growth
- Realise capital gains and derive profits from the growth of investments.

Funds Availability
- Amounts of funds available for a person to invest.
- Method: Scrutinize personal budget.
- Importance of drawing personal budget:
(a) Take control of spending
(b) Find money to save and invest
- Personal budget can be drawn from:
(a) Cash Flow = Cash Inflow Cash Outflow
(b) Net Worth = Total Assets Total Liabilities

(a) Monthly Cash Flow Analysis

Cash Inflow
Salary
Rental
Commissions
Others

TOTAL CASH INFLOW

Cash Outflow
Rental/Housing Loan Payments
Groceries and Utilities
Childcare/ Parents allowance

RM
5,000.00
500.00
1,000.00
1,000.00

RM
1,000.00
750.00
500.00

Education Expenses

250.00
2,000.00

Insurance Premiums
Savings
Misc

500.00
500.00
1,000.00

7,500.00

Loans (Car, Credit Cards etc)

TOTAL CASH OUTFLOW

6,500.00

Cash Flow
= Cash Inflow - Cash Outflow
Net Cash Flow = RM 7,500 - RM 6,500
= RM 1,000
(b) Simple Net Worth Analysis
No

Assets (Present Value)

1
2
3

House
Car
EPF

Savings Account

Ins. Cash Value

Amount
Liabilities
(RM)
220,000.00 Housing Loan Balance
30,000.00 Car Loan Balance
20,000.00 Credit Card Balance

Amount
(RM)
200,000.00
35,000.00
5,500.00

1,500.00 Personal Loan balance

10,000.00

20,000.00 Others

15,000.00

Net Worth
TOTAL

291,500.00

TOTAL

26,000.00
291,500.00

Diversification
Diversification in investment involves reducing the risks of investment by putting the
fund under management into several categories of investment

Do not put all your eggs in one basket

IMPORTANT:
Diversification DO NOT completely eliminates the risk of investing in stocks in a
Portfolio.
7

Summary of Key Points:

-Risk presents anywhere and in all circumstances.
-Risk is measured through probability.
-Method to overcome risk: (a) Insurance contract
(b) Non-Insurance contract
-Trade-off: (a) Risk Vs Security
(b) Risk Lover Vs Risk Averse
-Optimistic investors prefer higher risk.
-Pessimistic investors prefer lower risk.
-Higher is the expected return, the higher is the risk and vice versa.
-Knowledge of ones risk profile and preferred investment horizon are needed to
avoid mismatch of risk, return and maturity date.
-Key considerations in Investment (Safety, Income and Growth)
- Personal budget: (a) Cash Flow = Cash Inflow Cash Outflow
(b) Net Worth = Total Assets Total Liabilities
-Diversification used as the solution.

Sample Questions
1. An agent owes the client a moral obligation to
a. Educate a client to be an expert investor.
b. To recommend specific funds to invest in.
c. Educate clients with some basic and sound investment principles.
d. Make decisions on behalf of the client.
2. Clients 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 needs.
a. i,ii,iv only.
b. i,ii,iii only.
c. i,ii,iv only.
d. ii,iii,iv only.
3. What must an agent do to ensure the client is given proper advice on investment?
a. Ensure that there is a right combination of objectives and make sure proper risk analysis is
done.
b. Show the wide selection of investment for the client to choose from.
c. Motivate the client to borrow money to invest in guaranteed investment vehicles.
d. Ensure that the advice is advantageous to the agent and the insurance company.
4. What are the factors that can affect commodity prices?
I Demand and supply
II Weather conditions
III Pest attacks
IV Insecticides
a. I, II and III
b. I, II and IV
c. II, III and IV
d. I, II, III and IV
5. A liquid instrument which carries little or no risk of losing the principal amount is known as
a. cash and deposits
b. treasury bills
c. commodities
d. shares.

6. Every single investment vehicle can be categorized based on fundamental characteristics.

What are they?
I Safety
II Taxation treatment
III Growth (capital gains)
IV Income (steady stream of income)
a. I and II
b. I, II and III
c. I, III and IV
d. II, III and IV
7. Who has a greater or wider choice of investment available?
a. A long term investor
b. A small time investor
c. A fixed income investor
d. An investor with large funds
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

10

CHAPTER 3: TYPES OF INVESTMENT ASSETS

Objectives:
- To understand the various types of investment assets.
- To understand the advantages and disadvantages of the respective investment
assets.
Type of Investment Assets
1. Cash & Deposits
2. Fixed Income Securities
3. Shares
4. Unit Trusts
5. Investment Trust
6. Property
7. Real Estate Investment Trust (REITs)
8. Derivatives
9. Exchange Traded Funds (ETF)
10. Sukuk Bonds
11. Capital Guaranteed Fund
12. Commodities
13. Life Insurance
14. Annuities
Cash And Deposit

All liquid instrument

Short term debts instruments.
These Cover.
Treasury Bills

Bank Accounts

Treasury Bills
Central
bank

Issued

at discount rate

Institution

Discharged at face value

Short Term investment. Usually < 1 year
The government guarantees the investment.
I.e.: No risk
(Exception: Politically instability)
11

Spot market, a type of cash markets are market which quote prices referred to the
current market price of an item available for immediate delivery

Minimal risk
(loss of principal)

Highly
Liquid

Safest type of investment,

(Considered no risk
as it is guaranteed by government)

Low yield in return

Capital erosion in
the case of high
inflation

Penalty for early

withdrawal
Rates stated at the inception
will not change in response
to changes in
market interest rates
Fixed Income Securities

Investor lend money to issuer (government or company)

Return in fixed interest
Capital repayment at maturity
Regarded as IOUs
Traded in secondary market
12

Types of fixed income securities

Money market instruments

Government bonds
Corporate bonds
Convertible bonds
Preference shares

Fixed Income Security: Government Bonds

- Objective: Government raise funds from the public
- Extremely low default risk or credit risk
- Interest payments and repayment of principal are guaranteed

Safest little or no default or credit risk

Government guarantees to pay interest and repay principal

Fixed interest rate

Issued when government needs money to finance project

Classification of bond

short term bonds

(<5 years to maturity)

medium term bonds ( 5 - 10 to maturity)

long term bonds

(> 15 years to maturity)

Fixed Income Security : Corporate Bonds

Objective: Corporate companies raise funds from the market.
Types of corporate stocks
1. Debenture Stocks
2. Loan Stocks
3. Convertible Stocks
13

Debenture Stocks

Secured loans

Fixed charge on

companys property
or assets
Fixed rate & term
Option to repay the
debenture stocks
holders earlier.
Trustee appoint:
- Supervise interest &
capital payment
- If default, act for
investor

Loan Stocks

Unsecured loans

Risk losing capital

Convertible
Stocks

Fixed interest rate

& term
Less secure than
debenture stocks,
so higher interest
rate

Convertible to
ordinary shares of a
company on a fixed
date
Become part of
owner & entitled to
profits through
dividends declared

Risk
Loan Stocks

Debenture Stocks

Government
Bonds

Return
Note: Unsecured non-convertible bonds yield the highest return.

14

Shares
2 main types

Preference Shares

Ordinary Shares

Preference Shares

Ordinary Shares

Shareholder receives fixed

Investor is a shareholder

dividends if company earned

Shareholder owns part of

profit

the company

Have priority claims

Return in the form of

Prioritized compared to
ordinary share holders in the
event of profit or loss

Share prices are less

volatile
No voting rights

dividends
Shareholder may or may
not receive dividends
Dividend rate fluctuates
according to companys
profits
High liquidity
Strong potential of capital
appreciation

Share price influenced by:

Currency performance
Markets view on company
Countrys economy
Interest rate levels
Inflation rate
Companys earning

Share prices are more

volatile
Excluded from tax
Market risk and specific
risk
Subject to inflation hedge
Voting rights

15

Unit Trusts
Modus Operandi

Investor

Pool of Funds
(managed by professional fund
managers)

Open ended Fund

Kept by:
Trustee and governed by a
Trust Deed

Managed by:
The Investment manager
(Fund manager)

In Malaysia, unit trusts are supervised by the Securities Commission

Unit Trust:

Provides capital gain through hundreds of different securities

Diversification
In term of unit pricing
Generate income dividends, interests and capital gains

16

Advantages

Disadvantages

Bewildering array of funds

Spread of investments

Extra costs for switching

Lower risk compared to shares

Professional service (fund
managers)
Minimize paperwork to investors
Income from dividend can be
reinvested
Partial utilization

Investment Trust
(6) $
Investor A

Investor B
(5) Sell

(1) RM

(2) Units

Pool of Funds
(managed by professional fund managers)

(4)

(3) Invest
Closed-end fund

A closed-end fund and does not have to dispose off its assets if large number of
investors sell their shares
17

Investment Trust is:

Similar to unit trust

Buying and selling transaction at Secondary Market. I.e: Bursa Malaysia
More flexible
Much simpler
More accessible
More cost effective for small investor
e.g:
AFFIN Fund Management Sdn. Bhd.
BHLB Asset Management Sdn. Bhd.
Maybank Investment Management Sdn. Bhd.
Unit Trust

Formed by Trust Deed

Purchase units in trust,
not shares in company
Open-ended fund
i.e: no fixed
redemption date
Disposes assets when
large numbers of
investors cash-in
Lower risk

Investment Trust

Registered under
Companies Act
Purchasing shares in
company
Closed-end funds
i.e: fixed redemption
date
No asset disposals if
large numbers of
investors cash-in
Higher risk
Preferably not presumed
as very short term
investment (not < 3
years)

Property
3 types of real estate investment:

Agricultural Property
Domestic Property
Commercial / Industrial Property
18

Land quality & fertility

Agriculture

Location
Value of building

Location
Domestic
Commercial/
Industrial

Type of building

Real Estate Investment Trust (REITS)

It is a latest asset classification that has potential to have fair return on investment.
Main criterias:
Alternative asset group to equities and bond
REITs company manage and distribute rental
Return in the form of dividends
Advantages

Potential capital
appreciation
Steady income flow
Low risk
By mortgaging: capital
is freed

Disadvantages

During recession:
Property difficult to be
disposed off
Less liquid

19

Derivatives
Derivatives are financial instruments whose values are linked to the price of the
underlying instruments in the cash markets.

2 popular derivatives:

Stock Options

Options

Call
A right to buy

Warrants

Financial Futures

Futures

Put
A right to sell

Investor can buy a right, not obligation, to purchase or sell a security

At a future date (within a specified time period)
At a fixed price
Terms are normally 3, 6, 9 months
Derivatives Warrants
Warrants -Transferable Subscription Rights (TSR)
allows option holders the right to convert to ordinary shares at:
Predetermined conversion ratio or;
Fixed price ;
Within a specified time period
Similar to call option
Attach free with loan stocks or rights
Usually detached from the loan stock and traded separately in securities market

Disadvantage:
On expiry, warrants which are not exercised lose their value completely
20

Future
Physical Commodities
& financial instruments
Traded in Cash Market

Forward Markets
Price of an item
for deferred
delivery

Spot Markets
Current market price
of
item Available for
immediate
delivery

Future Markets

Future Commodity
For commercial buyers and sellers
Can be bought as:
- Physicals
- Futures
The Malaysian Commodity exchange for Trading futures in crude palm oil, crude palm
kernel oil, tin, rubber, and cocoa.
Generally, it is:

Volatile
Depend on supply & demand
Other factors e.g. weather
Very high risk

21

Exchange Traded Funds (ETF)

Exchange Traded Funds (ETF) or exchange-traded product (ETF) is an investment
fund traded on stock exchanges.
ETF Criteria includes:
Holds assets (stocks or bonds)
Similar to unit trust (exception: listed and traded as stocks and shares
Price is approximated to be same as the underlying assets
Mostly track an index
Advantages

Low Cost
Tax efficiency
Stock-like features
Close-ended fund
i.e: fixed redemption date

Types of ETFs includes:

(a) Index ETFs
(b) Commodity ETFs or ETCs
(c) Bond ETFs
(d) Currency ETFs or ETCs
(e) Actively managed ETFs
(f) Exchange-traded grantor trusts
(g) Leveraged ETF
Malaysia Scenario examples are:
-AFFMY1
-CIMBA40
-FBMKLCI-EA
-MYETFDJ
Sukuk Bonds
Sukuk is taken from the Arabic language that basically means financial certificates
which is equivalent to bonds. As permissibility in Islam disallows the usage of fixed
income and bonds that bears interest income, Sukuk is being formatted to be in line
with Islamic law on investment principles.

22

Criterias

Commercial paper
Provide investor a share of ownership in the underlying asset
Investors enjoy the division of assets in proportion to their investment
Investors bear the credit risk of the issuer
Issued by pooled funds (Mutual funds)
Based on hard assets that generate steady income and expectations
Originators may or may not guarantee the sukuk
Investors receive a fee equal to the income of the underlying assets
Issued by Special Purpose Vehicles (SPVs), subsidiaries of banks, trust
called SPV
Mostly issued in dollars
Unlike conventional bonds (tangible assets based instead of debt
based) and in compliance with Syariah principal
14 kinds of Sukuk (most used: Sukuk Al Ijara & Sukuk Al Musharaka)
Capital Guaranteed Fund (CGF)
Investment vehicle offered by certain institutions
Initial capital invested is guaranteed from any losses.
Investors do not incur losses with exception it is not redeemed prior to the maturity
date
Features
High asset allocation in guaranteed investment instruments. Normally up
to 80-90% total fund size.
Benchmark comparison with Fixed Deposit rate because slightly higher
in risk than FD.
Investment horizon normally 3-5 years
Offered only during offer period. No more subscription after closing date
and have to wait for another series to be launched.
Normal value per unit starts at RM1.00 for ease of return calculation
Higher initial investment compare to UT fund
Min initial investment amount is RM 5,000
Entry fee is relatively low compared to other instruments (service charge
is 1.5% practiced by industry)
Redemption fee before maturity, range from 0.3% to 1.5% of Net Asset
Value (NAV)
Examples:
(a) OSK-UOB capital guaranteed Funds Series
(b) RHB Unit Trust
(c) Hwang-DBS capital Guaranteed Fund
23

Life Insurance

Term
Whole Life
Endowment

Annuity

Whole Life & Endowment Policies

Term

Investment that
provides a return
upon death,
disability, critical
illness or maturity.

Purely protection plan

Payment of sum
assured upon death
or death/TPD

Returns linked to
investment
performance
Indirectly
Directly

Upon maturity:
nothing paid out

Annuities

Pays lump sum - then gets periodical smaller amounts until death.
To protect loss of income
- Arising out of excessive longevity.

Immediate Annuity

Yearly payments begins immediately and continues throughout the life of the
annuitant

Deferred Annuity

Annuity contract whereby the annuity payments will begin at a determined time in
the future
24

Summary of Key Points:

-11types of investment (Cash & Deposits, Fixed Income Securities, Shares, Unit
Trusts, Investment Trust, Property, Derivatives, Exchange Traded Funds, Sukuk ,
Capital Guaranteed Funds, and Life Insurance)
-Criterias of each asset and asset groups
-Similarities and differences of each asset and assets groups
-Advantages and disadvantages of each asset and assets groups
-Risk and return on each assets and asset groups
-Volatility of each asset and assets group
-Tenure (time horizon) of the assets
-Supervisory board of each asset and assets group

25

Sample Questions
1.The following instruments fall under Corporate Bonds EXCEPT;
a. Debenture Stocks.
b.Loan Stocks.
c. Convertible Stocks.
d.Warrants.
2.Sukuk have the following characteristics EXCEPT
a. They are issued by pooled funds.
b.They adhere to strict Syariah principles.
c. They can be guaranteed or not by their originators.
d.They can only be bought by Banks and Financial Institutions.
3.Mr. Indran wants to invest his money in a conservative steady income generating
investment vehicles. Your suggestion to him would be to put his money in;
i. Treasury Bills, Sukuk Bonds, REITs,
ii. Preference Shares, Warrants, Derivatives.
iii. Fixed Income Securities, Government Bonds, Corporate Bonds.
iv. Commodities, Futures, REITs.
a. i,ii,iii,iv
b.i,iii
c. ii,iii
d.iii,iv
4. What type of investment allows an investor to buy a right to purchase or sell a security at a
fixed price within a specified time period?
a. Shares
b. Options
c. Property options
d. Unit trust options
5. Treasury bills are generally considered to be of no risk. When is this NOT true?
a. When the share market drops
b. When the bank interest rate falls
c. When the property market crashes
d. When the country is politically unstable
6. Which type of investments offer bigger capital and income growth?
a. Investments with no risks
b. Investments with little risks
c. Investments with higher risks
d. Investments with highest risks

26

7. Who are appointed to supervise the way a company performs its obligations in respect of
debenture stocks?
a. Bankers
b. Lawyers
c. Trustees
d. Arbitrators
8. What are the types of investments of property funds?
a. Real estate only
b. Property shares only
c. Individual property only
d. Real estate and property shares
9. Which of the following is/are NOT readily available for most individual investors?
a. Property
b. Investment trusts
c. Annuities and pensions
d. Buying up a new company
10. What is the main disadvantage of property funds compared to equity funds?
a. Property has lower liquidity
b. Property carries a lower risk
c. Property funds are a safer investment
d. Property funds are difficult to sell at a profit
11. Which funds are at the top end of the risk-return graph?
a. Cash funds
b. Equity funds
c. Balanced funds
d. Managed funds
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

27

CHAPTER 4 : A WORLD SCENARIO

Objectives:
- To be aware of the history and establishment process of investment-linked life
insurance.
- To be familiarize of the establishment process of investment-linked life insurance.
History:
1957 - 1st policy issued in UK. known as unit-linked policy.
1976 - In US, known as variable life policy.
1992 - In Spore, launched by Prudential currently, market leader.
1997 - Berjaya Prudential Assurance Bhd (1st Launch)
1998 - Maybank Life Assurance Bhd.

The term Investment-linked in Malaysia shall be similar to the term Unit-Linked in

the United Kingdom and to the term Variable Life in the United States.
The first new generation investment-linked life insurance product was the Hambro
Whole Life Plan introduced in 1977
The introduction of the Enhanced Investment Scheme (EIS) by the Central Provident
fund in 1993 is one of the factors which contributed to the expansion of the
investment-linked insurance business in Singapore
Insurance agents and agency office employees dealing in variable life insurance must
register with the National Association of Securities Dealers
Insurance companies or the sales company dealing in variable life insurance must
register as a broker-dealer
Insurance agents and agency office employees dealing in variable life insurance
must pass an examination in securities business
Summary of Key Points:
-History of Investment-linked policy
-Factors affecting expansion of Investment-linked products
-Registration Rules and Organizations
-Regulated exams that need to be passed by the insurance industry players
28

Sample Questions
1. The first Investment-Linked Insurance plan was introduced by which company in Malaysia?
a. Mayban Life Assurance Berhad
b. Syarikat Takaful Malysia Berhad.
c. Berjaya Prudential Assurance Berhad.
d. Malaysian Assurance Alliance Berhad.
2. The Investment-Linked Life insurance policy was introduced to these countries 30 years ago
EXCEPT:a. United States Of America.
b. United Kingdom.
c. Malaysia.
d. Singapore.
3. Adam lives in the UK. He was impressed by the Investment-Linked Life Insurance policy
that you had bought when he was down for a holiday in Malaysia. He now is in London and
wants to buy a similar plan. What plan should he say that he wants to buy to his agent?
a. Investment-Linked Life Insurance Plan.
b. Universal-Variable Life Insurance Plan.
c. Variable Life Insurance Plan.
d. Unit-Linked Life Insurance Plan.
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

29

CHAPTER 5 : TYPES OF INVESTMENT-LINKED LIFE INSURANCE

PRODUCT
Objectives:
- To understand the nature of investment-linked life insurance.
- To understand the charges and fees imbued in investment-linked life
insurance.
- To understand the various types of investment assets
- To be knowledgeable of the guidelines governing risk based capital.
How do Investment-linked Life Insurance Policies Work

Investment
linked
Value of Policy

Special
Unitised Fund

Pay premium to
purchase fund

Fund managed
by Insurer

Policyholder

Directly linked
Investment

Protection
Death
TPD
PA
Health

Investment-linked insurance offers investors policies where:

Premiums are used to purchase funds
Value of policy linked to units in a special unitised fund
Value of units directly reflect the value of the underlying fund
Wide range of investment modes covering equity, fixed
interest and money market

30

How do Investment-linked Life Insurance Policies Work

Single Premium/Top Up

Policy Owners Units

Surrender
Withdrawal
Death claim

Life Office
Marketing & set up
expenses

Cancel units to pay

Mortality charges
& policy fee
Charges
Policy Fee
Annual fund management fee
Bid-offer spread
Reduction in allocation of units -Unallocated premiums
Initial units
Mortality charges
Surrender charges
Policy Fee
to cover the administrative expenses of setting up the investment-linked life
insurance policy
Annual Fund Management Fee
Investment management charges
Deduction of 05% to 2% annually from fund accumulated
Mortality Charges
Dependent on age
Cover mortality cost of the policy
Can be a recurrent charge (e.g. monthly) funded by cancellation of units on a
regular basis
Allows policy owner to vary sum assured over time

31

Surrender Charges
Charge deducted from value of units at surrender
Represents initial expenses incurred but yet to be recovered
The initial units
All of the policy owners premium allocated to buy investment units
Units allocated in early years is known as initial units.
Initial units will have higher annual management charges such as 6% per annum
throughout the term of the policy contract
Means that their cash value of the initial units is much lower than their face value
for the years
Is much less commonly used these days than in the past
The protection cost:

Are generally covered by cancellation of units in the fund

Are generally met by explicit charges stipulated openly in the policy terms
Vary with age of policy owner and level of cover
Offer
Price
Selling
price of
units

(-)

Bid price

Bid Offer
Spread

Price at which
the units are
cashed when
the policy
matures,
surrendered or
used to pay
charges

Reduction Allocation (Unallocated Premium)

Part of the policy owners premium is set aside for unallocated premium to meet
marketing (e.g commission) and policy setting up expenses
Types of Investment-linked Insurance Policies

Single Premium Investment-linked Whole Life Plan

Regular Premium Investment-linked Whole Life Plan
Investment-linked Individual Pension Plan
Investment-linked Permanent Health Insurance
Investment-linked Dread Disease Insurance
Investment-linked Education Insurance
Investment-linked Takaful Policies
32

Single Premium Investment-linked Whole Life Insurance Plan

Long-term saving and investment

125% of the single premium paid
Min amount RM3,000
There is no fixed term
Top-ups or injection are allowed

Regular Premium Investment-linked Whole Life Insurance Plan

Premium paid at regular intervals, monthly, quarterly or annually

Two distinct purpose:

Investment
Life protection

Investment-linked Individual Pension Plan

Involves a high allocation of the

premium through simply accumulating the fund

to retirement

Investment-linked Permanent Health Insurance

Provide health coverage

Contains cash value
Investment-linked Dread Disease Insurance

Advances the whole of the face amount in the event of the diagnosis
Risk cost is reviewed on a regular basis
Investment-linked Education Insurance

Provide funds for future education

Main selling policies in almost all insurance companies in Malaysia
Investment-linked Takaful Policies

Family takaful plan that combines investment and takaful cover

Provides death and disability benefits
Policy holder decides on contributions allocations towards protection and
investment

33

Risk Based Capital Guidelines

Initial start period: I Jan 2009
Objectives
Framework to ensure adequate capital resources to reflect underlying risk profiles
of individual insurers.
To manage business more effectively, by identifying sources of risk, implement
appropriate measures to mitigate, manage or remove risks.
Eg: Insurers with high risk assets will be required to hold more capital reserves.
Insurers with low Capital Adequacy Ratio (CAR) have to inject additional capital.
Criterias
Enable insurers to achieve sustainable profitability whilst safeguarding
policyholder interest
Enhance overall risk awareness
Improved the quality of operational risk and corporate governance.
Insurers enhance operations to improve their risk profile:
i. Improve quality of risk selection and underwriting
ii. Reduce volatility in loss experience through better claims management.
iii. Greater emphasis on product design and pricing
Ensure good risk management practices proper monitoring and control of
investments. Thus, insurer are required to:
i. Establish adequate internal controls
ii. Include rigorous audit procedures
iii. Install effective procedures
iv. Derive suitable plans
v. Undertake regular stress testing
vi. Ensure key staff have appropriate levels of skills, experience, expertise and
integrity

34

Summary of Key Points:

-Modus operandi of Investment-linked policy: Protection and Investment
- Protection:
(a) Death Benefits (Benefits receivable in the event the insured die)
(b) Total Permanent Disability; TPD (Benefits receivable in the event the
insured experience TPD. E.g: Full Body Paralysed)
(c) Personal Accident; PA (Benefits receivable in the event the insured
met with accident. E.g: Injury or hospitalisation incurred due to
accident)
(d) Health (Benefits receivable in the event the insured being diagnosed
with health problem. E.g: Heart Attack)
-7 Types of investment-linked policy (Single Premium Investment-linked
Whole Life Plan, Regular Premium Investment-linked Whole Life Plan,
Investment-linked Individual Pension Plan, Investment-linked Permanent
Health Insurance, Investment-linked Dread Disease Insurance, Investmentlinked Education Insurance, Investment-linked Takaful Policies)
- Risk Based Capital enhance overall risk awareness by ensuring insurers to
achieve sustainable profitability whilst safeguarding policyholder interest
-Risk Based Capital guidelines objectives and criterias

35

Sample Questions
1. What are the fees and charges that are levied on an Investment-linked product?
i. Policy Fee, Management Fee, Buying Price, Surrender Charges.
ii. Unallocated Premiums, Selling price, Withdrawal Charges, Free look Charges.
iii. Bid Price, Offer Price, Mortality Charges, Initial Units.
iv. Allocated Premium, Withdrawal Charges, Mortality Charges, Initial Units.
a. i,ii only.
b.i,iii only.
c. i,ii,iii only.
d.ii,iii,iv only.
2. What are the following supplementary benefits that can be added to an investment-linked
fund?
i.Dread Disease Rider
ii.Loan Cancellation Rider
iii.Medical Benefits Rider
iv.Holiday Planner Rider.
a. i,ii,iii.
b.i,iii,iv.
c. i,iii.
d.ii,iii,iv.
3. Which of the following statement about Investment-Linked Takaful Product is TRUE?
a. This product was solely created to satisfy the needs of all Muslims in Malaysia so as to
provide a savings and protection program.
b.Conventional insurance companies also provide Takaful cover to the Malaysian public.
c. Due to the importance placed in Syariah compliance, Investment-Linked Takaful is generally
unpopular and is only bought by religious people.
d.Takaful products do not have the kind of flexibility that other Investment-linked products
have.
4. Using the single pricing method, calculate the cash value of 4,000 units at a unit price of
RM1, a mortality charge of 2% and a RM100 policy fee.
a RM3,500
b RM3,800
c RM3,820
d RM3,620

36

5. What does the investment-linked permanent health insurance offer?

I Health cover on disability income
II Medical expenses
III Death cover
IV Cash value
a I and II
b I and IV
c II and III
d III and IV
6. What type of investment-linked insurance plan provided practically NO life protection at all?
a Single premium insurance plan
b Regular premium insurance plan
c Investment-linked individual pension plan
d Investment-linked permanent health insurance
7. How can an ordinary investor gain access to well diversified investment-linked funds
managed by professional investment managers with proven track records?
a By buying an investment-linked life policy
b By buying a whole life with-profit policy
c By buying an endowment life policy
d By buying an annuity
8. The Takaful investment-linked life plans are developed by
a takaful companies
b composite insurers
c Bank Negara Malaysia
d Syarikat Takaful Malaysia Sdn. Bhd.
9. The Risk-Based Capital Framework for insurers was implemented on
a 1 January 2008
b 1 January 2009
c 1 February 2009
d 1 October 2009
10. The _______ of an investment-linked life insurance policy must be at least 18 years old.
a nominee
b assignee
c life assured
d policy owner
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

37

CHAPTER 6: STRUCTURE OF INVESTMENT - LINKED FUNDS

Objectives:
- To understand the structure of investment-linked life insurance.
- To understand the types of investment-linked funds.
- To instill a sense of social and professional responsibility in those selling investmentlinked life insurance products.
Investment - linked funds can be structured into:

Accumulation units
Distribution units

Distributio
n

Accumulation

Capital

Capital
Fund

Investment

Income
In long term, unit price will rise

Accumulation Units

Investmen
t

Fund

Income
Unit price unchanged

Distribution Units

Investment income is ploughed back Investment income is used to purchase

into the fund. Unit prices will increase additional units to be distributed to the
over the long term.
policyholders. Price of units remains
unchanged but policy owner gets more
units.
Types of Investment linked Funds

Cash funds
Equity funds
Bond funds
Property funds
Specialized funds
Diversified funds
The number of unit purchased

38

TYPE

INVESTMENT AREAS

Cash Funds

Equity Funds
Bond Funds

Property Funds

Specialized
Funds

Diversified
Funds

Balance Funds

REMARKS

Cash
Bank Deposits
Stock, shares
Government &
corporate bonds
Fixed income
instruments
Real estate
Property trust

Low risk, secure

Geographical area
Specialized
industries
All kinds of assets
E.g.: equity, bond,
cash
Funds invest fixed
proportion of
specified assets.
70% in equity
30% in bond

Risk of Currency
Exchange

Capital Appreciation

Illiquid assets.

Risk
Equity Funds
Managed Funds

*
*

Bond Funds

*
*

Balance Funds

Cash Funds

Return

Risk & Return based on Type of Funds

Switching

Switch part or all of the investment from one fund to another fund
For the purpose of retirement and education fee planning
Switches between funds may : - Be offered free of charge
- Be offered free of charge for a limited number of switches
- Incur a specific charge for each and every switch

39

Summary of Key Points:

-Investment-linked structure (Accumulation and Distribution)
- Types of Investment-linked Funds (Cash Funds, Equity Funds,Bond Funds ,
Property Funds, Specialized Funds, Diversified Funds, Number of Unit Purchased)
-Risk and Return on Types of Funds
-Funds switching criterias

40

Sample Questions
1. Investment-linked funds can be structured into two ways, namely accumulation units and
distribution units. In accumulation units, the investment income of the funds is
a. Ploughed back into the fund, thus the unit prices will increase over the long term
b.Ploughed back into the fund, thus the unit prices will decrease over the long term
c. Used to purchase additional units to be distributed to the policy owners, thus the unit price
remains unchanged but the policy owners get more units
d.Used to purchase additional units to be distributed to the policy owners, thus the unit price
decreases and the policy owners get more units
2. In risk-return profile of cash funds, bond funds, balanced funds, managed funds and equity
funds, a risk-return graph will show that
i. higher return normally comes with lower risk
ii.higher return normally comes with higher risk
iii.at the top end of the graph are the equity funds
iv. the relatively risk less cash funds sit at the bottom end of the graph
a. i,ii&iii
b. i,ii,iv
c. i,iii,iv
d. ii,iii,iv
3. The switching facility under investment-linked life insurance policies is very useful
_______.
a. For the purpose of assets planning by the trustee
b. For the purpose of profit planning by the life policies
c. For the purpose of financial planning by the policy owners
d. For the purpose of sales planning by the fund managers
4. In _________, the investment income of investment-linked life insurance policy is ploughed
back into the fund.
a an accumulated units fund
b an accumulated bonus fund
c a life insurance reserve fund
d an accumulated interest fund
5. In what ways is an investment-linked fund divided amongst the respective policyholders?
a The fund is divided into a number of units
b The fund is divided by the number of the policyholders.
c The insurer declares the value according to the sum insured
d The reinsurer declares the value according to the sum insured

41

6. Investment-linked funds can be structured in two ways namely and ___

a terms units; annuity units
b warrants units; rights units
c investment units; mortality units
d accumulation units; distribution units
7. Investment-linked funds normally consist of what kinds of investments?
I Secured equity stocks
II Fixed interest securities
III Certain types of bonds only
IV A wide range of equity stocks
a I and III
b I and IV
c II and III
d II and IV
8. What will ultimately affect investment decision?
a Property pricing
b The level of available funds
c Fluctuations in the share market
d The availability of management advice
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

42

CHAPTER 7 : HOW INVESTMENT-LINKED INSURANCE PRODUCTS

WORK
Objective:
- To understand the working of investment-linked life insurance.

The Working Of Investment -Linked Life Insurance

Single premium/Top-up

Allocated premium
used to buy units
from
investment-linked
funds at offer price
Withdrawals
Surrender claim
Death claim

Unallocated
premium
Life Office

Unit which
belongs
to policy owner

To meet marketing
and set-up
expenses
Cancel units
(To pay mortality
charge & policy fee)

The value of each unit

Example:

Investment-linked fund is RM1 million

Number of units is 100,000 units
The value of each unit = RM10 per unit
(i.e. RM 1 million divided by 100,000 unit)
Policy owners are allowed to top-up their policies at any time, subject to a minimum
amount.
Cash Value
= (Number of units x Unit price) - (Mortality charge + Policy Fee)
= (3,800 units x RM 1.00) - ([3,800 units x RM1.00 x 1%] + RM100)
= RM3,800 - (RM38+RM100)
= RM3,800 - RM138
= RM3,662
43

Methods of Calculating Benefits

Single Pricing Method

Dual Pricing Method

1. Number of units
2. Cash Value
3. Annual Yield on Gross Premium

Return on Gross Premium

Annual yield
Case Study 1 : Single Pricing Method
Premium
= RM4,000
Unit Price
= RM1.00
Service charge = 5%
Policy fee
= RM100
Mortality charge = 1%
Number of Units
= RM4,000 (RM4,000 X 5%)
=

RM1.00
RM4,000 RM200

RM1.00
= 3,800 units
Step 2:
Cash Value
= (Number of units x Unit price) - (Mortality charge + Policy Fee)
= (3,800 units x RM 1.00) - ([3,800 units x RM1.00 x 1%] + RM100)
= RM3,800 - (RM38+RM100)
= RM3,800 - RM138
= RM3,662
Assume unit price after 10 years is RM1.97

44

Step 3:
Ending value of investment
= (Number of units X Unit price ) (Mortality charge + Policy fee)
= (3,800 unit X RM1.97) ([3,800 unit X RM1.97 X 1%] + RM100)
= RM7,486 (RM74.86 + RM100)
= RM7,486 RM147.86
= RM7,311.14
Beginning value of investment
= RM4,000
Step 3.2:
RGP = Ending value of investment
Beginning value of investment
= RM 7311.4 = RM 1.828
RM 4000.0
Annual yield = (RM1.828)1/10 -1
= 0.062 or 6.2%
Case Study 2 : Dual Pricing Method
Premium
= RM4,000
Unit Price
= RM1.00
Bid-offer spread = 5%
Policy fee
= RM100
Mortality charge = 1%
Step 1:
Number of Units
= RM4,000
RM1.00
= 4,000 units
Bid price = RM1.00 X (100% - 5%)
= RM1.00 X 95%
= RM0.95
Cash Value = (Number of units X Bid price) (Mortality charge + Policy fee)
= (4,000 unit X RM0.95) ([4,000 unit X RM0.95 X 1%] + RM100)
= RM3,800 (RM38 + RM100)
= RM3,800 RM138
= RM3,662
45

Top Ups
Policy owners are allowed to top-up their policies at any time, subject to a minimum
amount.
Withdrawal Benefit

Multiply by the unit price for the single pricing method

Multiply by the bid price for the dual pricing method
Example:
Unit price (for single pricing) / Bid price (for dual pricing)
At time t = RM2.00
If a policy owner withdraws 500 units,
500 units x RM2.00 = RM1,000.00
Surrender Value

Allows policy owners to surrender their policy units at any time

Surrender charges are deducted from the value of units at surrender
Death Benefit

The sum assured chosen by the life assured or the value of the units in the fund at
the bid price, whichever is higher

The sum assured chosen by the life assured plus the value of units in the fund at
the bid price

The Working Of Investment -Linked Life Insurance

Unit Benefit
RM

Death Benefit

Unit Benefit
Sum Assured
Sum Assured

years
Death Benefit : Unit Value or
Sum Assured (whichever is
higher)

years
Death Benefit : Unit Value +
Sum Assured
46

Regular Premium Policies

Operate under similar principles as single premium policies

Summary of Key Points:

-Modus operandi of Investment-linked premium, claims, and withdrawal
-Allocated and unallocated premium
-Methods of calculating benefits:
(a) Single Pricing Method (Number of units, Cash value, Ending value of
investment, Return on Gross Premium, and Annual Yield)
(b) Dual Pricing Method (Number of units, Cash value, Withdrawal benefit,
Surrender Value, Death Benefit)

47

Sample Questions
1. Policy fee payable by an investment-linked insurance policy owner is to cover
______________.
a. The mortality costs of the investment-linked life insurance policy
b. The administrative expenses of setting up the investment-linked life insurance policy
c. The handling charges by professional investment managers
d. The price for each unit bought under the investment-linked life insurance policy
2. Which one of the following statements about investment-policies are TRUE?
i. Offer price is used to determined the number of units to be credited to the account
ii. The margin between the bid and offer price is used to cover the marketing cost of the policy
iii. The policy value is calculated based on the bid price of units allocated into the policy
a. i&ii
b. i&iii
c. ii&iii
d. i,ii& iii
3. Single premium investment-linked life insurance policy:
a. Has no death benefit
b. Has cash value
c. Must be issued with a minimum of RM 3,000
d. Must be issued with a minimum of RM 5,000
4. The payment made to the insured upon the cancellation of a policy is called
a surrender value
b penalty payment
c investment value
d return of premium
5. The charges deducted from the benefits received by a policyholder are
I the policy fee.
II the mortality charge.
III an additional 5% charge.
IV the administration charges.
a II and III
b I, II and III
c I, II and IV
d II, III and IV
6. In investment-linked insurance, when is the investment premium placed in a unitized fund?
a At the time the premium is paid
b At the time the policy is taken up
c At the time the post-dated cheque is received
d At the time the policyholder agrees to pay the full premium
48

7. At which price does the policyholder buy the units in an investment-linked life insurance
policy?
a The bid-offer price
b The cash price
c The unit price
d The bid price
8. The structure of the charges of an investment-linked life policy is
I stipulated openly by life office.
II specified in the policy document.
III made known to policy owner at the outset.
a I only
b I and II
c II and III
d I, II and III
9. An investment-linked life insurance policy has a free-look provision of at least _______
days.
a 14
b 15
c 21
d 30
10. If a policyholder buys units on the dual pricing basis, how many units can he get by paying
RM10,000 for a unit priced RM2?
a 5,000 units
b 6,000 units
c 8,000 units
d 10,000 units
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

49

CHAPTER 8: BENEFITS AND RISKS OF INVESTING IN

INVESTMENT - LINKED FUNDS
Objectives:
-To understand the reason for people to invest in investment-linked life insurance.
-To be knowledgeable on the characteristics of the investment-linked life insurance.
Benefits And Risks Of Investing In Investment - Linked Funds

Flexibility

Pooling/
Diversification
Administration

Why Do People
Invest?
Expertise

Access
Risk of Investing in Investment-linked Funds
1. Investment Risk
The sum assured is always guaranteed but the unit value is not guaranteed
2. Cash value & maturity benefit
Based on value of units. It will rise and fall drastically according to stock market
volatility (for equity funds)
3. Charges
Characteristic

Investment-linked policies generally have a larger exposure to equity investment

than with profits and other conventional policies

Commissions and office expenses are met by a variety of explicit charges, some of
which are variable

The policies can be used for investment, as source of regular savings and
protection

The cash values and protection benefits are determined by the investment
performance of the underlying assets

50

Summary of Key Points:

-Characteristics of Investment-linked policies
-Risk of investing in Investment-linked funds
-Benefits of investing in Investment-linked funds

51

Sample Questions
1. The disadvantage found in an investment-linked policy are;
i. It is subjected to the smoothening process of the company.
ii. It is subjected to no charges if the company does not make any investment returns.
iii. It is subjected to fixed charges specified in the policy document.
iv. It is subjected to the vagaries of the stock market.
a. i,iii only.
b. i,ii only.
c. ii,iv only.
d. iii,iv only.
2. The flexibility offered by the Investment-Linked policy includes the following;
i. Policy owner can ascertain the level of premium that needs to be paid.
ii. Policy owner can decide to add single or multiple top-ups.
iii. Policy owner is subjected to a definite amount of premium
iv. Company will not charge any fees for premium holidays taken.
a. i,iv only.
b. i,iii only.
c. i only.
d. i,ii only.
3. The benefits of an Investment-Linked policy are as follows;
i. The ability of the company to pool and diversify.
ii. The flexibility it offers.
iii. The minimal charges levied on the policy.
iv. The insulation of market risks by the company for the client.
a. i,ii only.
b. ii,iv only
c. i,iii only.
d. iii,iv only.
4. Under the calculation of death benefits on unit value or death cover basis, what are the
criteria for payment upon death?
a. The unit value
b. The sum assured
c. The unit value plus sum assured
d. Unit value or death cover, whichever is higher
5. What is the minimum death benefit for investment-linked life insurance policies?
a RM3,000
b RM5,000
c RM10,000
d RM12,000

52

6. What distinguish investment-linked insurance policies from unit trust products?

a The minimum death benefit is provided under only investment-linked policies
b There is no difference; both are investment vehicles
c There is no guarantee for unit trust products
d Unit trust products incur higher cost
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

53

CHAPTER 9: COMPARISON BETWEEN INVESTMENT-LINKED LIFE

INSURANCE & TRADITIONAL WITH PROFIT
LIFE INSURANCE PRODUCTS
Objectives:
- To understand the similarities and differences of investment-linked life insurance and
traditional with profit life insurance products.
- To understand the risks and benefits of investment-linked life insurance.
Comparison Between investment-linked Life Insurance & Traditional With Profit Life
Insurance Products:
Without profit

Returns & Risk

- Fixed amount payable.
It does not depend on
investment performance
- No investment risk
Premium Computation
- Sum assured driven
- Fixed at inception
based on sum assured

With profit

Returns & Risk

- Bonuses are not
directly linked to life
office investment
performance
- Life office smoothen the
peaks & troughs of
investment return
- Types of bonuses:
cash, reversionary &
terminal
Premium Computation
- Sum assured driven
- Fixed at inception
based on sum assured +
expected bonus payable

Investment-linked

Returns & Risk

- Policy values according to
the underlying assets
- Return & risk directly
transferred to policyowners
Premium Computation
- Account driven
- Premium flexibility:
payment, top-up, premium
holiday
- Life office has right to
vary some of the charges

The Risk
The risk of fluctuations of the unit price of the policy that may rise or fall, depending
on the current market situation
The risk of the cash and maturity values of the policy being adversely affected if the
bid price of the units falls
The policy owner who are risk averse should buy investment-linked life insurance
policies with low equity investment
The Benefits

The policy benefits are directly linked to the investment performance of the
underlying assets

The fund provides a highly diversified portfolio, thus, lowering the risk of investment
54

 The fund relieves the investor from the hassle of administering his/her investment
The fund enables small investor to participate in a pool of diversified portfolio in
which he/she, with low investment capital is unlikely to have acceded to

The investment-linked policyholder can vary his premium payments, take premium
holidays, add single premium top-ups and change the level of sum assured easily

The investment-linked policyholder can have access to a pool of qualified and

trained professional fund managers

Term Assurance
Term Assurance policy is not suitable for investment purpose because it is meant
solely for protection needs
Traditional With Profit Life Insurance
The allocations to policy owners in the form of bonuses:
i.
Are not directly linked to the life offices investment performance
ii. Have already been smoothened by the life office
iii. Do not have the peaks and troughs of investment return as in good investment
years of life offices, contributions have been made to reserves and vice versa
Reversionary Bonus
Is paid at the time of death under the life policies or on maturity of the policies
Summary of Key Points:
-Comparison between Investment-linked and traditional life insurance (with and without
profit)
-Risk of investing in Investment-linked funds (fluctuations of the unit price, cash and
maturity values, low vs high equity investment-link life insurance policies)
-Benefits of investing in Investment-linked funds (highly diversified, policy benefits
directly linked to underlying assets, enable small investors to invest etc)

55

Sample Questions
1. The fundamental differences between traditional with-profit life insurance policies and
investment-linked life insurance policies include ________ .
i. Investment-linked life insurance policies are less likely to offer more choice in terms of the
type of investment funds
ii. The investment element of investment-linked life insurance policies is made known to the
policy owner at the outset and is invested in a separately identifiable fund which is made up
units of investment
ii. Investment-linked life insurance policies offer the potential for higher returns
iii. Traditional with profits life policies aim to produce a steady return by smoothing out
market fluctuation
a. i,ii,& iii
b. i,ii&iv
c. i,iii,iv
d. ii,iii,iv
2. The following statement about surrender value under traditional with-profit life insurance
products is TRUE:
a. The amount of surrender value is usually higher than the amount under without profit
policies and it varies with the age of the assured, being lower at older age
b. In the case of with-profit policies, the net cash surrender value includes the surrender value
of the reversionary bonus up to the date of surrender
c. Other than term insurance of more than 20 years, limited payment is made when such
insurance policies are surrender
d. When a with-profit insurance policy is surrender, the surrender value is calculated by
multiplying the bid price with number of units.
3. The criteria for comparing traditional life insurance products with investment-linked life
insurance products include ______________
i. The life offices management expertise
ii. The products investment returns and risks
iii. The policies premium computation
iv. Death benefit provided under the policies
a. i,ii,&iii
b. i,ii,&iv
c. i,iii,& iv
d. ii,iii, & iv

56

4. Name some of the criteria used to compare conventional insurance products with
investment-linked insurance products.
I Investment risks
II Investment return
III Surrender benefit
IV Management expenses
a I and II
b I, II and III
c I, II and IV
d II, III and IV
5. Name some of the financial instruments used by investment-linked funds.
I Cash funds
II Diversified funds
III Specialized funds
IV Money market funds
a II and IV
b I, II and III
c I, II and IV
d I, II, III and IV
6. Under the current investment-linked whole life plans the policy has total flexibility to alter a
policyholder's need for investment and protection in accordance with the
a market trend
b change of law
c insurers suggestion
d policyholder's wishes
7. Under a regular premium investment-linked insurance plan withdrawals and surrender are
a not allowed
b allowed after a certain period
c allowed after the premium is fully paid
d allowed when the investor becomes invalid
8. Investment-linked life insurance policies
a will never suffer any investment losses
b lack smoothing process of traditional with-profit life policies
c have a greater smoothing process than traditional with-profit life policies
d always receive greater investment returns than traditional with-profit life policies
9. Which type of policy does NOT have the surrender benefit?
a A term life policy
b A whole life policy
c An endowment policy
d A policy without profit
57

10. What is the difference between endowment assurance and whole life assurance?
a There is no difference
b Whole life policies only pay upon the death of the insured
c Endowment assurance usually has a shorter term and an early maturity date
d Whole life policy pay upon the policyowners retirement from employment
11. Once declared, the ____ can be withdrawn at once by the policyholder
a cash bonus
b terminal bonus
c survival benefit
d reversionary bonus
12. Traditional guaranteed without-profit life insurance products do NOT include
a temporary assurance
b investment-linked life insurance
c non-participating whole life insurance
d non-participating endowment insurance
13. What are the DISADVANTAGES of an investment-linked life policy as compared to a
conventional with profit life policy?
I An investment-linked life insurance policy is more flexible.
II The policyholder shoulders all the risk of investment himself.
III There are few guarantees under an investment linked life policy.
IV In times of poor market sentiments, the policyholder of an investment-linked life insurance
policy can lose all his investment.
a II and III
b I, II and III
c II, III and IV
d I, II, III and IV
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

58

CHAPTER 10 : TAXATION & LAW COVERING INVESTMENT-LINKED

INSURACE PRODUCTS
Objective:
- To familiarize on the taxation and law that governs investment-linked life insurance.
Taxation of Investment Linked Life Insurance

Same as other forms of life insurance policies.

RM6000
RM3000

Tax relief is allowed in respect of premiums paid on life insurance and deferred
annuities which is on the

Individuals life
The life of the spouse of the individual
The joint lives of the individual and his/her spouse
Taxation Treatment

Capital gain is not taxable

Capital losses is not tax deductible
If personal tax rate is less than corporate tax rate, shareholder is entitled to
rebate on the portion of the dividend paid as tax

Income Tax Act, 1967

Taxation & Law Covering Investment linked Insurance Products

Law Covering Investment-Linked Life Insurance
Insurance Act 1996

The protection of public interest

The promotion of fairness and equity
The fostering of competence
The playing a development role

59

Investment linked Insurance Business

Definition Section 7(2)(b) Insurance Act, 1996:
The effecting and carrying out of a contract of insurance on human life or annuity
where the benefits are, wholly or partly, to be determined by reference to the value, or
the income from, property of any description or by reference to fluctuations in, or in an
index of, the value of property of any description
BNM Guidelines

Requirement for approval

Separate funds
Investment limits
Valuation of assets
Valuation of liabilities
Age limit of Policy owners
Free-Look Provision
Minimum death Benefit
Minimum premium payment
Intermediation
BNMs Circular JPI: 1/1997

Specification of Assets for the purpose of a Licensed Insurers Margin of

Solvency

Is not applicable to the investment-linked funds, in view of the nature of the

business that investment-linked funds could be invested 100% in equities

Specifies the extent of a class of assets or description of assets that may be

taken into account for the purpose of a licensed insurers margin of solvency

Age Limit & Free Look Provision

Age limit of policy owner at least 18 years old

Free look provision 15 days
Summary of Key Points:
-Taxation of Investment-linked insurance
-Tax relief of Investment-linked insurance
-Law Governing Investment-linked insurance and Investment-linked insurance
business. E.g.: BNM guidelines (Circular JPI: 1/1997)
60

Sample Questions
1. The following statements about taxation are true, EXCEPT
a. Capital gain is not taxable
b. Capital losses is not tax deductible
c. Dividend income is not subjected to withholding tax according to the prevailing corporate
tax rate
d. If personal tax rate is less than corporate tax rate, shareholder is entitle to rebate on the
portion of the dividend paid as tax
2. The principal legal document regulating income tax in Malaysia is the __________
a. Income Tax Act , 1967
b. Insurance Act, 1996
c. Contracts Act, 1950
d. Companies Act, 1965
3. Under the free-look provision
a. There is no free-look provision in an investment-linked policy as there is no life Insurance
b. The agent can decide when he wants to deliver the policy
c. The agent can decide within 15 days of the issuance of the policy to demand a full refund of
all his units at offer price
d. A policy holder has only 15 days from the date he receives the policy document to examine
and decide the suitability of the policy and demand a full refund
4. With regard to Bank Negara Malaysia's circular JP: 1/1997, what factors must be taken into
account to measure a licensed insurer's margin of solvency?
I The extent of liability of the insurer.
II Class of assets of a licensed insurer.
III Description of assets of a licensed insurer.
IV The extent of a class of assets of a licensed insurer.
a I, II and II
b I, II and IV
c II. III and IV
d I, II, III and IV
5. The principal legal document regulating income tax in Malaysia is the
a Company Act, 1965
b Insurance Act, 1996
c Income Tax Act, 1967
d Income Tax Act, 1976

61

6. The premium relief is allowable when the _________ is on the life of the spouse of the
individual.
I life insurance
II deferred annuity
III general insurance
a I only
b II only
c I and II
d II and III
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

62

CHAPTER 11: IDENTIFYING & SATISFYING CUSTOMERS NEEDS

Objectives:
- To understand the process of providing advice prior to investment-linked life
insurance sale.
- Apply the process relevant knowledge.
- Giving financial advice to meet the customer need.
Process of Providing Advice
Establishing
Relationship

Gathering relevant
financial data

Process of
providing advice
involving 3 stages

Establishing current
financial position and
goals
Developing plans and
strategies to achieve
goals

Discuss possible
recommendations

Implementation of
agreed recommendation

Monitoring the portfolio

63

Step 1: Establishing Relationship

Primary process:
Establishing a relationship (trust)
with the client

Convince customer on the assistance that could be offered by the agent

Comprises of various methods (Normally taught by agents managers
Important process as it enables the agents to do preliminary screening on the
clients financial objectives and goals.

Step 2: Gathering Relevant Financial Data

Importance:
Assist the agent to analyze the customers need

This includes:
(a) Customer personal details
(b) Customer financial position
(c) Customer financial plans and objectives?
(d) Current types of investments and insurance are in force?
(e) Customer attitude towards risk?
Step 3: Establishing current financial position and goals

Analyzing those datas (relevant

financial data) and come up with
an analysis that helps to
establish the customers current
financial position and future
goals.
64

This includes:
(a) Needs & priorities
(b) Type of investment-linked life insurance policies and investment fund
(c) Financial ability
(d) Refer to another expert advisor in a specialist field
Step 4: Developing plans and strategies to achieve goals

Importance:
Develop pertinent plans that will help the
customer to achieve their goals

Analysis on the matter will derive various recommendations that will satisfy the

customers goals on areas such as:

- Adequate insurance coverage for liability cancellation, basic protection,
on medical cover, disability cover, dread diseases cover etc.
- Planning for childrens education
- Retirement Planning
- Asset Accumulation
- Estate Planning

Step 5: Discuss Possible Recommendations

Subsequent to the development

of the plan, agents shall discuss
on the recommended plans in
detail with the customers.

This includes:
(a) Explanations on the recommendations
(b) Provide the options AND alternatives
(c) Arrange for review at regular intervals
65

Step 6: Implementation of Agreed Recommendations

As the client agreed to a specified

recommendation, implementation is done as per
discussion and any changes must be
communicated to client prior to putting it
through

Requires time and discipline of the customer in order for it to be successful

Monitoring The Portfolio

Monitored periodically from time to time

Customer sould receive the policy
progress information regularly
Unexpected changes might occur at any
point in time. Eg: Salary rise/fall, New
born child

Actions needed:
- Assisting customer in switching and adjustments to ensure that the customer gets
the best possible return from the policies.

Summary of Key Points:

- 7 steps in realizing customer need based policy (ESTABLISHING relationship with
the client, GATHERING all relevant financial data, ESTABLISHING current financial
position and goals, DEVELOPING plans and strategies to meet the goals., DISCUSS
possible recommendations, IMPLEMENTATION of the agreed recommendations,
MONITORING the portfolio)
- All the steps must be done turrently to obtain best results.
- Every step must be practiced in accordance to the sequence
- Failure to follow the steps in a sequential basis may incur loss of trust, business, etc.
66

Sample Questions
1. Arrange the financial planning process in order;
i. Establishing relationship with the client.
ii. Discuss possible recommendations.
iii. Establishing current financial position and goals.
iv. Implementation of the agreed recommendations.
v. Monitoring the portfolio.
vi. Gathering all relevant financial data.
vii. Developing plans and strategies to meet the goals.
a. vi,i,ii,iii,iv,v,vii.
b.i,vi,iii,vii,ii,iv,v.
c. i,ii,iii,iv,v,vi,vii.
d.i,vi,iii,ii,vii,iv,v.
2. The CFF will address the following areas;
i. Customers Personal and Dependents Details.
ii. Life and Financial Priorities and Goals.
iii. Risk Return Ratio.
iv. Net Worth Analysis.
a. i,ii,iii.
b.i,ii,iv.
c. i,iii,iv.
d.ii,iii,iv.
3. Why is important for agents to establish a good relationship with their clients?
a. To ensure that the client is well taken care of and, will assist him in providing add on
business and quality referrals.
b.To establish himself as a very good agent in the eyes of the company.
c. To be able to attract more people to join him in carrying out insurance business.
d.To ensure that no other agents will approach his client to sell life insurance products.
4. What does the term 'prospects' refer to?
a Potential products
b Potential customers
c The future of the agent
d Percentage of closing a deal
5. The promotional message delivered to a prospect by an agent is known as the
a sales report
b marketing plan
c sales presentation
d purchase presentation

67

6. What are the factors involved in the customer's shopping around for a suitable product to
meet his needs?
I The value involved.
II Professional advice.
III The benefits derived from the purchase.
IV The customer's experience in buying the product.
a I and IV
b II and III
c I, III and IV
d II, III and IV
7. ___________must be done if there is a major change that might have happened to the
clients' investment account.
a A regular review
b An ad hoc review
c An emergency review
d An accidental review
8. The customer fact find form contains the following information, EXCEPT:
a medical history
b cash flow analysis
c customer's risk profile
d life and financial priorities and goals
9.When marketing investment-linked life insurance products, which of the following are the
final step in a structured approach?
a Monitoring the portfolio
b Gathering all relevant financial data
c Implementation of the agreed recommendations
d Developing plans and strategies to meet the goals
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

68

CHAPTER 12: MARKETING & AFTER SALES SERVICE ETHICS &

CODE OF CONDUCT
Objectives:
- To understand the nature of marketing plan.
- To obtain knowledge on after sales ethics .
- To abide code of conduct.
- To abide LIAM Guidelines.
Marketing
Owing to changes in the market environment, many insurance companies now sell
their products on a Market Oriented Basis. Marketing involves:-

Planning & control

Market identification
Product development
Pricing
Selection of distribution channel
Promotion

Sales Plan
Sales Goal

Sales Plan

Objectives

Sales Strategy

Implementation &
Control

69

Personal Selling

Product knowledge
Market knowledge
Knowledge of buying process
Knowledge of selling process
Selling techniques
Consumer Buying Decision Process Problem recognition
Problem
recognition
Post
Purchase
Evaluation

Information
Search

Purchase
Evaluation of
Alternative
Policies

The Selling Process

Locating the prospective customer

Creating a sales presentation
Conducting the sales interview
Handling objection
Closing the sales

70

After Sales Service

Carry on the responsibilities

Dispel the customer cognitive dissonance
Provide a basis for future sales
Re-emphasize the insurance agent commitment
Encourage the policy owner to call the agent
Explain the policy provisions, term and condition
Obtain names of referred leads and other prospects
Strengthen the customer relationship and help encourage persistency
An insurer must provide each investment-linked policy holder with a policy
statement and the fund performance report
Free-look provision
A policy holder has only 15 days from the date he/she receives the policy document to
examine and decide the suitability of the policy and demand a full refund
Ethics and Conduct

Integrity
Complying with law, principles and practice relating to financial advice
Professional and honorable
Observing & applying codes of good practices
Twisting

Specific form of misrepresentation

It refers to an agent inducing a policy holder to discontinue policy with another
company without disclosing the disadvantage of doing so

It includes misleading or incomplete comparison of policies

Misrepresentation resulting in inducing policy owner to cancel or have his policy
made paid-up in order to purchase a new policy to earn more income for the
agent

LIAM Guidelines

Part I - Guidelines on the Code of Conduct

Part II - Life Insurance Selling
Part III - Statement of Life Insurance Practice
71

Summary of Key Points:

- Marketing Plan (Planning & control, Market identification, Product development,
Pricing, Selection of distribution channel, Promotion)
- Sales Plan (Objectives, Sales goal, sales strategy, Implementation & control)
-Personal selling knowledge and techniques (Product knowledge, Market knowledge,
Knowledge of buying process, Knowledge of selling process, Selling techniques)
-Consumer buying decision process (Problem recognition, Information search, evaluation of
alternative policies, Purchase, Post purchase)
-Selling process (Locating the prospective customer, Creating a sales presentation,
Conducting the sales interview, Handling objection, Closing the sales)
-After sales services ( Responsibilities, Customer cognitive dissonance, Basis for
future sales, re-emphasize agent commitment, policy explanation, strengthen
customer relationship etc)
-Ethics and conducts (Integrity, Compliances, Professional, Good practices)
-Twisting (Misrepresentation, Inducing policy holder, Misleading, Incomplete comparisons of
policy etc)
-LIAM Guidelines (Part I, II, III)

72

Sample Questions
1. A sales plan includes the following:
i. Sales strategy.
ii. Hard selling techniques.
iii. Sales goal.
iv. Objectives- these can be in terms of a target market.
a. i,iii,iv.
b. ii,iii,iv.
c. i,ii,iv.
d. i,ii,iii.
2. Generally, a market-oriented insurance company should undertake the following functions;
i. Planning and control.
ii. Market identification.
iii. Product development.
iv. Undercut slow agents with productive ones.
a. i,ii,iv.
b. i,ii,iii.
c. i,iii,iv.
d. ii, iii, iv.
3. Sebastian is very unhappy with the policy that was given to him. He wants to make a
complaint. To whom can he complain to help him correct the situation?
i. Bank Negaras Insurance Mediation Bureau.
ii. LIAM.
iii. The particular Insurance Company.
iv. The Newspaper.
a. i,iii,iv.
b. i,ii,iii.
c. ii,iii,iv.
d. i,ii,iv.
4. What is an important ingredient for a successful sales interview?
a A change in the sales plan
b A reduction in the product pricing
c The agent's skill in handling objections from a prospect
d The agent making objections and drawing the prospect's attention to the advantages of the
product

73

5. Why is the personal delivery of a policy regarded as an important aspect of providing aftersales service?
I The customer's cognitive dissonance is alleviated by the agents' reassurance that the right
purchase has been mode.
II The agent can take the opportunity to obtain more names of referred leads and other
prospects.
III It re-emphasizes the agent's commitment to providing the policyholder quality service.
IV The policyholder is encouraged to call the agent whenever the need arises.
a I, II and III
b I, III and IV
c II, III and IV
d I. II, III and IV
6. Which of the following is considered inconsistent with after-sales service?
a Establishing the customer/agent relationship
b Strengthening the customer/agent relationship.
c Providing a basis for future sales on current needs
d Explaining the policy's provisions terms and conditions
7. ________ is a form of misrepresentation in which a policy owner is induced to discontinue
an existing insurance policy, and purchase a new policy.
a Twisting
b Switching
c Withdrawal
d Money laundering
**Note: For another overview and more sample questions, please refer to the contents in the
CD.

74

Key Summary Points

TOPIC 1 INTRODUCTION

Investment
Pay premium to
purchase fund
linked

Fund managed
by Insurer

Policyholder

Value of Policy

Special
Unitised Fund

Protection
Death
TPD
PA
Health

KEY CONSIDERATIONS

Investment Objectives
Funds Available
Risk or Security
Investment Horizon
Accessibility of Funds
Taxation Treatment
Performance of the Investment
Diversification

Directly linked

Investment
Performance

TYPES OF INVESTMENT ASSETS

Risk and Return

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

Cash & Deposits

Fixed Income Securities
Shares
Unit Trusts
Investment Trust
Property
Real Estate Investment Trust (REITs)
Derivatives
Exchange Traded Funds (ETF)
Sukuk Bonds
Capital Guaranteed Fund
Commodities
Life Insurance
Annuities

Moderate to high
Moderate to high
Moderate to high
Moderate to high
Moderate to high

TOPIC 3 TYPES OF INVESTMENT

RETURN

Risk Return Profile

Derivatives eg.
Warrants, options etc
Growth funds eg.small caps

Equity fund
Index linked
Managed/Balanced fund
Bonds/ fixed income
securities
0

Risk ( )

In an efficient market, an asset/security that promises high return is also high risk.

TOPIC 4

UK Unit- linked
US Variable Life

TOPIC 5

Distribution Pay dividends and split units

Accumulation Price/ unit increase, Unit remains
Distribution Price/ unit remain, units increase
Time
Accumulation

Distribution

Time

HOW INVESTMENT - LINKED

INSURANCE PRODUCTS WORK

Single premium/Top-up
Allocated premium

Unallocated
premium

used to buy units from

investment-linked

Life Office

funds at offer price

Withdrawals
Surrender claim

Unit which belongs

to policy owner

Death claim

Cancel units
(To pay mortality
charge & policy fee)

BENEFITS OF INVESTING IN INVESTMENT LINKED FUNDS

1. Pooling/Diversification
2. Flexibility
3. Expertise
4. Access
5. Administration

(To meet
marketing
and set-up
expenses)

STEPS IN FINANCIAL PLANNING

Step 1: ESTABLISHING relationship with the

client.
Step 2: GATHERING all relevant financial data.
Step 3: ESTABLISHING current financial
position and goals.

STEPS IN FINANCIAL PLANNING

Step 4: DEVELOPING plans and strategies to

meet the goals.
Step 5: DISCUSS possible recommendations.
Step 6: IMPLEMENTATION of the agreed
recommendations.
Step 7: MONITORING the portfolio.

Answer for Sample Questions - PCE

Chapter 1: 1.d 2.a 3.d 4.d
Chapter 2: 1.c 2.d 3.d 4.d 5.d 6.c 7.c 8.d 9.d 10.d
Chapter 3: 1.a 2.a 3.c 4.b 5.b 6.d 7.a 8.d 9.c 10.b 11.d
Chapter 4: 1.d 2.b 3.b 4.c 5.a 6.c 7.c
Chapter 5: 1.b 2.a 3.a 4.a 5.c
Chapter 6: 1.d 2.d 3.c 4.d 5.d 6.b 7.c 8.a 9.? 10.b 11.d 12.d
13.c
Chapter 7: 1.d 2.c 3.d
Chapter 8: 1.a 2.d 3.d 4.d
Chapter 9: 1.b 2.d 3.c 4.d
Chapter 10: 1.a 2.b 3.a 4.c 5.c 6.a
Chapter 11: 1.d 2.a 3.c 4.d
Chapter 12: 1.d 2.b 3.d 4.a 5.d 6.a 7.d 8.a 9.d 10.b
Chapter 13: 1.b 2.c 3.a 4.d 5.d
Chapter 21: 1.a 2.c 3.d 4.d 5.d 6.d 7.c 8.d 9.d
Chapter 22: 1.a 2.b 3.b 4.d 5.b 6.c 7.a 8.d 9.c 10.b 11.d 12.c
Chapter 23: 1.b 2.b 3.c 4.c 5.b 6.d 7.d 8.b 9.d
Chapter 24: 1.c 2.d 3.a
Chapter 25: 1.d 2.b 3.a 4.d 5.d
Chapter 26: 1.d 2.c 3.b 4.c
Chapter 27: 1.a 2.d 3.c 4.b 5.d
Chapter 28: 1.b 2.d 3.b
Chapter 29: 1.c 2.b 3.a 4.c 5.c 6.c
Chapter 30: 1.c 2.b 3.c 4.d 5.c 6.d 7.b

Answers for Sample Questions CEILLI

Chapter 1: 1.d 2.d 3.c 4.c
Chapter 2: 1.c 2.c 3.a 4.b 5.a 6.c 7.d
Chapter 3: 1.c 2.d 3.b 4.b 5.d 6.c 7.c 8.d 9.d 10.a 11.b
Chapter 4: 1.b 2.c 3.d
Chapter 5: 1.b 2.c 3.b 4.c 5.b 6.c 7.a 8.a 9.b 10.d
Chapter 6: 1.a 2.d 3.d 4.a 5.a 6.d 7.d 8.b
Chapter 7: 1.b, 2.d 3.c 4.a 5.c 6.a 7.c 8.d 9.b 10.a
Chapter 8: 1.d 2.d 3.a 4.d 5.b 6.a
Chapter 9: 1.d, 2.b 3.a 4.b 5.b 6.d 7.b 8.b 9.a 10.c 11.a 12.b
13.c
Chapter 10: 1.c 2.a 3.d 4.c 5.c 6.c
Chapter 11: 1.b 2.b 3.a 4.b 5.a 6.c 7.b 8.a 9.a
Chapter 12: 1.a 2.b 3.b 4.c 5.d 6.a 7.a