M9 Training Slides

CMFAS Module 9: CMFAS Module 9:
Life Insurance and Life Insurance and

Investment Linked Policies Investment Linked Policies
1
CMFAS M9 Exam Objectives
To test knowledge and understanding:
a. Life Insurance & Investment-Linked Policies
b. Annuities
c. Riders
2
d. Sales Process
e. Underwriting Process
f. After-Sales Service
g. Impact of Law & Taxation on Life Insurance
Good To Know
Exam mode: Computer Screen
Duration : 2 Hrs
Questions : 100Multiple Choice Questions
MUST Bring
NRIC
or Passport
on the day of exam!
3
Passing Mark : 70% (70 Questions)
1 mark for each right answer
No mark deducted for wrong and blank answer
CMFAS M9 Question Types
Type of Questions
1. The majority of exam questions test the ability to recall
materials from the textbook.
2. Application questions.
4
2. Application questions.
3. Questions that test the understanding of:
i. the underlying insurance principles and concepts;
ii. products
Chapter 1
Risks and Insurance
5
Risks and Insurance
Risks and Insurance
Definition of Risk
Risk is defined as exposure to the chance of injury or
loss, a hazard or dangerous chance Dictionary.com
Speculative Risk
Pg 2
6
Involves 3 possible outcomes: loss, gain or no change
Example: Investing
Pure Risk
No possibility of gain: Either loss or no loss
Example: Natural Disaster
Risks and Insurance
Characteristics of Insurable Risk
Loss occurs by chance
Loss must be definite
Loss must be significant
Pg 3 - 4
7
Loss must be significant
Loss rate must be predictable
Loss must not be catastrophic to the insurer
Risks and Insurance
Dealing with Risk
Remember ACTA!
Avoiding the risk
Control the risk
Pg 4-5
8
Control the risk
Transfer the risk
Accept the risk
Risks and Insurance
3 Types of Personal Risk
Premature death
Outliving resources
Poor health (sickness/disability)
Pg 5
9
Poor health (sickness/disability)
Risks and Insurance
Basic Life Insurance Terms You Should Know
Death Benefit
Applicant
Policy Owner
Pg 6
10
Policy Owner
Life Insured
Third Party Policy
Sum assured
Beneficiary
Risks and Insurance
Hazards
Pg 7
Physical characteristic
that may increase the
likelihood of a loss
Physical
Hazard
11
likelihood of a loss
Hazard
Likelihood that a person
may act dishonestly in
the insurance transaction
Moral
Hazard
Risks and Insurance
Anti Selection and Underwriting
Anti Selection/Adverse Selection
People who have more to lose, tend to seek more insurance
Underwriting
Pg 8
12
Underwriting
Method of minimising anti-selection problems. Can classify risks
as:
1) Standard 2) Sub-standard 3) Postponed/Declined
Risks and Insurance
Various Life & Health Insurance Products
Life Insurance Policies:
1) Term 2) Whole Life 3) Endowments 4) ILPs
Annuities
Pg 9-10
13
Different types. The most common being till end of life annuity
Health Insurance Products
Designed to cover hospital/ medical/ surgical/ emergency
accident outpatient expenses
1) Private Health Insurance 2) CPF Board
Risks and Insurance
Life Insurance Financial Protection against:
Premature Death
Outliving Resources
Sickness/ Disablement
Pg 10-11
14
Sickness/ Disablement
1) Critical Illness 2) Medical Expenses 3) Hospital Cash
4) Disability Income 5) Long Term Care
Businesses
Keyman Insurance being the most common form
Risks and Insurance
Basic Life Insurance Principles
Law of Large Numbers
As the #of people increase, the risk to the insurer decreases
Principle of Utmost Good Faith
Pg 13-16
15
Principle of Utmost Good Faith
Applicants are expected to:
1) Disclose all material facts
2) Not to make any misrepresentation of material facts
Insurers are also expected to abide by this principle
Risks and Insurance
Information Revealed Information Not Revealed
Non Disclosure
Concealment
Pg 14-16
Innocent Misrepresentation
Negligent Misrepresentation
Fraudulent
Misrepresentation
16
Risks and Insurance
Insurable Interest Requirement
Compulsory in all contracts of Life Insurance
It exists if:
1) A person is likely to benefit if the insured continues to live
Pg 16 - 18
17
1) A person is likely to benefit if the insured continues to live
2) He/she will suffer a loss or detriment with the insureds death
Why is it necessary?
1) It minimizes the moral hazards in insurance
2) Proposer is expected to safeguard the subject matter
Risks and Insurance
Insurable Interest
When must it exist?
General Insurance policies: At the time of the loss
Life Insurance: Only during inception, not required during
death
Pg 16-20
18
death
Examples inlude:
1) Own life 2) Another Person Whom One is
Dependant On 3) Trustees & Beneficiaries
4) Creditors & Debtors 5) Key-person Insurance
6) Spouse 7) Child or ward
Risks and Insurance
A Valid Trust Structure
should meet the
following conditions
Life Insured is
the Settlor
Applicant is the
Trustee of the
Trust
Any Beneficiary
has insurable
interest on Settlor
Pg 19
19
Trust interest on Settlor
Beneficiary is
Settlors spouse
Settlors child /
ward below 18
years old
Any person whom
Settlor is partly /
wholly dependant
on
OR
OR
OR
Mr Davids Wife and Son Mr Ravi (Lawyer)
Trustee applies for whole life
policy on the life of Mr Lim
(Settlor).
Beneficiaries of this policy
are Mr Lims wife and son.
Mr Lim consents to the
purchase of the whole life
policy
Risks and Insurance
A Beneficiary of a Trust
requires the following
conditions to be met
Life Insured is
the relevant
Beneficiary
Applicant is the
Trustee of the
Trust
Any Beneficiary with
insurable interest on
relevant Beneficiary
Pg 19
20
Beneficiary Trust relevant Beneficiary
Relevant
Beneficiarys
spouse
Relevant
Beneficiarys child
/ ward below 18
years old
Any person whom
relevant
Beneficiary is
partly / wholly
dependant on
OR
OR
OR
Mr Roberts Wife and Daughter Mr Ramesh (Lawyer)
Applied for term policy on
the life of Mrs Roberts
(Relevant Beneficiary in
Trust).
Beneficiary of this policy is
Mr Roberts.
Mrs Roberts consents to the
purchase of the policy.
Risks and Insurance
Structure of the Singapore Insurance Market
Buyers,
Sellers (Reinsurers)
Intermediaries
Pg 21-24
21
Intermediaries
1) Representative of a Life Insurance Company (Insurer)
2) Representative of a Bank or Other Financial Institution
3) Representative of a Licensed And Exempt Financial Adviser
4) Introducers of Life Insurance Advisory Services
Risks and Insurance
Other Relevant Organisations
Rating Agencies
They provide independent assessment and opinion on the overall
financial capacity or credit worthiness of financial institutions that issue
capital market instruments.
Pg 21-24
22
capital market instruments.
They basically reflect the rating agencys opinion on the credit
worthiness of the financial institution.
In the case of rating an insurer or re-insurer, the agency will make their
decision based on a broad range of factors.
Not all insurance and reinsurance companies are rated as they are not
compulsory for them to get it.
Risks and Insurance
Other Relevant Organisations
Market Associations
They are trade associations in Singapore representing insurance
companies and intermediaries. Examples of such members are:
Pg 24-25
23
companies and intermediaries. Examples of such members are:
Association of Financial Advisers [AFA(S)]
Life Insurance Association of Singapore (LIA)
Singapore Reinsurers Association (SRA)
Risks and Insurance
Financial Industry Disputes Resolution
Centre (FIDReC)
Affordable, one stop centre for customers
For claims up to $100,000 (insureds and insurers only)
Pg 25-26
24
For claims up to $100,000 (insureds and insurers only)
For claims up to $50,000 (consumers and banks only)
Individuals or sole proprietors accepted
1) Mediation (1
st
Stage)
2) Adjudication (2
nd
Stage)
FIDReCs Dispute Resolution Process
Risks and Insurance
MoneySENSE Programme
Launched in 2003, brings initiatives to enhance the
basic literacy of consumers
Covered in 3 tiers
Pg 27
25
Covered in 3 tiers
1) Basic Money Management
2) Financial Planning
3) Investment Know-How
Quiz Time!
A class of relationship in which insurable interest needs to
be proven is when a:
A. person insures his own life
B. creditor insures the life of his debtor
26
C. wife buys a policy on the life of her husband
D. guardian buys a policy on the life of her ward who is
a minor
Quiz Time!
QUESTION: One of principles of Utmost Good Faith
ANSWER: Disclosure of all material facts, Not making any
Misrepresentation of material facts
QUESTION: Name TWO personal risks
27
ANSWER: Premature Death, Outliving Resources, Poor Health
(Sickness or Disability)
QUESTION: How many classes of Risks are there as a result
Of Underwriting? Name all
ANSWER: 4. Standard, Sub-Standard, Postponed, Declined
Chapter 2
Setting Life Insurance
Premium
28
Premium
Setting Life Insurance Premium
Actuaries consider the following:
Mortality & Morbidity Rates (Fig.2.1)
Investment Income
Expenses (What are the 2 Categories?)
Pg 30-35
29
Expenses (What are the 2 Categories?)
Gender (Difference in Premium Rates)
Smoking Status
Sum Assured
Premium Frequency (RP vs SP vs Yrly Renewable vs Ltd
Prem)
Setting Life Insurance Premiums
Suitability of Frequency and Mode of
Premium Payments
Premium affordability
If customer has not set aside sufficient money to buy life
Pg 35-36
30
If customer has not set aside sufficient money to buy life
insurance policies, please dont attempt to sell him a Single
Premium Policy. The coverage will not be enough.
Product suitability
Quiz Time!
QUESTION: Name any 3 factors actuaries must take
note of when setting life insurance premiums
1) Mortality and Morbidity Rates
2) Investment Income
3) Expenses
31
3) Expenses
4) Gender
5) Smoking Status
6) Sum Assured
7) Frequency of Premium Payments
Can be found on Pg 30
Quiz Time!
QUESTION: How is Gross Premium Calculated?
ANSWER: Gross Premium = Net Premium +
Loading (Expenses)
QUESTION: Policy owners need only pay
32
QUESTION: Policy owners need only pay
premiums for a specified period of time. What
type of premium payment is this called?
ANSWER: Limited Premium
Can be found on Pg 35
Chapter 3
Classification of Life
Insurance Products
33
Insurance Products
Classification of Life Insurance Pdts
Hmm, how do I
classify
soooo many
products?
34
Ways of classifying:
By Statutory Insurance Fund insurers to maintain
separate insurance funds for ILP and Par/Non-Par policies.
By Premium Type (Single, Recurrent, Regular, Yearly
Classification of Life Insurance Pdts Pg 38
35
By Premium Type (Single, Recurrent, Regular, Yearly
Renewable, Limited Payment Policy)
By Product Type
By Ownership (Single Life, Joint {First-To-Die vs Last-
Survivor}, Third-Party, Group Policy)
S17 of the Insurance Act (Cap. 142):
Insurers who are registered to carry on insurance
business are required to maintain insurance funds in
respect of their insurance business
To ensure that
Pg 38-39
36
To ensure that
the assets and
liabilities of the
shareholders
and those
relating to the
insurance
businesses are
kept separate!
ILPs cannot be mixed with Par
& Non Par Plans
Product Type Purpose Served
Term Insurance Provide life cover for fixed term
Whole Life Insurance Provide life cover for whole life
Endowment Insurance Provide life cover for limited term and lump sum at end of the term
Investment Linked Life
Insurance
Provide mainly for investing in UTs or investments with some
insurance cover
Pg 39
37 37
Universal Life Insurance Provides life cover with flexibility in changing mix btwn cover and
investment
Annuities Protect against insufficient income arising out of excessive longevity
Critical Illness Insurance Protects against contracting one of the covered critical illnesses
Long Term Care Insurance Protects against being unable to perform a specific number of ADL*
Medical Expense Insurance Protects against risk of ill health and hospitalisation
Disability Income Insurance Protects against risk of loss of income if a person is disabled
Classification by Premium Type
Single Premium Policy is paid at the beginning of the policy
term in one lump sum
Recurrent Single Premium - It allows the policy owner to
Classification of Life Insurance Pdts Pg 40-41
38
Recurrent Single Premium - It allows the policy owner to
make single premium payments on a regular basis
Regular Premium It allows the policy owner to pay premiums
on a yearly, half yearly, quarterly or monthly basis
Classification by Premium Type
Yearly Renewable Premium Only applicable to Yearly
Renewable Term policies. The premium upon renewal is based on
the life insureds attained age
39
the life insureds attained age
Limited Premium Payment Applicable to policies where the
policy owner needs to pay premiums only for a specified number
of years or a specified age
Classification by Ownership
Single Life Policy
Most common type of insurance policy issued
As policy only covers one life, hence the name of the
policy
Pg 41-43
40
policy
Joint Life Policy
Generally used to cover husband and wife (to cover a
loan)
First-to-die Life Insurance Policy pays on the death
of one of the insureds
Last Survivor Life Insurance Policy pays out only
on the death of the second life insured
Third-party (life of another) policy
Usually issued to the husband on the wifes life and
vice versa or parent on childs life
One of the parties may not be covered under the
policy e.g. Husband = policy owner, wife = life insured
The cover for the two parties differs e.g Father buys
Payors benefit rider, Child = Life insured
41
Payors benefit rider, Child = Life insured
Group policy
Multiple employer groups such as trade associations
and labour unions;
Members of professional associations or affinity
groups (such as membership clubs); and
Debtor-creditor groups which generally consist of a
credit granting institution such as a bank and its
debtors
Characteristics of Group Life Insurance
Master Contract Issued under a single contract called the
Master Contract. Kept by policy owner. When an insured
member dies or leave the group, only his coverage is terminated.
42
member dies or leave the group, only his coverage is terminated.
They main plan goes on as it under the master contract
Minimal Underwriting Requirements Made available to
the participating employees with simpler medical underwriting if
the group size is large. Medical examination is only required where
the sum assured exceeds the free cover limit
Characteristics of Group Life Insurance
Experience Rating Usually underwritten based on past
claims experience.
Cost Effective Many life insured. Only one master contract,
43
Cost Effective Many life insured. Only one master contract,
thus save on admin costs
Plan Continuation It is usually renewable by the employer on
a yearly basis
Individual Life Insurance Group Life Insurance
Only the individual applicant Members who belong to the group.
Ocassionally, family members are also
covered
Each individual insured gets a policy
contract
A master contract is issued for the
Company
Individual can select the amount of Members may or may not have the right to
44
coverage he wants decide on the amount. Can be a flat
amount or multiple of basic salary
Individuals health and financial status
evaluated
Group evaluated as a whole
Coverage continues till termination, policy
expiry or maturity
Coverage ceases when individual leaves
group. The remanining members still
covered
Higher cost of coverage due to individual
underwriting and higher admin costs
Lower cost of coverage due to less admin
costs and documentation involved
Group Life Insurance
Normally Group Life Insurance can be written as:
1) Term Life Insurance
2) Whole Life Insurance
45
2) Whole Life Insurance
3) Endowment Insurance
Since Group Term Life Insurance has the greatest appeal to
employers and is sold by most insurers in Singapore, we will
discuss only Group Term Life Insurance
Group Term Life Insurance
Yearly Renewable Term Insurance Policy
Premiums varies with the size and experience of Group on
yearly basis
Pg 45
46
yearly basis
Just a simple health declaration needed if the group is small
Group Term Life Insurance (Features)
1) Coverage
Mostly 24-hours worldwide coverage, with certain
exclusions. Usually up to age 65-70 and covers Death and
TPD
2) Extended Benefit
Provides continued coverage for 12 months even though the
employee leaves the company, usually on the condition
Pg 45
47
employee leaves the company, usually on the condition
that:
a) Employee remains unemployed
b) Employer notifies the insurer within (usually 14) days from
the date of termination
c) Master policy is in force
3) Riders
Allows for the provision of riders such as:
1) Critical Illness 2) Accidental Death & Dismemberment
Pg 46
48
1) Critical Illness 2) Accidental Death & Dismemberment
3) Hospital & Surgical 4) Disability Income
4) Sum assured
According to rank OR
Number of times of basic monthly salary
5) Premiums
Paid on annual basis. Grace period is usually 30/31 days from
annual premium due date.
Pg 46
49
annual premium due date.
Premium
Payment
Non-Contributory
(Company pays
premiums in full)
Contributory
(Members pay
premiums in part
or in full)
6) Commencement of cover
Coverage normally commences at the start of employment.
Covers only people who are actively at work
Pg 47
50
Covers only people who are actively at work
7) Assignment of Policy
NO third party assignment allowed
8) Termination of Coverage
a) When employee reaches specified age
b) Employee retires or gets terminated
9) Termination of Coverage
c) Employee transferred to work overseas during which he
is no longer under Company payroll
Pg 47
51
is no longer under Company payroll
d) Temporary leave of absence, vacation without pay, sick
or injured for more than 6 months
e) Employer does not pay premium within grace period
f) Insurer or employer decides not to continue with policy
*Reinstatement usually allowed. Terms & conditions apply
10) Claims procedure
Documentation needed:
Death claim form (1 by employer and 1 by attending
Pg 47
52
Death claim form (1 by employer and 1 by attending
physician)
Copy of Death Cert
Copy of payslip
Police report (if applicable)
Incident report (if applicable)
10) Claims procedure
Documentation needed:
TPD claim forms (1 by employer and 1 by attending
Pg 48
53
TPD claim forms (1 by employer and 1 by attending
physician)
Copy of payslip
Copy of NRIC (certified by employer)
Quiz Time!
Under a Last Survivor Life Insurance policy:
A. death benefit is payable on the second death
B. death benefit is payable on both deaths, in
proportionate amounts
54
proportionate amounts
C. income benefits are payable after the first death and
last until the second death
D. annuity benefits are payable after the first death and
last until the second death
Quiz Time!
QUESTION: Name the 2 kinds of contribution plans
for GTL Policies
ANSWER: Contributory & Non-contributory
55
QUESTION: How are the sum assured for GTL
Policies determined?
ANSWER: According to rank, according to number of
times of basic monthly salary
Chapter 4
Traditional Life
Insurance Products
56
Insurance Products
Traditional Life Insurance Products
Term Insurance
Level Term
Decreasing Term
Increasing Term
Whole Life
Insurance
Ordinary Whole
Life
Limited
Endowment
Insurance
Pure
Endowment
Anticipated
Pg 50-59
57
Increasing Term
High Protection
No Savings
Limited
Premium
Payment WL
High Protection
Low Savings
Anticipated
Endowment
Low Protection
High Savings
Inception
of Policy
Policy Expiry
Date
What happens if he
dies?
Term
Policies
Pg 50-59
58
Policy Term
Nothing is payable if the insured is
alive after policy expiry
No Cash value
No Policy Loan
No bonus payable
Premium is the lowest
Premium is usually fixed EXCEPT for
Increasing Term and Renewable Term
Insurance
e.g. CPF Dependants
Protection Scheme
Features of Term Insurance
Covers the insured against death during the policy term
Non participating = no bonus payable on death
Duration of cover is only for period specified at inception.
Pg 50-51
59
Once specified period is up, policy expires
Policy lapses if premium is not paid within grace period
Most insurers offer TPD coverage and certain riders which
can be attached to the policy
No cash value accumulation
No policy loan feature
Features of Term Insurance
No automatic premium loan
Premium cost is the lowest compared to other types of life
insurance
Death benefit is paid in a lump sum
Pg 51
60
Death benefit is paid in a lump sum
Upon TPD, the sum assured is paid either in a lump sum
or in installments.
Example of Term Insurance is the CPFs Dependants
Protection Scheme (DPS). The DPS covers death and TPD
and is renewable yearly up to age 60.
S$100,000
Level Death benefit payable
Nothing is
payable if the
insured survives
to the end of the
policy term
Example: A10-Year S$100,000 Level Term
Insurance Policy
Term
Pg 50-59
61
Policy Term 1
10 (end of policy term)
S$0
Note: Both the death benefit and the premium remain level
throughout the term of the policy
Term
Policies
S$100,000
Death Benefit
Example: A10-Year S$100,000 Decreasing Term
Policy
Pg 50-59
62
Policy Term 1 10
S$0
1. Based on observation, what happens to the sum assured over time?
2. Under which situation will an insured need a Decreasing Term Policy?
3. Will the premiums reduce as the sum assured is reduced periodically?
4. When will the premium stop but coverage can still continue?
S$150,000
Fig 6.10 10-Year S$100,000 Increasing Term Insurance
Death Benefit increasing
at 5% per annum
Period of Benefit Payment
Pg 50-59
63
Policy Term 1 10
S$100,000
1. What happens to the death benefits?
2. Why do you think the client need an Increasing Term Insurance?
3. Will the premium be increased at each increase of sum assured?
Example: Exercising The Renewable Option For a 5-Year
Renewable Term Insurance Policy
Renew w/o evidence
of insurability
Conditions allowed for renewal:
Expiry date DOES NOT EXCEED
a specified age
Premium MUST BE PAID at
renewal
Pg 50-59
64
Policy
Inception Date
Policy Expiry
Date
New Policy
Expiry Date
1/1/2005 31/12/2009 31/12/2014
of insurability
renewal
Pay a higher premium at EACH
RENEWAL due to his ATTAINED
AGE
Traditonal Life Insurance Products
Yearly Renewable Term (YRT) insurance:
$
Premium
Depending on policy terms, client
may not be able to renew the
policy after age 70.
Pg 50-59
65
1. What is the advantage and disadvantage of renewable option?
2. To discourage client from renewing such policy indefinitely, what is
one of the conditions the insurers may rely on? (ans on pg 56)
30 31 32 33 34 35 36
70
Term
Policy
Suitable for clients who prefer
permanent insurance but do not
have the budget at the time of
purchase
Whole
Life
Policy
Change or
Convert w/o
evidence of
insurability
Pg 50-59
66
Attained Age Conversion
When term coverage is converted to permanent insurance under attained age
conversion, the renewal premium rate is based on the attained age of the insured.
Original Age Conversion
The date of the conversion is considered to be the date on which the policyowner
purchased the original term policy. The premium would be based on the earlier age.
Policy owner usually needs to make a large cash outlay at time of conversion
Conditions allowed for conversion are:
Term
Policy
Suitable for clients who prefer
permanent insurance but do not
have the budget at the time of
purchase
Whole
Life
Policy
Change or
Convert w/o
evidence of
insurability
Pg 50-59
67
Conditions allowed for conversion are:
1. Anytime during the policy term or before he reaches a specified age, depending
on whichever is the earlier
2. Must be done in writing on a form as prescribed by the insurer accompanied by
the premium for the new policy based on the insureds attained age
3. Sum Assured for the new policy < = Term policy
4. New policy will include all limitations of risk (exclusions) applicable to the Term
policy
Suitability of Term Insurance
Term Insurance is suitable either the need for protection is:
Purely Temporary
Permanent, but the insured cannot temporarily afford the
Pg 60
68
premiums for permanent insurance
Whole Life Insurance Plans
Nature of WL Insurance
1) Provides for the payment of the policys face value +
bonuses if applicable upon the death of the insured.
Pg 61
69
bonuses if applicable upon the death of the insured.
2) Provides coverage for the whole life of the insured.
Hence the name
3) Known as Ordinary Whole Life or Limited Payment Life
4) Riders allowable to be attached
5) TPD coverage is normally included as part of the policy
or as a rider
Definition of Total & Permanent Disability
An insured is said to be suffering from TPD if he cannot ever
perform any work, occupation or profession.
Pg 61
70
He is also considered to have TPD if he suffers from one of the
following:
1) Loss of sight of both eyes
2) Loss of both limbs; and/or
3) loss of sight of one eye and loss of one limb
Features of WL Insurance
1) Covers against death, for whole of insureds life
Traditional Life Insurance Products Pg 61
71
2) Normally coupled with a TPD benefit/rider. TPD claims
either in lump sum or installments capped at $2M/insurer
3) Accumulates cash value (usually after 3 years)
4) Riders allowable to be attached
5) Premium higher than term policy. Fixed amount
throughout premium term on a regular basis
Features of WL Insurance
6) Premiums payable throughout the policy term or for a
limited period
Traditional Life Insurance Products Pg 61-62
72
limited period
7) Death benefit is paid in one lump sum
8) Can be a participating or non-participating policy
Inception
of Policy
End of
Policy
Term
Whole Life Insurance
Pg 61-63
73
Maturity value (Basic Sum
Assured) is paid to the
insured if he is alive at the
end of the policy term
If insured dies at 60, policy
pays out at age 60,
premium payment stops.
Policy ceases.
30 100 (for example)
60
AGE
Pg 61-63
Policy Endows Here
S$100,000
Cash
Values
Cash Value =
Death Benefit
74
1. If he dies before 100, how much will insurer pay?
2. If he lives till 100 and beyond, how much will insurer pay?
3. What if he stops paying premiums before reaching 100?
30 40 50 60 70 80 90 100
Premium
Non-forfeiture options
Surrendering the policy for its cash value:
Policy owner surrenders his whole policy for its
Pg 64
75
Policy owner surrenders his whole policy for its
accumulated cash values. This option should be
exercised with constraint. Although he can purchase
another insurance plan in the future, his health status
might have changed.
Use the cash value to purchase extended term
insurance
Pg 64
76
insurance
Policy owner uses his existing cash values to convert his
existing policy to an extended term insurance.
Appropriate when policy owner does not want to pay for
his premiums anymore, but still wants coverage.
Use the cash value to purchase paid up Whole Life
Insurance
Pg 64
77
Policy owner uses his existing cash values to convert his
existing policy to a reduced amount of paid-up Whole life
policy. The sum assured is the amount that can be
purchased at the Insureds attained age by the net cash
value as if a single premium. No further premiums
required.
S$300,000
(Sum assured)
$66,000
(Cash Values)
Cash Values
Example
of Non-
Forfeiture
Options
Pg 64
78
(Cash Values)
25 30 35 40 45 50 100
(years)
Example: Mr. Beckham, aged 50 years, has $300,000 policy, with
$66,000 cash value. He has the following options:
1) Surrender whole policy for $66,000
2) Continue the $300,000 coverage for 16.5yrs as Paid Up Term
Insurance
3) Reduce the coverage to $184,000 of paid up Whole Life Insurance
Criteria Ordinary Whole
Life Insurance
Limited Premium
Payment Whole
Life Insurance
Premiums Lower Higher
Pg 67
79
Premium Payment
Term
Payable for life Can be arranged to be
fully paid up during
ones working years
Sum Assured
(assuming same age,
gender and premiums)
Higher Lower
Cash Value Builds up slowly Builds up quickly
Whole Life Insurance Term Insurance
Offers lifetime coverage; for entire lifetime
of the insured (as long as the policy remains
in force)
Offers limited term coverage. No more
benefits once that period ends
Generates cash value, thus creating a NO cash value throughout the whole term Generates cash value, thus creating a
savings vehicle. Normally generated from 3
rd
policy year onwards
NO cash value throughout the whole term
More expensive in premiums when
compared to Term Insurance
Much cheaper than most plans, including
Whole Life Insurance plans
Provides less coverage than Term Policies for
the same amount of premiums
Provides superior coverage over Whole Life
Insurance for the same amount of premiums
80
Suitability of Whole Life Insurance
In summary, the Whole Life Policies:
1) Provide protection against long term or permanent
needs; and
Pg 67-72
81
2) Accumulate a savings fund that can be used for
general purposes or to meet specific objectives
Nature of Endowment Insurance
Its another type of life insurance, that provides death benefit
during the policy term, or the maturity value which is equal to
the death benefit if he survives to the end of the policy term.
Pg 67-68
82
Unlike whole life insurance plans, they have a fixed maturity
date. They are designed to provide a death benefit equal to
the
Target accumulation amount during the accumulation period.
They can be participating or non participating policies
Features of Endowment Insurance
Duration of cover is only for the specified period at
inception of the policy
Upon death/maturity, benefit usually paid in lump sum
TPD benefit usually paid in lump sum or in installments
Pg 69
83
TPD benefit usually paid in lump sum or in installments
Riders are allowable to be attached
Cash value builds up quickly.
Non forfeiture options like APL* available once policy
acquires cash value
Policy lapses if premium is not paid within grace period.
APL will activate if policy has sufficient cash value
Features of Endowment Insurance
Policy loans allowed once policy acquires cash value
Premium usually higher than Term Insurance and Whole
Life Insurance. Lump sum premium is allowed. Payable
either the full term or for limited number of years
Pg 69
84
either the full term or for limited number of years
Can be Participating or Non Participating
Endowment Insurance Plans
Types of Endowment Insurance
1) Pure Endowment Insurance
Pg 67-72
85
2) Anticipated Endowment Insurance
Maturity
Date
Death Benefit payable
when death/ TPD
occurs
Premium for such policy
is higher than term and
whole life (non-par)
Example of an
Endowment
Insurance Policy
Pg 67-72
86
Policy Term
Inception
of Policy
Maturity value (Basic Sum
Assured) is paid to the
insured if he is alive at the
end of the policy term
Can be 10, 15, 20 yrs or up to a
certain age limit (e.g. 65)
Inception
of Policy
Maturity
Date
Nothing is
Example of a PURE Endowment Insurance
Policy
Should
death/TPD
Pg 67-72
87
Policy Term
Face Amount is paid to the
insured only if he survives to
the end of the specified period
It is NOT sold as a standalone policy,
EXCEPT in some sub-standard cases,
where underwriter may counter-offer this
policy to the insured in view of his medical
history
payable!
death/TPD
occur
Maturity
Benefit,
$12,500
$2,500 $2,500 $2,500 $2,500 $2,500
Example of an Anticipated
Endowment Insurance Policy
Pg 67-72
88
3 6 9 12 15 18
Example of an 18-year, $25,000 Anticipated Endowment
Insurance Policy. Insured will receive cash payments every 3
years.
Should he die/get TPD during the course of the term, he would
still receive $25,000 + bonuses.
Cash payments can be left with the Insurer to accumulate
interest.
Suitability of Endowment Insurance Plans
Childrens Education
Saving/Investing Purposes
Pg 72
89
1) Childrens Education
2) Savings/ Investment Purposes
(Such as retirement planning, etc)
MAS Disclosure Requirements Relating to
Life Insurance Policies
Must furnish the client with:
1) Product summary
Pg 72
90
1) Product summary
2) Benefit Illustration
3) Product Highlights Sheet (ILP only)
4) Your Guide to Life Insurance
Quiz Time!
QUESTION: Name the 2 kinds of Endowment
Insurance Policies
ANSWER: Pure Endowment & Anticipated Endowment
91
QUESTION: What are the 3 non-forfeiture options?
ANSWER: Surrendering cash values, use cash values to
purchase a Paid Up whole life policy, use cash value to
purchase to an Extended Term Insurance policy
Quiz Time!
QUESTION: Give an example of a Decreasing Term
Insurance
ANSWER: Mortgage Insurance
IMPORTANT NOTE: Read
the table on pages 73-74. Its
a testable item!
92
QUESTION: What is renewable option (Term
Insurance)?
ANSWER: Giving the life insured the right to renew the
policy at the end of the policy term, without the evidence
of insurability.
Chapter 5
Riders
(Supplementary
93
(Supplementary
Benefits)
Riders (Supplementary Benefits)
Riders = supplementary benefits
Basic Contract = can be Non-Par or Par policy
Riders
Basic
Contract
Basic
Contract
+
Pg 76
94
riders are not automatically included in a policy.
policy-owner must specifically request for riders to be
included but their requests are subject to insurers
assessment and approval
subject to additional premium
Contract +
Riders
Riders cannot be dropped by the insurer as long as premiums
are paid when due
If the policy lapses, the insurer may refuse to reinstate a rider
at the same time that it reinstates the policy
Pg 76
95
Cannot purchase a rider without a basic policy
Cannot cancel the basic policy and retain only the rider
The term of the rider cannot exceed that of the basic policy
Some of the common riders offered by insurers are:
Waiver of premium rider
Total and permanent disability (TPD) rider
Critical illness rider
Term riders
Pg 76
96
Term riders
Payor benefit rider
Guaranteed insurability option rider
Accidental death benefit rider
Accidental death and dismemberment rider
Hospital cash (income) benefit rider
Waiver of Premium Rider
Keeps a policy in force in the event that the insured is not
able to pay the premiums, when he is totally and
permanently disabled or is suffering from one of the
critical illness covered under his policy
Pg 77
97
It causes the premiums under a policy to be waived once
any of the aforesaid events happened
2 Main Groups
Total and permanent
disability (TPD)
Critical illness
Refer to Page 78 for definition of TPD
$ $ $ $ $ $
Disability or Critical
Illness occurs
recovers
Pg 78
98
Waiver of Premium Rider
Keeps the policy in force and the policys cash value would
also continue to increase
Premium
Paying
Term
Premium Waived
TPD is defined as:
Disability such that there is , neither at the time the
disability commences, nor at any time thereafter, any
work, occupation or profession that the life insured
Pg 78
99
work, occupation or profession that the life insured
can ever be capable of doing or following to earn or
obtain any wages, compensation or profit.
Rider expires when the insured reaches a
specified age
Disability or Critical
Illness occurs
Rider expires
here
$ $ $
100
here
No waiver of
premium
Premium Paying Term
$ $ $
$ $ $ $ $ $
Normally rider
expires at age
60 or 65 years
TPD is defined as:
It also includes the total and irrecoverable:
1) Loss of sight of both eyes or
2) both feet at or above the ankle or
Pg 78
101
3) One hand at or above the wrist and one foot at or
above the ankle.
TPD Waiver of Premium Rider Exclusions:
1) Intentionally self inflicted injuries, while sane or insane
2) Bodily injuries sustained as a result of travel or flight in or on
any type of aircraft, except
Pg 78
102
It also includes the total and irrecoverable:
1) Loss of sight of both eyes or
3) One hand at or above the wrist and one foot at or above the
ankle.
$(60% of SA)
$(10% of SA)
$ $ $
Total and Permanent Disability Rider
Example of Payment of TPD Benefit
Pg 80
103
Disability
Strikes
6
month
waiting
period
In the event of a total and permanent
disablement, the disability benefit is paid as a
lump sum or in installments spread over a
number of years.
Most insurers place a limit (usually $2M) on the aggregate amount of
TPD benefit that they will pay on all the policies that an insured has
with the insurer. They will also not pay if the disability was caused by
intentional self-inflicted injuries.
Critical
Illness Rider
Acceleration
Benefit
Additional
Benefit
Pg 81
104
Exclusions:
1) Pre-existing illnesses
2) Self inflicted injury/illness, while sane or otherwise
3) Willful misuse of drugs and/or alcohol
4) Congenital or inherited disorder
Benefit
Exclusions:
5) AIDS or HIV
6) Bodily injury sustained as a result of travel in or on any type of aircraft,
Pg 84
105
6) Bodily injury sustained as a result of travel in or on any type of aircraft,
except as a fare paying passenger or as a crew member of an
international airline operating on a regularly scheduled passenger flight
of a licensed commercial aircraft
7) War or warlike operation, civil war or civil commotion
$200K Whole
Life Policy
with 50%
Acceleration
Death/ TPD
$200K Whole Life
Insurance Policy with
50% Acceleration
Rider
Critical Illness
106
$100K
payout
$100K
payout
Death/TPD
Acceleration
Rider
$200K
payout
$100K Whole
Life Policy
with 200K
Acceleration
Rider
Critical Illness
$100K Whole Life
Insurance Policy
with 200K
Additional Benefit
Rider
107
Rider
$100K
payout
$200K
payout
$100K
payout
Eligibility Criteria for Critical Illness Rider
1) Must be a Critical Illness covered by rider
2) Meets definition & not fall under exclusions
Pg 85
108
2) Meets definition & not fall under exclusions
3) Meets the conditions as specified by Insurer
4) Meets Waiting Period and Survival Period
Pg 85
Acceleration Benefit Additional Benefit
Payment under the policy on diagnosis of a
covered critical illness affects the basic sum
assured
Payment under the policy on diagnosis of a
covered critical illness does not affect the basic
sum assured
May cause the policy to be terminated upon the
payment of a covered critical illness claim, if it is a
100% acceleration rider
Will not cause the policy to be terminated upon
the payment of a covered critical illness claim
The maximum amount payable under the policy is The maximum amount payable under the policy is
109
The maximum amount payable under the policy is
equal to the basic sum assured plus bonuses (if
any)
The maximum amount payable under the policy is
equal to the basic sum assured plus bonuses (if
any) plus the rider sum assured
Critical illness sum assured must not exceed that
of the basic sum assured
Critical illness rider sum assured can be up to a
certain number of times of the basic sum assured,
subject to the insurers guidelines
Critical illness rider term usually follows the basic
plan and can be for life
Critial illness rider term must not exceed that of
the basic plan and usually expires when the life
insured reaches a specified age
Lump sum payout Pay a lump sum amount upon diagnosis of critical illness covered
by the policy
One critical illness claimonly Only one covered CI can be covered. There are some policies
which can cover more than one
Waiting period Specific waiting period. Say 90 days
Cap on sum assured Some insurers may impose a limitation on the amount to
minimise moral hazard
Level premium Premium is level and is either guaranteed or non guaranteed
Pg 84
110 110
Level premium Premium is level and is either guaranteed or non guaranteed
Flexibility No restriction on how the benefit can be used. Both for ILP and/or
traditional
No cash value Do not acquire cash value
Termination Auto terminated once basic policy terminates. May expire at the
maximum age before the basic policy terminates
24hour worldwide coverage Provide worldwide coverage, 24/7 unless otherwise stated
Term Rider
Is a term policy attached to a permanent policy
Cannot be attached to a term policy
Amount of the term rider coverage is usually expressed as a
ratio of the sum assured of the basic plan
Pg 88
111
ratio of the sum assured of the basic plan
Types of term riders
Level term rider
Decreasing term rider
Family income benefit rider
Term Rider
Payor Benefit Rider (3
rd
party policies, on payors life)
Guaranteed Insurability Option Rider
Accidental Death Benefit Rider
Pg 88-93
112
Accidental Death & Dismemberment Rider
Hospital Cash (income) Benefit Rider
Read up on pages 94 - 95
Quiz Time!
QUESTION: Name the 2 categories that the riders of
Waiver of Premium Rider are in
ANSWER: TPD and Critical Illness
113
QUESTION: What are the 3 types of Term Riders?
ANSWER: Level Term, Family Income Term,
Decreasing Term.
Chapter 6
Participating Life
Insurance Policies
114
Insurance Policies
Participating Life Insurance Policies
What are participating policies?
Life insurance products that participate in the performance of
the participating fund of the life insurer. They share in the
profits or the surplus of the participating fund
Common participating plans:
Pg 98
115
Common participating plans:
1) Participating Whole Life Insurance policy
2) Participating Endowment Insurance policy
3) Participating Anticipated Endowment Insurance policy
Objective of Par Policies and Its Implications
They provide competitive and stable medium-to-long
term returns to participating policy owners.
Guaranteed and Non Guaranteed Benefits (Bonuses)
Participating policies provide a combination of guaranteed and non
guaranteed benefits.
Guaranteed benefits are paid out to the beneficiaries should the life
insured die within the policy term, and also upon surrender.
Pg 99
116
insured die within the policy term, and also upon surrender.
Non guaranteed benefits depend on the following key
factors:
1) Investment performance
2) Level of expenses incurred by or allocated to the participating fund
3) Amounts paid out to meet claims on policies in the participating fund
Bonus
Distribution
Methods
Reversionary Bonus
Terminal / Maturity
bonus
Pg 99-102
117
Cash Bonus Interim Bonus
Types of Non-guaranteed Benefits (Bonuses)
- Revisionary Bonus (RB)
Its the most common type of bonus. Also known as Annual Bonus.
It is an addition to the sum assured, regardless of the age of the
insured, or how long the policy has been in force.
Pg100
118
insured, or how long the policy has been in force.
In proportion to the sum assured eg: $10 for every $1,000 SA.
Declared yearly and credited to each policy on its anniversary date.
Sometimes called vesting
Guaranteed once declared.
- Revisionary Bonus (RB)
1) Simple Revisionary Bonus
(Refer to Example 6.1, Page 101)
Pg100
119
2) Compound Revisionary Bonus
(Refer to Example 6.2, Page 101)
- Terminal Bonus (TB)
It is added on top of the RB when terminated (due to death, TPD, CI, etc)
maturity or surrender, usually provided the policy has been in force for a
Pg102
120
maturity or surrender, usually provided the policy has been in force for a
minimum period.
In Singapore, typical bonus allocation for insurers take place in
March/April, following the end of the financial year.
- Terminal Bonus (TB)
Pg102
Policies that terminate in the early part of the year before the finalisation
of the bonus allocation may be given interim bonuses.
121
Typically determined based on the prevailing bonus rates, or bonus rates
used in reserves for future bonuses or results from an interim bonus
investigation report
Pg102
Cash Dividends
Some plans provide cash dividends rather than additions to the sum
assured. Can be converted to additional sum assureds or applied to
122
reduce future contributions.
Pg103
Refer to the Examples written on the white
board for INTERIM BONUSES:
123
Pg103
Level of Revisionary Bonus vs Terminal Bonus
The mix between revisionary bonus & terminal bonus can vary for
124
different participating products. Some have higher terminal bonus with
lower revisionary bonus, and vice versa.
Death
Benefit
Guaranteed
Death Benefit
Bonuses
Credited
Surrender
Value
Guaranteed
Surrender
Value
Surrender Value
Bonuses
Credited
=
=
+
+
Pg 104
125
Value Credited
Paid-Up
Amount
Guaranteed
Paid-Up Value
Paid-up Value of
Bonuses
Credited
= +
Buying a life insurance policy is a long term commitment. Early
termination of the policy usually involves high cost and the surrender
value may be less than the total premiums paid.
Pg 104
Assets Bonuses
Assets backing
Determination of Bonuses
126
Participating
Fund
Premiums Participating Policies
Current
bonuses
(once
declared,
guaranteed)
Future
bonuses
(non-
guaranteed)
Assets backing
Participating
Group
Pg 105
Risk Sharing Mechanism
a) Risk sharing rules
b) Methodology to determine amount of asset to back each
participating product group
127
Risk Sharing Rules
a) Bonuses (RB & TB) allocated on yearly basis
b) Bonuses allocated have to be approved by the Board of
Directors of the insurer
Pg 105-106
Risk Sharing Rules
Key risks affecting participating fund
performance include:
128
Investment risk
Expense risk acquisition and maintainence
Mortality risk
Dread disease and other morbidity risks
Lapse/surrender risk
Business risk, eg, non participating policies and riders
Bonus Allocation
The Appointed Actuary to take the following into
consideration:
1) Maintaining equity and fairness between different generations of
participating policies
Pg 107
129
2) Maintaining solvency of the fund
3) Ensuring consistency with the objective to provide competitive and
stable medium to long term returns to participating policy owners
Vesting and Allocation of Bonuses are NOT the same!
Bonuses allocated may not vest immediately. Usually, allocated
bonuses are vested only upon the policy anniversary for which the
bonuses are due and after premiums are paid
- Determination of Annual Bonuses to be allocated:
Allocated annually to all in-force participating policies, except in
some cases, such as policies in force for less than 2 years.
Normally bonus rates will only be adjusted IF:
there is a prolonged period of good or poor performance; and/or
Pg 107-109
130
there is a prolonged period of good or poor performance; and/or
there is a change in medium to long-term expected investment
returns
- Terminal Bonus
A percentage of compounded bonus. Normally given only to long
term plans. Not applicable to policies that terminate during the
initial years.
- Terminal Bonus
Using the 90:10 rule. The Insurance Act states that insurers can
only take out just 1/9 of the amount allocated to policy owners as
bonus for that year.
Pg 108-109 Participating Life Insurance Policies
131

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