Life Insurance and Investment-Linked Policies PDF

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The SCI is not engaged in rendering legal, tax, investment or other professional advice and the reader should consult professional counsel as appropriate. We have tried to provide you with the most accurate and useful information possible. However, the information in this publication may be affected by changes in law or industry practice, and, as a result, information contained in this publication may become outdated. This material should in no way be used as an original source of authority on legal matters. Any names used in this Study Text are fictitious and have no relationship to any persons living or dead. 1st Edition published in 2002. 2nd Edition published in 2007. 3rd Edition published in April 2010. 4th Edition published in September 2011. 5th Edition published in December 2015. 6th Edition published in February 2020. 7th Edition published in February 2024 Table Of Contents Chapter 1 Risk And Life Insurance 1 1. Risk And Insurance A. Speculative Risks And Pure Risks 2. Requirements Of Insurable Risks A. The Loss Must Be Significant In Financial Terms B. The Loss Must Occur By Chance C. The Loss Must Be Definite D. The Loss Rate Must Be Measurable E. The Loss Must Not Be Catastrophic To The Insurer F. The Loss Must Be Based On Large Number of Insureds 3. Dealing With Risk A. Avoiding The Risk B. Controlling The Risk C. Retaining The Risk D. Transferring The Risk 4. Types Of Personal Risks That Can Be Insured A. Risk Of Premature Death B. Risk Of Outliving Resources Or Longevity Risk C. Risk Of Poor Health And Disablement 5. Some Basic Life Insurance Terms 6. Insurance and Gambling Compared 7. Hazards A. Physical Hazard B. Moral Hazard 8. Concept Of Anti-selection 9. Various Life And Health Insurance Products A. Life Insurance Products B. Annuities And Investment Products C. Health Insurance Products 10. Life Insurance As A Financial Protection Tool Contents A. Financial Protection Against Premature Death B. Financial Protection Against Outliving Resources C. Financial Protection Against Ill Health And Disablement D. Financial Protection For Businesses 11. The Importance Of Life Insurance A. Assist In Making Savings Possible B. Provides A Safe Investment C. Encourages Thrift D. Minimises Worries And Provides Peace Of Mind 12. Pooling Of Risks And The Law Of Large Numbers 13. Principle Of Utmost Good Faith A. Insured’s Duty Of Utmost Good Faith B. Insurer’s Duty Of Disclosure 14. Insurable Interest Requirement A. Why Is Insurable Interest Necessary? B. When Must Insurable Interest Exist? C. Insurable Interest Required For Life Insurance Under Insurance Act 15. Principle Of Indemnity And Life Insurance Copyright reserved by the Singapore College of Insurance Limited [V1.0] i Module 9: Life Insurance And Investment-Linked Policies 16. Structure Of The Singapore Insurance Market A. Buyers B. Sellers C. Intermediaries D. Introducer Of Life Insurance Advisory Services E. Web Aggregators 17. Other Relevant Organisations A. Rating Agencies B. Market Associations C. Professional Bodies D. Financial Industry Disputes Resolution Centre (FIDReC) 18. MoneySENSE Programme 19. Singapore Deposit Insurance Corporation (SDIC) Chapter 2 Setting Life Insurance Premium 32 1. Pricing Considerations A. Mortality And Morbidity Rates B. Investment Income C. Expenses D. Gender E. Smoking Status F. Amount Of Sum Assured G. Frequency Of Premium Payments H. Suitability Of Frequency And Mode Of Premium Payments Chapter 3 Classification Of Life Insurance Products 41 1. Ways Of Classifying Life Insurance Products Contents 2. Classification By Statutory Insurance Fund A. Participating Policies B. Non-Participating Policies C. Investment-linked Life Insurance Policies 3. Classification By Product Type 4. Classification By Premium Type 5. Classification By Ownership A. Single Life Policy B. Joint Life Policy C. Third-Party Policy D. Group Policy 6. Characteristics Of Group Life Insurance A. Contractual & Voluntary Plans B. Advantages Of Contractual (Non-Contributory) Plan C. Advantages Of Voluntary (Contributory) Plan ii Copyright reserved by the Singapore College of Insurance Limited [V1.0] Table Of Contents Chapter 4 Traditional Life Insurance Products 50 1. Common Types Of Life Insurance Policies 2. Term Insurance A. Nature Of Term Insurance B. Features Of Term Insurance C. Types Of Term Insurance D. Renewable And Convertible Options E. Suitability Of Term Insurance 3. Whole Life Insurance A. Nature Of Whole Life Insurance B. Features Of Whole Life Insurance C. Distinguishing Whole Life Insurance From Term Insurance D. Non-Forfeiture Options E. Types Of Whole Life Insurance F. Suitability Of Whole Life Insurance 4. Endowment Insurance A. Nature Of Endowment Insurance B. Features Of Endowment Insurance C. Types Of Endowment Insurance D. Suitability Of Endowment Insurance 5. MAS Disclosure Requirements Relating To Life Insurance Policies 6. Guidelines On The Online Distribution Of Life Policies With No Advice [Guideline No: ID01/17] Appendices Chapter 5 Riders (Or Supplementary Benefits) 81 1. Riders (Or Supplementary Benefits) A. Waiver Of Premium Rider Contents B. Total And Permanent Disability (TPD) Rider C. Critical Illness Rider D. Term Rider E. Payor Benefit Rider F. Guaranteed Insurability Option Rider G. Accidental Death Benefit Rider H. Accidental Death And Dismemberment / Disablement Rider I. Hospital Cash (Income) Benefit Rider J. Conclusion Appendix 5A Appendix 5B Copyright reserved by the Singapore College of Insurance Limited [V1.0] iii Module 9: Life Insurance And Investment-Linked Policies Chapter 6 Participating Life Insurance Policies 134 1. What Are Participating Policies? A. Common Types Of Participating Policies B. Objective Of Participating Policies And Its Implications 2. Guaranteed And Non-Guaranteed Benefits (Bonuses) A. Types Of Non-Guaranteed Benefits (Bonuses) B. Death, Surrender And Paid-Up Values 3. Determination Of Bonuses A. Risk Sharing Mechanism B. Bonus Allocation Process C. Reserving For Future Non-Guaranteed Bonuses 4. Disclosure Requirements Relating To Participating Life Insurance Policies A. Point-Of-Sale Disclosure – Product Summary B. Point-Of-Sale Disclosure – Policy Illustration C. Post-Sales Disclosure – Annual Bonus Update 5. “Your Guide To Participating Policies” 6. Participating Fund Governance A. Internal Governance Policy On Management Of Participating Fund B. Information To Be Contained In The Internal Governance Policy Appendices Chapter 7 Investment-linked Life Insurance Policies (ILPs): Types, 162 Features, Benefits And Risks 1. Introduction 2. What Is An ILP? 3. What Is An Investment-linked Sub-Fund? 4. Purpose Of ILPs A. Investment Contents B. Wealth Accumulation C. Protection 5. Types Of ILPs A. By Frequency Of Premium Payment B. By Product Features 6. Features Of ILPs A. Protection B. Top-Ups C. Sub-Fund Switch D. Partial / Full Surrender E. Premium Holiday F. Riders 7. Key Factors To Consider Before Purchasing An ILP A. Insurance Protection Needs B. Risk Profile C. Personal Investment Objective D. Time Horizon 8. Are ILPs Suitable For Older People? iv Copyright reserved by the Singapore College of Insurance Limited [V1.0] Table Of Contents 9. Investing In ILPs With CPF Savings 10. Differences Between An ILP And A Traditional Life Insurance Policy A. Bonuses B. Investment Returns C. Premium Breakdown D. Investment Mandate 11. Pricing Of ILP Units A. Offer And Bid Prices B. Single Pricing 12. How Much Of The Premium Is Used To Purchase Units? A. Front-End Loading B. Back-End Loading 13. How Are Unit Prices Computed? 14. Insurance Protection Features Of ILPs A. What Types Of Insurance Protection Do ILPs Provide? B. Effect Of Age On Cost Of Insurance C. Effect Of Age On Amount Of Premiums To Be Paid D. How Does The Level Of Protection Affect Cash Values? 15. Investment Returns Of ILPs A. Are Investment Returns Guaranteed? B. What Types Of Sub-Funds Do ILPs Offer? 16. Fees And Charges For ILPs A. Initial Sales Charge Or Bid-Offer Spread B. Sub-Fund Management Fee C. Benefit / Insurance Charges D. Policy Fees E. Administrative Charges F. Surrender Charges G. Premium Holiday Charges H. Sub-Fund Switching Charges 17. Benefits Of Investing In ILPs Contents A. Pooling Or Diversification B. Flexibility C. Dollar Cost Averaging D. Professional Management E. Affordability F. Ease Of Administration G. Choice Of Sub-Funds H. Potential Returns I. Guaranteed Insurability 18. Risks Of Investing In ILPs A. Investment Returns Are Not Guaranteed B. Insurance Coverage Charges Are Not Guaranteed C. Units May Be Insufficient To Pay The Insurance Coverage Charges 19. Comparison With Unit Trusts (UTs) Copyright reserved by the Singapore College of Insurance Limited [V1.0] v Module 9: Life Insurance And Investment-Linked Policies Chapter 8 Investment-linked Sub-Funds 185 1. Purpose And Benefits Of Investment-linked Sub-Funds 2. Structures Of Investment-linked Sub-Funds A. Accumulation Structures B. Distribution Structures 3. Definitions Of Investment-linked Sub-Funds A. Mother Fund B. Feeder Fund C. Mirror Fund D. Portfolios 4. Types Of Investment-linked Sub-Funds A. Equity Funds B. Fixed Income Or Bond Funds C. Cash Funds D. Managed Funds E. Property Funds F. Geographically Specialised Unit Funds G. Specialised Unit Funds H. Capital Guaranteed Funds I. Managed Portfolios 5. Investment Strategy Or Policy A. Managed Fund B. Equity Fund C. Bond Fund 6. Switching Facility 7. Monitoring Chapter 9 Investment-linked Life Insurance Policies: Computational 193 Aspects Contents 1. Introduction 2. Interpreting The Timeline – Growth Rate 3. Death Benefit A. Comparison Between DB3 And DB4 4. Allocation Rates – How Premiums Are Allocated To Purchase Units 5. Mortality Charges A. DB3 B. DB4 6. Computation Of Units To Be Allocated A. Application Of Premium B. Top-ups 7. Withdrawal Benefit 8. Surrender Benefit 9. Return On Gross Premium Appendix 9A vi Copyright reserved by the Singapore College of Insurance Limited [V1.0] Table Of Contents Chapter 10 Annuities And Other Life Insurance Products 218 1. What is CPF LIFE? A. CPF Life Plans 2. How Do Annuities Work? 3. Types Of Annuities A. Immediate Annuities B. Deferred Annuities 4. Variations Of Annuity Policies A. Payout Options B. Bonus Entitlement C. Number Of Lives Covered D. Increasing Rate Annuity 5. Benefits And Limitations Of Annuities 6. Other Life Insurance Products A. Guaranteed Income B. Universal Life Chapter 11 Application And Underwriting 236 1. Life Insurance Proposal Form A. Purposes And Importance Of The Life Insurance Proposal Form B. Contents Of A Proposal Form C. Amendment To Proposal Form 2. Basic Principles Of Underwriting A. Purpose Of Underwriting B. Factors That Affect The Risk 3. Medical And Non-Medical Proposal Forms 4. Other Sources Of Underwriting Information A. Attending Physician’s Report Contents B. Specialist’s Medical Tests C. Adviser’s Report D. Questionnaires 5. Underwriting Decision 6. Commencement Of Risk 7. General Underwriting Principles For Group Life Insurance A. Group’s Reason For Existence B. Group Stability C. Group Size D. Nature Of Group’s Business E. Employee Classes F. Level Of Participation G. Age And Gender Within The Group H. Expected Persistency I. Previous Claims Experience Copyright reserved by the Singapore College of Insurance Limited [V1.0] vii Module 9: Life Insurance And Investment-Linked Policies Chapter 12 Policy Services 256 1. Introduction 2. Premium Payments A. Frequency Of Premium Payment B. Methods Of Premium Payment 3. Premium Receipt A. Conditional Premium Deposit Receipt B. Official Receipt 4. Premium Notice 5. How Can Advisers Help Their Clients? 6. Why Are Policy Alterations Necessary? 7. Types Of Alteration Of Policy A. Change Of Address B. Change Of Name C. Change In Frequency Of Premium Payment D. Reduction In Sum Assured E. Increase In Sum Assured F. Change In Type Of Policy G. Change In Term Of Insurance H. Removal Of Extra Premiums I. Extra Benefits (Riders) J. Change Of Insurance Nominees Or Beneficiaries 8. Duplicate Policy A. Requirements For The Issuance Of A Duplicate Policy 9. Assignment Of Policy A. What Is An Assignment? B. Types Of Assignments C. Statutory Provisions On Assignment Of Policy D. Execute An Assignment Of Policy To A Targeted Beneficiary 10. Policy Loans Contents A. Requirements For Application Of Policy Loans B. Implications On Policy Owners 11. Withdrawing Cash Bonus A. Requirements For Application Of Withdrawal Of Cash Bonus B. Implications On Policy Owners 12. Lapsing Of Policies A. Loss On Lapsation 13. Reinstatement Of Lapsed Policies A. Health Evidence B. Effects Of Reinstatement Of Policy 14. Surrendering Of Policy 15. Alternatives To Surrendering Of Policy A. Documents Required For Surrender Of Policy 16. Effects of Bankruptcy on Life Insurance A. Statutory Position of Bankruptcy B. Effects of Bankruptcy on Life Insurance Policies viii Copyright reserved by the Singapore College of Insurance Limited [V1.0] Table Of Contents Chapter 13 Life Insurance Claims 279 1. Claims Settlement A. Proper Claimants B. Payment Of Claims Without Probate 2. Types Of Claims A. Death Claims B. Total And Permanent Disability Claims C. Maturity Claims D. Critical Illness Claims E. Hospital Cash (Income) Claims F. Accidental Death Benefit Claims G. Accidental Death And Dismemberment Benefit Claims H. Annuity Claims 3. Role Of Advisers In Claims Settlement Chapter 14 The Insurance Contract 289 1. Elements Of A Valid Insurance Contract A. Offer And Acceptance B. Consideration C. Capacity To Contract D. Insurable Interest E. Parties Of The Same Mind (Consensus Ad Idem) 2. Duty Of Disclosure A. Prudent Insurer B. Inducement 3. Warranties And Representations 4. Material Misrepresentation A. Ambiguous Questions Contents B. Proposal Form Versus Policy C. Unanswered Or Incomplete Answers 5. Doctrines Of Waiver And Estoppel A. Waiver B. Estoppel 6. Breach Of Contract A. Breach By An Insured B. Options To The Insurer On The Discovery Of A Breach Of Utmost Good Faith C. Insurer's Duty Of Utmost Good Faith 7. Vitiating Factors A. Misrepresentation B. Duress C. Undue Influence D. Illegal Contract E. Mistake F. Non Est Factum 8. Contract Provisions In Life Insurance Policies Copyright reserved by the Singapore College of Insurance Limited [V1.0] ix Module 9: Life Insurance And Investment-Linked Policies A. The Policy Owner’s Rights B. Heading And Operative Clauses C. Policy Schedule D. General Provisions E. Endorsements Chapter 15 Law Of Agency 312 1. Agency, Principals And Agents 2. Creation Of An Agency 3. Duties Of An Agent A. Common Law Duties Of An Agent B. Fiduciary Duties Of An Agent C. Intermediaries 4. Rights Of An Agent A. Remuneration B. Indemnity 5. Agent’s Authority A. Actual Or Express Authority B. Implied Authority C. Usual Authority D. Apparent Or Ostensible Authority 6. Agent Acts Outside The Authority 7. Ratification Of A Contract A. Conditions For Ratification B. Effects Of Ratification 8. Termination Of Agency Chapter 16 Income Tax And Life Insurance 320 Contents 1. Introduction 2. Taxable Income A. Exemption From Income Tax 3. Statutory Income, Assessable Income And Chargeable Income A. Statutory Income B. Assessable Income C. Chargeable Income 4. Personal Reliefs A. Earned Income Relief B. NSman (Self / Wife / Parent) Relief C. Spouse / Handicapped Spouse Relief D. Qualifying / Handicapped Child Relief E. Working Mother’s Child Relief F. Handicapped Brother / Sister Relief G. Parent / Handicapped Parent Relief H. Grandparent Caregiver Relief I. Life Insurance Relief J. Central Provident Fund (CPF)/Provident Fund Relief for Employees x Copyright reserved by the Singapore College of Insurance Limited [V1.0] Table Of Contents K. CPF Relief For Self-Employed Persons L. Tax Relief for Cash Top-ups To Retirement And Healthcare Savings M. Course Fees Relief N. Foreign Domestic Worker Levy Relief O. Supplementary Retirement Scheme (SRS) Relief P. Matched Retirement Savings Scheme (MRSS) Q. Additional MediSave Contribution Scheme (AMCS) For Employees 5. Rebates A. Parenthood Tax Rebate 6. Who Will Benefit From Income Tax Relief By Taking Up An Insurance Policy? 7. Tax Benefit For SRS Participants A. Tax Concession On Withdrawal B. Tax Benefits For Annuities Purchased Through SRS Chapter 17 Insurance Nomination, Wills And Trusts 334 1. Framework For The Nomination Of Beneficiaries (NOB) A. Background – Before 1 September 2009 B. After 1 September 2009 C. The Current Statutory Positions On Life Insurance Nomination D. Leaving The Life Insurance Policy Un-Nominated 2. Aims Of Nomination Framework 3. Scope Of Nomination Framework A. Cash-Funded Policies 4. Who Can Nominate? 5. Choices Available To Policy Owners 6. Types Of Nominations Allowed Under Various Types Of Policies A. Insurance Policies Under CPF Investment Scheme B. Others Contents C. When Considering What Type Of Nomination To Make 7. Application To Other Types Of Policies A. Group Insurance B. Existing Policies C. Income Insurance Limited Policies 8. Trust Nomination A. Making A Trust Nomination B. Payment Of Proceeds C. When A Nominee Dies Before The Policy Owner D. Revoking A Trust Nomination 9. Revocable Nomination A. Making A Revocable Nomination B. Payment Of Proceeds C. When A Nominee Dies Before The Policy Owner D. Changing A Revocable Nomination E. Execute a Revocable Nomination 10. Differences Between Trust Nomination And Revocable Nomination 11. Nomination Forms Copyright reserved by the Singapore College of Insurance Limited [V1.0] xi Module 9: Life Insurance And Investment-Linked Policies A. Different Nomination Forms B. List Of Nomination Forms C. Checklist For Filling In A Nomination Form D. Differences Between Trust Nomination Form And Revocable Nomination Form 12. Priority Of Nominations A. Conflicts Between Wills And Nominations 13. Wills A. Purpose Of A Will B. Who Can Make A Will? C. Grant Of Probate D. Who Is An Executor? 14. Trusts A. What Is A Trust? B. Types Of Trusts C. Benefits Of Trusts D. Trust Versus Will 15. Effects of Death on Life Insurance and Various Distribution Methods A. Intestate Succession Act 1967 Table 1: Future Value Interest Factors For One Dollar 363 Contents xii Copyright reserved by the Singapore College of Insurance Limited [V1.0] 1. Risk And Life Insurance CHAPTER 1 RISK AND LIFE INSURANCE CHAPTER OUTLINE 1. Risk And Insurance 2. Requirements Of Insurable Risks 3. Dealing With Risk 4. Types Of Personal Risks That Can Be Insured 5. Some Basic Life Insurance Terms 6. Insurance And Gambling Compared 7. Hazards 8. Concept Of Anti-Selection 9. Various Life And Health Insurance Products 10. Life Insurance As A Financial Protection Tool 11. The Importance Of Life Insurance 12. Pooling Of Risks & The Law Of Large Numbers 13. Principle Of Utmost Good Faith 14. Insurable Interest Requirement 15. Principle Of Indemnity & Life Insurance 16. Structure Of The Singapore Insurance Market 17. Other Relevant Organisations 18. MoneySENSE Programme 19. Singapore Deposit Insurance Corporation (SDIC) LEARNING OUTCOMES After reading this chapter, you should be able to: understand risk and insurance understand the requirements of insurable risks know the methods of dealing with risk outline the types of personal risks that can be insured define some basic life insurance terms compare insurance with gambling understand physical hazards and moral hazards know the concept of anti-selection discuss life and health insurance products understand life insurance as a financial protection tool explain the importance of life insurance know the pooling of risks and the law of large numbers discuss the principle of utmost good faith understand insurable interest requirement Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1 Module 9: Life Insurance And Investment-Linked Policies understand the principle of indemnity explain the structure of the Singapore insurance market know other relevant organisations know the MoneySENSE programme know the Singapore Deposit Insurance Corporation (SDIC) 2 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance CONTENTS CHAPTER OUTLINE............................................................................................................. 1 1. RISK AND INSURANCE................................................................................................ 5 A. Speculative Risks And Pure Risks........................................................................ 5 2. REQUIREMENTS OF INSURABLE RISKS.................................................................... 5 A. The Loss Must Be Significant In Financial Terms............................................... 6 B. The Loss Must Occur By Chance.......................................................................... 6 C. The Loss Must Be Definite.................................................................................... 6 D. The Loss Must Be Measurable............................................................................. 6 E. The Loss Must Not Be Catastrophic To The Insurer........................................... 6 F. The Loss Must Be Based On Large Number of Insureds.................................... 6 3. DEALING WITH RISK.................................................................................................... 7 A. Avoiding The Risk................................................................................................. 7 B. Controlling The Risk.............................................................................................. 7 C. Retaining The Risk................................................................................................ 7 D. Transferring The Risk............................................................................................ 7 4. TYPES OF PERSONAL RISKS THAT CAN BE INSURED............................................. 8 A. Risk Of Premature Death...................................................................................... 8 B. Risk Of Outliving Resources Or Longevity Risk................................................... 8 C. Risk Of Poor Health And Disablement................................................................. 8 5. SOME BASIC LIFE INSURANCE TERMS..................................................................... 9 6. INSURANCE AND GAMBLING COMPARED............................................................... 9 7. HAZARDS.................................................................................................................... 10 A. Physical Hazard................................................................................................... 10 B. Moral Hazard....................................................................................................... 10 8. CONCEPT OF ANTI-SELECTION................................................................................ 11 9. VARIOUS LIFE AND HEALTH INSURANCE PRODUCTS........................................... 11 A. Life Insurance Products...................................................................................... 11 B. Annuities And Investment Products.................................................................. 12 C. Health Insurance Products.................................................................................. 12 10. LIFE INSURANCE AS A FINANCIAL PROTECTION TOOL........................................ 13 A. Financial Protection Against Premature Death.................................................. 13 B. Financial Protection Against Outliving Resources............................................ 13 C. Financial Protection Against Ill Health And Disablement................................. 13 D. Financial Protection For Businesses.................................................................. 14 11. THE IMPORTANCE OF LIFE INSURANCE.................................................................. 14 A. Assist In Making Savings Possible..................................................................... 14 B. Provides A Safe Investment............................................................................... 15 C. Encourages Thrift................................................................................................ 15 D. Minimises Worries And Provides Peace Of Mind............................................. 15 12. POOLING OF RISKS AND THE LAW OF LARGE NUMBERS.................................... 15 13. PRINCIPLE OF UTMOST GOOD FAITH..................................................................... 16 A. Insured’s Duty Of Utmost Good Faith................................................................ 16 A1. Material Facts................................................................................................... 16 A2. Facts Which Need Not Be Disclosed.............................................................. 17 A3. Duration Of Duty Of Disclosure...................................................................... 17 B. Insurer’s Duty Of Disclosure............................................................................... 18 14. INSURABLE INTEREST REQUIREMENT.................................................................... 18 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 3 Module 9: Life Insurance And Investment-Linked Policies A. Why Is Insurable Interest Necessary?................................................................ 19 B. When Must Insurable Interest Exist?................................................................. 20 C. Insurable Interest Required For Life Insurance Under Insurance Act.............. 20 C1. Own Life........................................................................................................... 20 C2. Spouse............................................................................................................. 20 C3. Child Or Ward.................................................................................................. 20 C4. Another Person Whom One Is Dependent On............................................... 20 C5. Trustees & Beneficiaries................................................................................. 21 C6. Creditors & Debtors......................................................................................... 21 C7. Key-Person Insurance...................................................................................... 21 15. PRINCIPLE OF INDEMNITY AND LIFE INSURANCE................................................. 22 16. STRUCTURE OF THE SINGAPORE INSURANCE MARKET...................................... 23 A. Buyers.................................................................................................................. 23 B. Sellers.................................................................................................................. 23 B1. Sellers – Direct Insurers.................................................................................. 23 B2. Sellers – Reinsurers......................................................................................... 24 C. Intermediaries..................................................................................................... 24 D. Introducer Of Life Insurance Advisory Services................................................ 25 E. Web Aggregators................................................................................................ 25 17. OTHER RELEVANT ORGANISATIONS...................................................................... 26 A. Rating Agencies.................................................................................................. 26 B. Market Associations............................................................................................ 26 C. Professional Bodies............................................................................................ 27 D. Financial Industry Disputes Resolution Centre (FIDReC).................................. 27 D1. Mission And Background Of FIDReC.............................................................. 27 D2. Jurisdiction Of FIDReC.................................................................................... 28 D3. FIDReC’s Dispute Resolution Process............................................................ 28 D4. Filing A Complaint........................................................................................... 29 18. MONEYSENSE PROGRAMME................................................................................... 29 19. Singapore Deposit Insurance Corporation (SDIC).................................................... 30 4 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance 1. RISK AND INSURANCE 1.1 Life insurance products are designed to provide protection against the risk of financial loss 1. In order to understand insurance and how it works, we need to understand the concept of risk and which types of risks are insurable. Everyday, both individuals and businesses are exposed to risks. For example, an individual who is the breadwinner in the family may meet with a serious accident while driving his car, leaving the family with no income, if he becomes disabled and unable to work. A company may suffer business losses when one of its key employees is stricken with a major illness and is unable to continue working. As you can see from the above two examples, risk, in the insurance context, is the possibility of loss, and there is an uncertainty element to it. A. Speculative Risks And Pure Risks 1.2 Both individuals and businesses experience two kinds of risks – speculative risk and pure risk. Speculative risk involves three possible outcomes: loss, gain, or no change. For example, in purchasing shares of stock, the buyer is speculating that the value of the stock will rise and that he will earn a profit on his investment. However, the value can also fall and the buyer will lose some or all of the money that he has invested. On the other hand, the value of the stock can also remain the same – the buyer may not lose money, but he may not make a profit. Insurers will not insure speculative risks. 1.3 Pure risk involves no possibility of gain; either a loss occurs or no loss occurs. An example of a pure risk is the possibility that an individual may become disabled. If he is unable to work, he will experience an income disruption leading to a financial loss. If, on the other hand, he never became disabled, then he would incur no loss from that risk. This possibility of financial loss without the possibility of gain – pure risk – is the only kind of risk that can be insured (provided that it meets certain other requirements) as explained in the next section. This is because the purpose of insurance is to compensate for financial loss, not to provide an opportunity for financial gain. 2. REQUIREMENTS OF INSURABLE RISKS 2.1 In addition to the pure risk requirement, there are other requirements that must be met before a risk can be potentially insurable. The loss must: (a) be significant in financial terms; (b) occur by chance; (c) be definite; (d) be measurable; (e) not be catastrophic to the insurer; and (f) be based on large number of insured. 2.2 Let us now look at the first five of the above requirements in turn. 1 Insurance does not cover non-financial risks, such as choosing a life partner, choosing a new car or selecting the right school for one’s child. Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 5 Module 9: Life Insurance And Investment-Linked Policies A. The Loss Must Be Significant In Financial Terms 2.3 Insignificant losses arising from, say, the risk of catching a cold in the rain, are not normally insured. The administrative expenses of paying benefits when a very small loss occurs will drive the cost for such insurance protection so high in relation to the potential loss, that most people will find the protection financially unattractive. 2.4 On the other hand, some losses will cause financial hardships to most people and are considered to be insurable. For example, a person injured in an accident may lose a significant amount of income if he is unable to work. Insurance coverage is available to protect against such a potential risk. B. The Loss Must Occur By Chance 2.5 In order for a potential loss to be insurable, the loss must occur by chance. In order words, it must be random in nature and cannot be predicted in advance. The loss must be caused either by an unexpected event, such as contracting a terminal disease, or by an event that is not intentionally caused by the person covered by the insurance, such as fire. Although death is a certain event, a person is unable to control the timing of his death, as the event usually occurs by chance. Hence, death is an insurable event. However, insurers will exclude suicide coverage within a certain period of the inception of the policy as suicide is clearly not accidental. C. The Loss Must Be Definite 2.6 The insurer must be able to determine whether the loss occurred, and if so, how much money was lost. The amount of loss to be insured can be arrived at, in the case of general insurance, by appraisal or estimation, or in the case of life insurance, by prior agreement. D. The Loss Must Be Measurable 2.7 The loss must be measurable in monetary term. E. The Loss Must Not Be Catastrophic To The Insurer 2.8 A potential loss is not considered insurable if a single occurrence is likely to cause or contribute to catastrophic financial damage to the insurer. Such a loss is not insurable because the insurer cannot responsibly promise to pay benefits for the loss, e.g. the loss resulting from nuclear risk. F. The Loss Must Be Based On Large Number of Insureds 2.9 There must also be a large number of exposure units, because pricing is based on the law of large numbers. For example, a household insurer needs a large number of flats and buildings to predict the aggregate losses with some reliability. From this, it can calculate the premiums which are adequate to cover the losses and expenses of these policies. 6 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance 3. DEALING WITH RISK 3.1 In order to eliminate or reduce one’s exposure to a specific financial risk, and depending on the frequency and severity of the losses, one can deal with risk in one of the following methods: avoiding the risk; controlling the risk; retaining the risk; or transferring the risk. 3.2 Let us look at each of the methods in turn. A. Avoiding The Risk 3.3 This method of managing risk is simply to avoid risk altogether. For example, we can avoid the risk of personal injury that may result from a car collision by never driving a car. B. Controlling The Risk 3.4 Risks can be controlled by taking steps to prevent or reduce losses. An example will be to undergo a health screening examination yearly, when one reaches a certain age (e.g. 40 years old), so that one can detect and treat an illness before it is too late. C. Retaining The Risk 3.5 This method of managing risk is to accept or retain risk, meaning to assume all the financial responsibility for the risk. Individuals and businesses sometimes decide to accept total responsibility for a given financial risk. In this situation, the person or business is said to self-insure against the risk. For example, an employer can provide medical expense benefits to its employees, by either setting aside money to pay their medical expenses, or paying the expenses out of its current income. In such a case, the employer is said to self-insure the medical benefit plan. D. Transferring The Risk 3.6 An individual can transfer risk to another party by shifting the financial responsibility for that risk to another party, generally in exchange for a fee. The most common way to transfer risk is to buy insurance. For example, a breadwinner may transfer his risk of premature death or disability to the insurer by paying a small, predictable amount of premium to the insurer. In return, the insurer promises to pay the insured amount upon the happening of the insured event. In this way, the individual is relieved of the uncertainty of a potentially much larger financial loss associated with the risk that he faces. He can then go about doing his daily activities with peace of mind, knowing that if anything happens to him, his dependants will not suffer any severe financial hardship. Hence, insurance plays an important function in acting as a risk transfer mechanism. Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 7 Module 9: Life Insurance And Investment-Linked Policies 4. TYPES OF PERSONAL RISKS THAT CAN BE INSURED 4.1 The three main types of personal risks faced by an individual that can be insured are: premature death; outliving resources; and poor health and disablement. 4.2 Let us look at each of the above risks in turn. A. Risk Of Premature Death 4.3 Premature death is defined as the death of a breadwinner as a result of illness or accident with unfulfilled financial obligations. These obligations can include dependants to support, a mortgage to be paid off or children to educate. If the surviving family members receive an insufficient amount of replacement income from other sources or have insufficient financial assets to replace the lost income, they will suffer not only emotionally but also financially. B. Risk Of Outliving Resources Or Longevity Risk 4.4 With advances in medical science and the standard of living, people are living longer. The average life expectancy of male and female lives as of December 2022 is 80.7 and 85.2 years respectively. The major risk associated with old age is insufficient capital and income during retirement. Planning for retirement is something that most people do not take action on until it is too late. This can pose a problem for the person, as well as society. C. Risk Of Poor Health And Disablement 4.5 The risk of poor health includes both the payment of catastrophic medical bills and the loss of earned income. The costs of major surgeries have increased substantially in recent years. In addition, as life expectancy increases, people will tend to incur medical expenses as they age. Unless these people have adequate Health Insurance, private savings and financial assets or other sources of income to meet these expenditures, they can be financially drained in the event of a catastrophic illness. Moreover, such illness can result in the person becoming severely disabled and being unable to work. As such, he will be losing his income, as well as incurring substantial medical cost for treatment of his illness. 4.6 All the three personal risks that we have discussed so far can be mitigated to a certain extent with Life and Health Insurance products. Before we look at the various products, we will first look at some basic insurance terms. 8 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance 5. SOME BASIC LIFE INSURANCE TERMS 5.1 A life insurance policy is a contract which the insurer promises to pay a benefit upon the death of the person who is insured. As such, life insurance provides financial protection against the economic loss caused by the premature death of the person being insured. This benefit is commonly known as Death Benefit. The insurer will pay a lump sum payment of the sum assured, plus bonuses if applicable, in the event of the life insured’s death. 5.2 The applicant (also known as the proposer)) is the person or business that applies for an insurance policy. When a policy is issued, the person or business that owns the insurance policy is known as the policy owner. In most cases, the applicant is also the policy owner. 5.3 The person who is insured by a life insurance policy is referred to as the life insured. The policy owner and the life insured may be, and often are, the same person. If, for example, a person applies for and is issued an insurance policy on his own life, then he is both the policy owner and the life insured. If, however, a person’s father applies for and is issued a policy on his juvenile son’s life, then he is the policy owner and the son is the life insured. When one person purchases insurance on the life of another person, the policy is known as a third-party policy. 5.4 If the insured risk (e.g. death) occurs while the insurance policy is in force, the insurer pays the policy benefit. This policy benefit when paid as a lump sum, is often referred to as the sum assured 2. This is the amount guaranteed to be paid out by the insurer in the event of a claim. If the policy is a participating life insurance policy, non-guarantee bonuses from the insurer’s participative fund which were declared and accumulated to date, will also be paid in addition to the sum assured. Life insurance policy proceeds are usually paid to the policy’s owner, the deceased life insured’s estate if he is also the policy owner or nominated beneficiary. 6. INSURANCE AND GAMBLING COMPARED 6.1 There are two important differences between insurance and gambling. Firstly, gambling creates a new speculative risk, while insurance is a technique for handling an existing pure risk. Thus, if you bet S$50 on a lottery draw, a new speculative risk (risk of losing S$50) is created. However, if you pay S$50 a month to an insurer for life insurance, the risk of premature death is already present and is transferred to the insurer by a contract. No new risk is created by the transaction. 6.2 Secondly, the difference between insurance and gambling is that gambling is socially unproductive, because the winner’s gain comes at the expense of the 2 The sum assured is also called the policy’s face amount or face value because this amount is generally listed on the face, or first, page of the policy. Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 9 Module 9: Life Insurance And Investment-Linked Policies loser. In contrast, insurance is always socially productive, because neither the insurer nor the insured is placed in a position where the gain of the winner comes at the expense of the loser. The insurer and the insured both have a common interest in the prevention or delay of a loss. Both parties win if the loss does not occur. Moreover, gambling transactions never restore the losers to their former financial position. In contrast, insurance contracts restore the insureds financially in whole or in part if losses occur. 7. HAZARDS 7.1 As noted earlier, insurers cannot predict when a specific individual will die, become injured, or suffer from an illness. Insurers, however, have identified a number of factors that can increase or decrease the likelihood that an individual will suffer a loss. The most important of these factors are physical hazards and moral hazards. A. Physical Hazard 7.2 A physical hazard is a physical characteristic that may increase the likelihood of loss. For example, a person with a history of heart attacks possesses a physical hazard that will increase the likelihood of that person dying sooner than that of a person of the same age and gender without such similar medical history. A person who is overweight has a physical characteristic that is known to contribute to health problems, and those health problems may result in the economic loss associated with higher-than-average medical expenses. Underwriters of insurers must carefully evaluate the intending insureds to detect the presence of such physical hazards. B. Moral Hazard 7.3 Moral hazard is the likelihood that a person may act dishonestly in the insurance transaction. For example, if an individual applies for a sum assured which is far in excess of what others in the same financial situation would buy, the insurer would be concerned about the reason for the high cover. The individual may be seeking insurance for a dishonest reason. Underwriters also evaluate the moral hazards presented by individuals in cases where they find that those individuals have provided false information on their applications for insurance. In these cases, the applicants could be trying to obtain insurance coverage that they would not otherwise be able to obtain. When underwriters evaluate applications for insurance, they take a variety of steps to identify intending insureds who present these moral hazards. 10 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance 8. CONCEPT OF ANTI-SELECTION 8.1 When an insurer receives an application for insurance, the insurer must assess the degree of risk that it will take on if it agrees to issue the policy. An insurer cannot afford to presume that each proposed risk represents an average likelihood of loss. Not all individuals of the same gender and age have an equal likelihood of suffering a loss. Furthermore, those individuals who believe they have a greater-than-average likelihood of loss tend to seek insurance protection to a greater extent than do those who believe they have an average or less- than-average likelihood of loss. This tendency, which is called anti-selection, adverse selection, or selection against the insurer, means that the insurer will need to carefully review each application to assess properly the degree of risk the insurer is assuming for the policies it issues. If the insurer consistently under-estimates the risks that it assumes, its premium rates will be inadequate to provide the promised benefits. 8.2 To minimise problems arising from anti-selection, insurers can employ a number of methods; one of which is effective underwriting. Underwriting or selection of risks, is the process of identifying and classifying the degree of risk represented by an intending insured and the insurers’ employees who are responsible for evaluating proposed risks are called underwriters. Underwriting involves identifying the risks that an intending insured presents, as well as classifying the degree of risk that an intending insured represents. The risks can be classified as standard, sub-standard or declined / postponed. 8.3 The other methods are offering policies with different excesses 3 and offering policies with pre-existing condition exclusions. These will be covered in a later chapter of this Study Text. 9. VARIOUS LIFE AND HEALTH INSURANCE PRODUCTS A. Life Insurance Products 9.1 Life insurance is provided on both an individual and a group basis and is available under a variety of types of policies. We describe the following major types of life insurance policies: Term Insurance provides a death benefit if the insured dies during a specified period. Whole Life Insurance provides life insurance coverage throughout the insured’s lifetime and also build up cash values4 which can be used as a form of savings for the policy owner. A policy’s cash value is a valuable asset that the policy owner can use in a number of ways. This is further explained in a later chapter. 3 In an insurance policy, the deductible (also known as “excess”) is the portion of any claim that is not covered by the insurer. It is the amount of expenses that must be paid out of pocket before an insurer will cover any expenses. Typically, a general rule is: the higher the deductible, the lower the premium, and vice versa. Depending on the policy, the deductible may apply per covered incident, or per year. For policies where incidences are not easy to delimit (for example health insurance), the deductible is typically applied per year. Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 11 Module 9: Life Insurance And Investment-Linked Policies Endowment Insurance provides a policy benefit that is paid either when the insured dies or on a stated date if the insured lives until then. Endowment Insurance has some characteristics of both Term Insurance and permanent life insurance. Like Term Insurance, Endowment Insurance provides life insurance coverage for only a stated amount for a specific period of time. Also, like permanent life insurance, Endowment Insurance provides a savings element. 9.2 All the above policies may also provide the life insured with Total and Permanent Disability (TPD) Benefits either attached to the basic policy or as a supplementary benefit. 9.3 Other types of life insurance that are available in the market include Universal Life Insurance. Universal Life Insurance is a form of “interest sensitive” Whole Life Insurance that offers a death benefit, and because of its flexible premium feature, provides the opportunity to build cash values which the policy owner can borrow from or withdraw. The cash values earn interest at a declared rate, which may change over time. Notwithstanding that, most Universal Life Insurance plans guarantee a minimum interest crediting rate. These plans give the policy owner the flexibility to assist him in meeting his financial goals. Within certain limits, the policy owner can choose the amount, method and timing of his premium payments. B. Annuities And Investment Products An Annuity is a series of periodic income payments to a named individual in exchange for a premium or a series of premiums. Investment-linked Life Insurance policies (ILPs) provide a combination of protection and investment elements. Premiums buy life insurance protection and investment units in professionally managed investment- linked sub-funds. Structured ILPs are ILPs where the sub-funds are invested in structured products and other structured funds. C. Health Insurance Products 9.4 These products are designed to cover hospital expenses, surgical expenses and emergency accident outpatient expenses incurred as a result of accident, sickness or disease commencing or occurring during the period of insurance. In Singapore, there are private Health Insurance schemes, as well as those offered by the Central Provident Fund Board. For further details, refer to the section below, as well as the SCI Health Insurance module. 12 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance 10. LIFE INSURANCE AS A FINANCIAL PROTECTION TOOL 10.1 Life insurance is an effective mechanism for providing financial protection for individuals against the personal risks that we have discussed earlier on. A. Financial Protection Against Premature Death 10.2 Life insurance can be used to fulfil a breadwinner’s financial obligations to his dependants in the event of his premature death. A Term Insurance or Whole Life Insurance policy can provide the funds needed to meet the funeral expenses and to provide a sum of money, to take care of his dependants. Term Insurance can also be used to pay off any outstanding loan that the client may have. Endowment Insurance, on the other hand, can be used to accumulate the funds necessary to finance one’s children’s education in the future. B. Financial Protection Against Outliving Resources 10.3 Annuity and Endowment Insurance policies can be used to provide the necessary income that a person will need in his retirement. In fact, Annuities are specially designed for this purpose. There are many types of Annuity policies designed to meet the various needs of individuals, as you will see in a later chapter of this Study Text. An individual can buy an Annuity policy to pay him a regular income for life. This reduces the risk of one living too long and outliving one’s financial resources. 10.4 Endowment Insurance, on the other hand, can be arranged to mature at the age that a person retires. In this way, the person will receive the benefits upon his retirement, which he can use to purchase an Annuity or to invest elsewhere. C. Financial Protection Against Ill Health And Disablement 10.5 The risk of ill health can be met by Health Insurance coverage. Some examples of Health Insurance are listed below. 10.6 Critical Illness Insurance is suitable for providing protection against the contracting of a covered critical illness under the policy. 10.7 Medical Expense Insurance reimburses the insured for expenses incurred as a result of an event, illness or accident, and provides inpatient and some outpatient benefits. 10.8 Hospital Cash (Income) Insurance, on the other hand, will provide the insured with a fixed amount of daily allowance benefit for each day of his hospital stay, irrespective of other expenses incurred for medical treatment during his hospitalisation. There is also no restriction on the use of the benefits payable under this plan. Hence, the insured can use it to meet any of his needs. 10.9 Disability Income Insurance is a form of income-protection insurance which helps to replace a portion of the insured’s income that he loses if he becomes totally disabled and unable to work due to an accident or sickness. Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 13 Module 9: Life Insurance And Investment-Linked Policies 10.10 Long-Term Care Insurance is a product that is designed to meet some or all of the costs of care to the insured who, as a result of accident, sickness, frailty or a combination of these, is physically impaired to the extent that he is no longer able to function independently. Instead, he has to depend on others to help him perform most basic activities of daily living. D. Financial Protection For Businesses 10.11 Financial protection principles apply to businesses, as well as individuals. This is especially true for small businesses where the business owner’s wealth is tied up in the business and its continued success is dependent on their skills and application. For many businesses, especially these smaller ones, the success of the business may depend on certain key individuals. To protect the business against financial losses arising out of the loss of contribution by these key individuals due to sickness, disability or death, the business owner can purchase Key-Person Insurance. A business can also purchase life insurance to provide benefits for its employees. Another key application of life insurance in business setting is to use it as a funding vehicle for buy-sell agreements in business succession planning. 11. THE IMPORTANCE OF LIFE INSURANCE 11.1 Aside from the advantage of providing financial protection for individuals, families and businesses; life insurance benefits policy owners in other important ways such as the following: A. Assist In Making Savings Possible 11.2 Although one may prefer to save rather than purchase life insurance, saving involves time, resources and discipline. A savings programme can yield only a small amount at the start, whereas an insurance policy guarantees the full face value or other benefit from its beginning. Hence, it can protect the policy owner against failure through early death or incapacity to have sufficient working time to save adequately through other means. Thus, if one is able to save S$500 annually, it will take nearly 20 years to accumulate a fund of approximately S$15,000 assuming that the accumulations are safely invested annually at 4% compound interest. Even at that, an individual’s ability to accumulate such a savings fund is contingent upon his survival for the full period, and this may be defeated by death or disability before the savings have reached any appreciable sum. 11.3 To depend entirely on saving as a means of providing for the future could prove disastrous financially. It is generally accepted that the first requisite in providing for the future support of dependants is reasonable certainty. Life insurance provides protection against the possible failure to continue the annual accumulations of the savings fund because of early death or disability. 14 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance B. Provides A Safe Investment 11.4 Life insurance can, with careful selection, be a reasonable, long-term savings instrument. Life insurance policies and annuities can be safe investments, but life insurance policies also make it possible for the policy owner to arrange for the safeguarding of the policy death benefits and values. C. Encourages Thrift 11.5 Life Insurance can constitute an excellent means of encouraging thrift for many persons. Many individuals who may not otherwise save regularly will nevertheless regularly pay premiums on a life insurance policy. If the policy is of the type that has a cash value this can constitute a type of semi-compulsory savings plan. D. Minimises Worries And Provides Peace Of Mind 11.6 If the breadwinner has adequate amounts of life insurance, he is less likely to worry about the financial security of his dependants in the event of premature death; an individual insured for disability income protection does not have to worry about the loss of earnings if a serious illness or accident occurs. Worry and fear are also reduced after a loss occurs, because the insureds know that he has the insurance that will pay for the loss. 12. POOLING OF RISKS AND THE LAW OF LARGE NUMBERS 12.1 You may wonder how insurers can accept so many risks. Well, the answer lies in a concept called risk pooling. An insurer accepts the risk of financial loss of a large number of people, but only a small percentage of these people will actually suffer an insured financial loss at any given period. Contributions, in the form of premiums from the many policy owners, go into this pool. From the pool, payments are made to compensate the losses of the few. Pooling brings together a large number of exposures of similar risk characteristics, thereby allowing the application of the law of large numbers to predict the frequency (probable number of losses) and severity of losses (probable size of the losses). 12.2 The law of large numbers, which is a fundamental mathematical principle of insurance, states that the greater the number of insured persons, the more the actual loss experience will tend towards the expected loss experience. With the increasing number of insured persons, risk and uncertainty will diminish. Thus, the larger the insured group, the more predictable will be the loss experience for the insured group as a whole. 12.3 To illustrate the law of large numbers, consider the flip of a coin, which can result in a head or a tail. Flipping a coin 30 times may result in any combination of heads and tails; there may be 19 heads and 11 tails or any other combination. Based on simple mathematics, you would expect to get the same number of heads and tails, because the chance of getting either is 50%. Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 15 Module 9: Life Insurance And Investment-Linked Policies 12.4 However, flipping the coin just 30 times may not give us the 50/50 split that we would expect. Flipping the coin 30,000 times, we would almost certainly see a result of approximately 15,000 heads and 15,000 tails. The law of large numbers, therefore, operates to give a result which is in keeping with the underlying probability (in this example, 50% heads and 50% tails). 12.5 When the insurer applies the law of large numbers to life insurance, it enables them to predict fairly confidently, the final cost of claims in any one year. This is because insurers provide cover against a large number of similar risks, and the final number of actual loss events tends to be very close to the expected number, provided that the conditions under which the original data were gathered remain constant. This enables the insurer to calculate likely losses and so confidently charge a fixed premium. 13. PRINCIPLE OF UTMOST GOOD FAITH A. Insured’s Duty Of Utmost Good Faith 13.1 In ordinary contracts, the contracting parties are not required to reveal all they know about a proposed agreement, as those contracts are subject to the principle of ordinary good faith. A common law principle application to most of these contracts is caveat emptor (let the buyer beware). 13.2 Insurance contracts, however, have always been subject to the more stringent principle of utmost good faith. A life insurance contract is a contract of “utmost good faith” or “uberrima fides”. When issuing a life insurance contract, the insurer must rely on the truthfulness and integrity of the proposer. This is because the proposer knows everything about the risk to be insured, whereas the insurer knows only what the proposer chooses to disclose to the insurer. In return, the proposer must rely on the insurer’s promise and ability to pay future claims. 13.3 The principle of utmost good faith expects the proposers of life insurance policies to: disclose all material facts (see explanation below) which they are aware of or ought to have been aware of, even if no question is specifically asked in the proposal (or application) form; and not to make any misstatement of material facts. 13.4 The fact that the questions in the proposal form have been truthfully answered is not sufficient. The proposer must volunteer information on material facts, even if not asked in the proposal form. This is an obligation, not a matter of choice. A1. Material Facts 13.5 Material facts are facts that can cause an underwriter to deal with a case differently if the information was disclosed at the time of application of the insurance policy. For example, a proposer has undergone some medical tests prior to applying for a life insurance policy. Though the medical test results, which have yet to be released, may or may not reveal any irregularities, it is still the responsibility of the proposer to inform the insurer of such tests done prior 16 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance to the insurance application as such facts will influence the risk assessment of the underwriter whether to accept or decline an insurance application. Failure to do so will give the insurer the right to void the insurance policy from inception (upon discovery) due to the non-disclosure of material facts to the insurer. 13.6 Another example such as an insured’s occupational exposure to hazards will also have to be disclosed. Other examples of material facts thus include the insured’s insurance history, the insured’s claims history, the insured’s previous criminal convictions, as well as other instances of moral hazard. A2. Facts Which Need Not Be Disclosed 13.7 There is no duty for the proposer to disclose: facts which the insurer already knows [e.g. an insurer should know about outbreak of civil unrest in a certain country, or Influenza A (H1N1) in various parts of the world]; facts which the insurer ought to know; facts about which the insurer waives information; facts which can be discovered, where enough information has been given to provoke enquiry by the insurer (e.g. in answering a proposal form question on other existing life insurance policies taken out with the same insurer, the proposer states as “refer to details in your company’s records”, instead of writing down all the policy details as requested in the proposal form); and facts which lessen the risk (e.g. a person applying for Personal Accident Insurance does not like to take part in hazardous activities). A3. Duration Of Duty Of Disclosure 13.8 We have looked at the duty to disclose material facts. Let us now look at when this duty arises. 13.9 The duty of disclosure arises from the beginning of negotiations until the time that the insurance contract takes effect (the inception of the policy) and at other specific times after inception. The duty arises both under common law and under the policy terms. Let us take a look at the duty of disclosure at each stage of the insurance contract. A3A. At Inception 13.10 Under common law, the duty of disclosure starts at the beginning of negotiations and ends at the formation of the insurance contract. Sometimes, a policy wording will extend this duty so that it is continuous throughout the policy period. A3B. On Renewal 13.11 On the renewal of a policy, the duty of disclosure by the insured is revived for general insurance. There is no such duty of disclosure for life insurance policies, as they are not renewable annually, but which are issued for a specific number Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 17 Module 9: Life Insurance And Investment-Linked Policies of years or for life. For such policies, if the insured wishes to continue paying premiums, the insurer is obliged to accept them. There is, therefore, no duty of disclosure at so-called “renewal” since no new contract is formed. A3C. On Alteration 13.12 During the currency of the insurance contract, it may be necessary to change the terms of the policy. The insured may wish to increase the sum assured or change the description of the property. In these cases, the duty of disclosure is revived as a new contract is being formed. B. Insurer’s Duty Of Disclosure 13.13 The insurer also has a duty of disclosure to the insured. In order to fulfil this duty, the insurer must also exercise utmost good faith by, for example: notifying an insured of a possible entitlement to a premium discount resulting from a good previous insurance history; only taking on risks which the insurer is licensed to accept, i.e. avoid unenforceable contracts; and ensuring that statements made are true, as misleading an insured about policy cover is a breach of utmost good faith. 14. INSURABLE INTEREST REQUIREMENT 14.1 We noted at the beginning of this chapter that only pure risks are insurable; insurance is intended to compensate an individual or a business for a financial loss, not to provide an opportunity for gain. At one time, people used insurance policies as a means of making wagers. For example, they purchased insurance policies on the lives of people who were completely unrelated to them and, in that way, created a possibility of financial gain for themselves if such insured people died. 14.2 The practice of purchasing insurance as a wager is now considered to be against public policy. In most countries, legislation has been put in place requiring that, when an insurance policy is issued, the policy owner must have an insurable interest in the risk that is insured – the policy owner must be likely to suffer a genuine loss or detriment should the event insured against occur. 14.3 The presence of insurable interest must be established for every life insurance policy to ensure that the insurance contract is not formed as an illegal wagering agreement. If the insurable interest requirement is not met when a policy is issued, the policy is not valid. The presence of an insurable interest for life insurance can usually be found by applying the following general rule: An insured interest exists when the policy owner is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies. 14.4 To understand how insurable interest requirements are met, we need to consider two possible situations: (1) an individual purchases insurance on his 18 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance own life; and (2) an individual purchases insurance on another person’s life. In both cases, the applicant for life insurance must name a beneficiary. Let’s look at each of these situations. 14.5 All persons are considered to have an insurable interest in their own lives. A person is always considered to have more to gain by living than by dying. Therefore, an insurable interest between the policy owner and the insured is presumed when a person seeks to purchase insurance on his own life. 14.6 Certain family relationships, e.g. parents and their children are assumed by law to create an insurable interest between a life insured and a policy owner or beneficiary. 14.7 An insurable interest is not presumed when the policy owner or beneficiary is more distantly related to the life insured than the relatives described above or when the parties are not related by blood or marriage, e.g. friends. In these cases, a financial interest in the continued life of the life insured must be demonstrated in order to satisfy the insurable interest requirement. For instance, if Mr. Tan obtains a S$30,000 personal loan from a bank, the bank would have a financial interest and, consequently, an insurable interest in Mr. Tan’s life. If Mr. Tan should die before repaying the loan, the bank could lose some or all of the money that it lent him. Similar examples of financial interest can be found in other business relationships. 14.8 The insurable interest requirement must be met before a life insurance policy will be issued. After the life insurance policy is in force, the presence or absence of insurable interest is no longer relevant. Therefore, a beneficiary need not provide evidence of insurable interest in order to receive the benefits of a life insurance policy. 14.9 The Insurable Interest Requirement in Health Insurance. The insurable interest requirement also must be met when a Health Insurance policy is issued. For Health Insurance purposes, the insurable interest requirement is met if the applicant could demonstrate a genuine risk of economic loss should the proposed insured require medical care or become disabled. Because of the nature of Health Insurance, applicants rarely seek Health Insurance on someone in whom they have no insurable interest. Typically, people seek Health Insurance for themselves and for their dependents. As a contract of indemnity, a Health Insurance policy provides coverage to pay for medical expenses that the insured has incurred or to replace a disabled insured’s lost income. Applicants are generally considered to have an insurable interest in their own health. Additionally, for Disability Income Insurance purposes, businesses have an insurable interest in the health of their key employees. A. Why Is Insurable Interest Necessary? 14.10 To sum up, insurable interest is required for life insurance contracts for the following reasons: firstly, it excludes the possibility of gambling (i.e. minimise problems of moral hazard in insurance). Secondly, the proposer is expected to safeguard the subject matter (i.e. the proposer is interested in its preservation). Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 19 Module 9: Life Insurance And Investment-Linked Policies 14.11 Without insurable interest, any life insurance is more or less a gamble, since the policy owner (policyholder) will not actually be at risk with the insured peril or event. B. When Must Insurable Interest Exist? 14.12 In most General Insurance policies, insurable interest must be present at both the inception of the insurance contract and at the time of loss. However, as far as Marine Cargo Insurance is concerned, there is no need for insurable interest to be present at the inception of the insurance contract. Rather, insurable interest must exist only at the time of loss. 14.13 In contrast, as laid out in Section 146 of the Insurance Act 1966, in life insurance, there must be an insurable interest, or a presumed insurable interest, present at the inception of the insurance contract, but it need not be present at the time of the life insured’s death. A beneficiary, therefore, need not provide evidence of insurable interest in order to receive the benefits of a life insurance policy. C. Insurable Interest Required For Life Insurance Under Insurance Act C1. Own Life 14.14 Section 146(1)(b)(i) of the Insurance Act 1966 provides that a person may take out a policy on his own life. 14.15 Although legally there is no limit to the amount of insurance that an individual can take up on his life, in practice, the insurer usually limits the amount of sum assured to a sum that matches reasonably with the life insured’s financial status and earning power, so that he can afford to pay the premium during the term of his life insurance policy. This will also reduce the risk of moral hazard and fraud. C2. Spouse 14.16 According to Section 146(1)(b)(ii) of the Insurance Act 1966, husbands and wives may effect policies on each other’s lives provided they are married at the time the policy is effected. Hence, a husband can buy a policy on the wife’s life and vice versa. C3. Child Or Ward 14.17 Under Section 146(1)(b)(iii) of the Insurance Act 1966, it states that a person may effect insurance on his child’s or ward’s life if the child or ward is under the age of 18 years at the time the policy is effected. C4. Another Person Whom One Is Dependent On 14.18 According to Section 146(1)(b)(iv) of the Insurance Act 1966, a person may effect insurance on a person whom he is wholly or partly dependent at the time of application for the insurance policy. 20 Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 1. Risk And Life Insurance C5. Trustees & Beneficiaries 14.19 Before the Nomination of Beneficiaries (NOB) framework came into effect on 1 September 2009, policies issued under trust are void contracts as no insurable interest exists between the trustee (holder of property on behalf of beneficiaries) and the settlor or grantor (the person who creates the trust), as well as the beneficiaries (persons who will receive the policy proceeds). 14.20 On 1 September 2009, the Insurance Act 1966 was revised and new Sections 146(3b) and (3c) were added to allow trustees and beneficiaries of a trust to purchase policies on the life of the settlor. However, there are several conditions that need to be satisfied. They are as follows: (1) the life insured must be the settlor or a beneficiary of the trust; (2) the proposer is the trustee of the trust; (3) any beneficiary of the trust – (i) has an insurable interest in the life of the settlor / relevant beneficiary at the time the insurance is effected; or (ii) is – (a) the settlor / relevant beneficiary’s spouse at the time the insurance is effected; (b) the settlor / relevant beneficiary’s child or ward under the age of 18 years at the time the insurance is effected; or (c) any other person whom the settlor / relevant beneficiary is wholly or partly dependant on and; (4) the settlor / relevant beneficiary consents in writing to the effecting of the insurance before it is effected. C6. Creditors & Debtors 14.21 It has been well established that a creditor has an insurable interest in the life of his debtor. When a creditor who pays the premiums for a policy insures the debtor’s life, his insurable interest is not limited solely to the amount of the indebtedness. He can insure his debtor’s life for a sum assured estimated to be sufficient to reimburse him at the debtor’s death for the premiums paid plus the debt and the interest on both. C7. Key-Person Insurance 14.22 A key-person or key-man refers to an employee who is vital to the continued profitability of a business. Examples of a key-person can be a sales executive with valuable foreign contacts, or an inventor who creates new products. The loss of such a key-person can seriously affect the business profitability. 14.23 Hence, a business enterprise will have an insurable interest in the life of such a key-person. Therefore, it is common for a business enterprise to effect insurance on the life of a key-person. The business enterprise is the proposer, and it has to show that its insurable interest in the key-person (life insured) warrants the level Copyright reserved by the Singapore College of Insurance Limited [Version 1.0] 21 Module 9: Life Insurance And Investment-Linked Policies of cover required. The sum assured should be that required to compensate for the loss of profits on the death of the key-person and, in particular, to cover the expenses of recruiting, hiring and training a successor. This is why an underwriter usually request for such evidence like a Key-Person Insurance questionnaire, as well as the profit and loss statements of the company in the past three years, for the assessment of Key-Person Insurance applications. 15. PRINCIPLE OF INDEMNITY AND LIFE INSURANCE 15.1 As a representative, you must always uphold the highest standards of integrity and professionalism, and give advice to your clients that is fair and objective, and in the clients’ best interests at all times. 15.2 As mentioned earlier, insurance seeks to compensate an insured only for the loss that he has sustained. Insurance is not intended to enable him to profit from the misfortune. This is in accordance with the principle of indemnity which states that the financial position of an insured is to be restored approximately to the position that existed immediately prior to the occurrence of the loss. The purposes of employing this principle in insurance are to prevent the insureds from profiting from insurance and at the same time to reduce moral hazard that can be exercised by some insureds. 15.3 For an indemnity principle to work, a number of factors will need to be considered. Amongst these are: the insured must show that he has suffered a loss in monetary terms. Losses based only on factors such as sentimental value cannot be included. Secondly, the insured must establish the extent and value of his loss. Thirdly, the insured is not entitled to recover more than the amount of the loss from a single loss, irrespective of the number of policies that he has in respect of the same property. 15.4 The principle of indemnity applies to General Insurance as well as Health Insurance. However, it does not apply to Life Insurance and Personal Accident Insurance. It is because we cannot price the value of a human life. Neither can we depreciate a human value. In life insurance, therefore, insurers use the sum assured that an insured wants to purchase, provided that the amount is reasonable. Personal Accident Insurance is another line of insurance where insurers do not use the principle of indemnity Instead, they provide an agreed amount, e.g. S$600 per week for loss of income or S$200,000 for loss of one limb. Note that, however, in Life and Personal Accident Insurance, the principle of indemnity is not totally overlooked, in the sense that the financial benefits are kept approximately in line with the insured’s likely earnings that he could have made if having not suffered from the loss. For this, insurers often exercise the following underwriting practices: (a) Insured’s ability to afford premiums. In theory, Life Insurance and Personal Accident policies can have an unlimited sum assured. In practice, however, the sum assured tends to be restricted

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