Investment Strategies and Insurance Concepts

Certificate Examination in Investment-Linked Life Insurance (CEILLI) Tutorial

• Allianz Academy, January 2022
• Internal Use Only

Course Objective

• Equip participants with solid technical knowledge about investment-linked life insurance
• Understand the key contents of CEILLI
• Increase passing rate!

Course Objective - Detailed

• CEILLI: 60 questions
• PCIL:
  • Part A (Chapters 1-6): 40 questions
  • Part B (Chapters 7-10): [no question count given]
  • Part C (Chapters 11-16): 30 questions
  • Part D (CEILLI): 30 questions
• Passing rate: 50%

Course Overview

• Introduction to Investment-Linked Life Insurance
• Regular Premium Investment-Linked Life Insurance
• Single Premium Investment-Linked Life Insurance
• Considerations for Purchasing an Investment-Linked Policy
• Investment Considerations
• Types of Investment Vehicles & Potential Risks
• Common Types of Investment-Linked Funds
• Pertinent Guidelines on Investment-Linked Business
• Agents' Professional Approach & Guidelines

1.1 Introduction

• Steady growth in the Malaysian insurance industry over the past 20 years
• Insurance companies continually design and offer plans to meet customer's needs.
• Investment-linked insurance gaining popularity
• Introduction to investment-linked insurance, and its increasing demand

1.1 Introduction - Details

• Investment-linked insurance policy offers insurance coverage
• Directly connected to investment performance
• Portion of premium goes to protection
• Portion of premium goes to investment
• Funds fluctuates with the market
• No guaranteed interest rate or minimum cash value
• Coverage Portion (sum assured)
• Investment portion will be invested in funds, returns will be account value

1.1 Introduction - Choices

• Coverage amount
  • Minimum sum assured based on age, premium and formula
  • Higher sum assured
• Annual premiums
  • Regular premium (min RM1,200 per year)
  • Single premium (RM5,000 one-time payment)
• Return of Contribution
  • Long-term savings accumulate returns

1.1 Introduction - Other countries

• Malaysia/Singapore: Investment-Linked
• UK: Unit-Linked
• USA: Variable Life

Self-Assessment Questions - 1

• Investment returns under investment-linked life insurance policy are not guaranteed
• Linked to the performance of the investment fund managed by the life office
• Fluctuate according to the rise and fall of market prices
• Correct Answer:  C. I, III, and IV

Self-Assessment Questions - 2

• The term "investment-linked" in Malaysia is similar to "Unit-Linked" and "Variable Life" in UK and the USA respectively
• Correct Answer: A

Self-Assessment Questions - 3

• Investment-linked insurance is a contract that provides protection on human life as well as investment returns
• Correct Answer: B

2.1 Introduction

• More flexible, transparent, and more complicated compared to traditional insurance products
• Main Focus: Protection First, Investment Second

2.2 Minimum Regular Premium

• Minimum regular premium depends on insurer
• Generally, the minimum annual premium is RM1,200 – RM 1,800.
• Payment modes: Monthly, Quarterly, Semi-annually or Annually

2.3 Allocated & Unallocated Premium

• Allocation in fund selection by insurer
• Includes insurance charges, policy fees, and fund management fees
• Allocated Premium Account:
  • For buying units
  • Monthly Cost of Insurance (COI)
  • Annual fund management fee
  • One-time policy fee
  • Other administrative/service fees
• Unallocated Premium Account:
  • For agent's commissions and other management expenses
• Allocation Ratios vary by year, progressively reaching 100% in the 11th year.

2.4 Top-Up Premium

• Used to enhance unit accumulation
• Upfront charge of 5% is deducted and placed into the selected funds
• Regular vs. Ad Hoc Top-Up

2.5 Sum Assured Multiple (SAM) Rule

• Imposed by Bank Negara Malaysia (BNM)
• Minimum cover amount based of basic annual premium and age during policy inception
• Exceptions to SAM Rule: Regular Top-Up, Premium-Paying Rider, Unit-Deducting Rider
• Formula: SAM = (Total Annual Premium - Notional Premium of Riders)

2.6 Optional Riders

• Accident Rider
• Medical Rider
• Critical Illness Rider
• Premium-Paying Rider
• Unit-Deducting Rider
• Waivers of Premium
• Payor Benefit
• Disability Income

2.7 Account Value

• Projected value of unit at any time if surrender policy (net of tax and all charges)
• Depends on value of each unit and number of units accumulated to date
• Value may decrease if investments fail

2.8 Partial Withdrawal

• No limit on frequency / amount of partial withdrawal
• Remaining account value must remain above a minimum
• High withdrawals may lead to insufficient account value to cover COI at older age

2.8 Surrender and Charge

• Total surrender is allowed without restrictions
• Insurer may impose early withdrawal / surrender charge
• This depends on age and cut-off point of the policy

2.9 Fund Switching & Switching Fee

• Allow policy owners to switch part or all investments into a different fund/s
• Fund switches are commonly offered as FOC, given a limited number of transfers in a set time

2.10 Premium Holiday

• Prevent policy lapse when premiums are unpaid if account value is sufficient
• Premium is payable by account value if payment is not made on due date
• COI and other management charges are deducted from account value, not agents' commissions
• Policyholders can pre-select to cover either basic sum insured or cover basic and riders

2.11 Free-Look Period

• Similar to traditional life insurance policies, IL policies have a 15-day free-look period from the date of delivery.
• Insurer refunds unallocated premiums, unit value, insurance and policy fees, and related medical examination costs

2.12 No-Lapse Guarantee Period

• IL policies do not lapse during the first few years even if account value is insufficient to cover COI
• Any unpaid premiums are deducted from future premiums until paid in full

2.13 Death Benefit Mechanism

• Death benefit (DB) is the basic sum assured (BSA) plus accumulated account value (AAV)
• Death benefit must never be less than the basic sum assured

2.14 Dual Pricing & Single Pricing

• Dual Pricing (Bid-offer spread, Offer Price Per Unit, Bid Price Per Unit)
• Single Pricing (No bid-offer spread, Acquisition / disposal at same unit price)

2.15 The Long Horizon

• Cumulative account value and annual return will increase over time as both protection and investment factors
• Graph shows market performance over 10 years; even with market downturns a growth can be seen

2.16 Dollar Cost Averaging

• Using the same amount of money to buy units at regular intervals helps to average out the cost of each unit.
• This can cushion the impact of price fluctuations on capital

2.17 Retirement, Medical & Education Plans

• Some insurance companies offer retirement, medical, and education plans under RP-IL plans
• Tax relief for medical and education plans is RM 3,000 per year

3. Self-Assessment Questions - Summary

• Questions regarding particular topics in the CEILLI curriculum
• Solutions (Answers) to the questions provided for reference

3.1 Single Premium Investment-Linked Life Insurance - Main Objective

• The main focus: Investment First, Protection Second

3.2 Single Premium Investment-Linked Life Insurance - Minimum Basic Single Premium

• Range of basic single premium (SP) : RM5,000 – RM20,000.

3.3 Single Premium Investment-Linked Life Insurance - One-time Unallocated Premium Charge

• Since only one premium is paid, unallocated premium charge is a one-time payment
• Normally around 5%, depending on the insurance structure
• The same charge applies to top-up premiums.
• Remaining 95% of the premium is used to purchase investment units

3.4 Single Premium Investment-Linked Life Insurance - Sum Assured Formula

• Standard Cases:  125% of Paid SP
• Sub-Standard Cases/Older Age: 105% of Paid SP (whichever is higher, or RM5000)

3.5 Single Premium Investment-Linked Life Insurance - Death Benefit Formula

• Death Benefit is either Basic Sum Assured (BSA) or Accumulated Account Value (AAV) whichever is higher
• All Top-Ups (TUs) are excluded from BSA formula
• Additional payments of TUs are meant for investment

3.6 Single Premium Investment-Linked Life Insurance - COI Deduction & Risk Mechanism

• Cost of Insurance (COI) deduction will be made if there is Sum at Risk (SAR)
• SAR is the shortfall between BSA and AV
• If BSA is the same or lower than AV, SAR will not be deducted

4. Considerations for Purchasing an Investment-Linked Policy

• Transparency
• Expertise
• Access
• Flexibility
• Administration
• Diversification/Pooling

4.2 Benefits

• Transparency
• Administration
• Diversification/Pooling
• Access
• Flexibility
• Expertise

4.2 Benefits (Details)

• Pooling and Diversification: IL funds offers access to a 'pooled' & diversified portfolio which individual investors cannot achieve with their own funds. A well-diversified fund has better risk characteristics
• Expertise: Funds managed by professional fund managers, with investment expertise, financial knowledge for long-term high returns
• Flexibility: IL policy owner can choose to change the premium or protection amount, as long as it meets guidelines/rules
• Access: policy owners gain access to well-diversified IL funds managed by professionals
• Administration: policy owners are not required to manage daily administrative tasks. Provides statements and relevant information
• Transparency: agents provide official sales materials at point of sale. Including proposal summaries, benefit and risk disclosures, premium holiday declarations and investment return statements

4.3 Risks & Uncertainties

• Investment Fluctuations:
  • Guaranteed: Death and TPD benefits based on Sum Assured (SA)
  • Non-Guaranteed: Account Value based on unit value, and link to fund performance
• Charges:
  • Administration fees, insurance charges, fund management fees, COI deductions
• Other considerations: Policy value may fluctuate depending on market, global economic situation

5. Investment Considerations

• Investment Objectives: Safety, Income, Growth
• Availability of funds
• Risk or security
• Investment horizon
• Accessibility of funds
• Taxation

6. Types of Investment Vehicles & Potential Risks

• Cash and deposits
• Treasury bills
• Fixed income securities
• Bonds
• Shares
• Unit Trusts
• Properties
• Real Estate Investment Trusts (REITs)
• Sukuk

7. Common Types of Investment-Linked Funds

• Investment-Linked Funds (ILF): Cash, Equity, Sukuk, Property, Balanced, and Specialized funds

7.5 - 7.7 Managed, Balanced & Specialized Funds

• Managed Funds: Investments across various asset categories (equities, fixed incomes, properties, cash/money markets) The asset allocation depends on fund manager's views of future prospects
• Balanced Funds: Invest in specified proportions of specific asset categories (e.g., 70% in equities, 30% in fixed income) and, in general, do not change this mix too often
• Specialized Funds: Designed around a specific themes/regions (e.g., Asia Pacific Fund, Emerging Markets Fund, etc.) or a specific theme (e.g., Global Green Energy Fund)

7.9 Risks vs. Returns of Investment-Linked Funds

• Bond funds: Lower return potential, stable/less volatile/lower risk
• Equity funds: Higher return potential, volatile/less stable and higher risk
• Risk reduction strategies: Dollar Cost Averaging, Diversification, Top-up premium

8. Pertinent Guidelines on Investment-Linked Business

• Professional conduct in sales/marketing
• Valuation of units on every business day
• Insurers may split ILF units
• Limit of unit split/combination only once per financial year
• Limit of sales illustrations to a 30-year projection period

9 Agents Professional Approach & Guidelines

• Agents as key distributors
• Agent's role in satisfying customer needs
• Agent's skills to satisfy consumer needs (financial analysis, knowing the customer)
• Agent's role in customer buying process (problem recognition, information search, evaluate alternative policies, purchase, post-purchase evaluation, repeat stage 1)
• Agent's role in selling process (locating prospective customers, sales presentation, sales interview, handling objections, closing the sale, repeat stage 1)
• Agents' role in after-sales services (addressing post-sales concerns, reinforcing customer decisions, re-emphasizing commitment to quality service, explaining policy provisions)

9.6 LIAM Codes of Conduct

• Policy owner's consent before premium holiday
• Top-up premiums are allocated for unit purchases
• Guide lines on selling policies
• Provide relevant statements to customers

9.7 Treating Customers Fairly Policy

• Agents should be well-trained in investment/savings products
• Products are sold based on customers' suitability, needs, and risk appetite

Self-Assessment Questions - Summary

• Questions regarding particular topics in the CEILLI curriculum
• Solutions (Answers) to the questions provided for reference