A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors, and to share the costs of doing so.Terminology varies with country but collective investment schemes are often referred to as investment funds, managed funds, mutual funds or simply funds (note: mutual fund has a specific meaning in the US) [Wikipedia].
Exempt financial adviser means a financial adviser who is exempt under section 23 (1) from holding a financial adviser’s licence [FAA];
Financial adviser means a person who carries on a business of providing any financial advisory service, but does not include any person specified in the First Schedule [FAA];
investment product means [FAA] —
(a) any capital markets product as defined in section 2 (1) of the Securities and Futures Act;
(b) any life policy; or
(c) any other product as may be prescribed;
Licensed financial adviser means a holder of a financial adviser’s licence under the Financial Advisers Act [Insurance Act];
Reinsurance is a means by which an insurance company can protect itself with other insurance companies against the risk of losses. Individuals and corporations obtain insurance policies to provide protection for various risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn, provide insurance to insurance companies [Wikipedia].
Representative means a person, in the direct employment of or acting for or by arrangement with a financial adviser, who performs for the financial adviser any of the functions of a financial adviser (other than work ordinarily performed by accountants, clerks or cashiers), whether his remuneration (if any) is by way of salary, wages, commission or otherwise, and includes an officer of the financial adviser who performs for the financial adviser any of those functions, whether or not his remuneration is as aforesaid [FAA];
Credit derivative means a financial contract which is designed to transfer credit risk on loans or other assets between 2 parties;
Credit event, in relation to a credit derivative, means any event agreed upon between the contracting parties to the credit derivative which triggers a payout or delivery of assets under
the credit derivative;
Deposit means —
(a) a deposit as defined in section 4B of the Banking Act (Cap. 19), in a case where the deposit is accepted by a bank; or
(b) a deposit as defined in section 2 of the Finance Companies Act (Cap. 108), in a case where the deposit is accepted by a finance company as defined in that section of that Act;
Dual currency investment means a deposit which is accepted in one currency and which may be repayable in another currency;
Merchant bank (in Singapore) means a merchant bank approved under section 28 of the Monetary Authority of Singapore Act (Cap. 186);
Structured deposit means —
(a) a deposit under which any interest or premium is payable, or is at risk, in accordance with a formula which is based on —
(i) the performance of any financial instrument or securities as defined in section 2 (1) of the
Securities and Futures Act (Cap. 289); or
(ii) the occurrence of any credit event in respect of a credit derivative —
(A) to which the bank or the finance company, as the case may be, is a contracting party; or
(B) from which the bank or the finance company, as the case may be, would enjoy a benefit or incur a loss; or
(b) a dual currency investment.
Accredited investor means —
(a) an individual —
(i) whose net personal assets exceed $2 million in value (or its equivalent in a foreign currency); or
(ii) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency);
(b) a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency), as determined by —
(i) the most recent audited balance-sheet of the corporation; or(ii) where the corporation is not required to prepare audited accounts regularly, a balance-sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance-sheet, which is a date within the preceding 12 months;
(c) the trustee of a trust of which all property and rights of any kind whatsoever held on trust for the beneficiaries of the trust exceed $10 million in value (or its equivalent in a foreign currency);
(d) an entity (other than a corporation) with net assets exceeding $10 million in value (or its equivalent in a foreign currency);
(e) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005 (Act 5 of 2005)) in which each partner is an accredited investor; or
(f) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more persons, each of whom is an accredited investor;
Institutional investor means —
(a) a bank that is licensed under the Banking Act (Cap. 19);
(b) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap. 186);
(c) a finance company that is licensed under the Finance Companies Act (Cap. 108);
(d) a company or society registered under the Insurance Act (Cap. 142) as an insurer;
(e) a company registered under the Trust Companies Act (Cap. 336);
(f) the Government;
(g) a statutory body established under any Act;
(h) a pension fund or collective investment scheme;
(i) the holder of a capital markets services licence for —
(i) dealing in securities;
(ii) fund management;
(iii) providing custodial services for securities;
(iv) securities financing; or
(v) trading in futures contracts; or
(j) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;
Terms related to CPF Investment Scheme:
Retirement Account (RA): The Retirement Account is set up to meet your basic needs during your old age. When you reach 55, you will need to set aside your Minimum Sum, using the savings in your Special and Ordinary Accounts, in the Retirement Account. You can then withdraw the rest of the savings in your Ordinary and Special Accounts in one lump sum.
Minimum Sum Scheme (MSS): Setting aside the Minimum Sum when you reach 55 ensures that you have some regular income from age 62 (the current Draw-Down Age) to live on in your retirement.The Minimum Sum was set at $80,000 in 2003 and will be raised gradually until it reaches $120,000 (in 2003 dollars) in 2013. These amounts will be adjusted yearly for inflation.If you are unable to set aside your full Minimum Sum in cash, your property, bought with your CPF savings, will be automatically pledged for up to half of your Minimum Sum. See: http://mycpf.cpf.gov.sg/CPF/my-Cpf/reach-55/Reach55-2.htm
Minimum Sum draw-down age (DDA): The Minimum Sum draw-down age will be raised gradually from 62 in 2012 to reach 65 by 2018.
Risk and Insurance
Risk is the possibility of loss and there is an uncertainty element to it.
Characteristics of Insurable Risks:
- The loss must occur by chance;
- The loss must be definite;
- The loss must be significant;
- The loss rate must be predictable; and
- The loss must not be catastrophic to the insurer.
- premature death;
- outliving resources; and
- poor health.
Life insurance is insurance that provides protection against the economic loss caused by the death of the person insured.
The traditional types of life insurance policies are:
- Term Insurance
- Whole Life Insurance
- Endowment Insurance
Law of large numbers. The greater the number of persons insured, the more the actual loss experience will tend towards the expected loss experience.
Breach of Utmost Good Faith:
- Non-disclosure - omission to disclose a material fact inadvertently or because the party thought it was not material
- Concealment - intentional suppression of a material fact
- Innocent misrepresentation - inaccurate statements regarding a material fact, believing them to be true, or are made without any intention to mislead
- Fraudulent misrepresentation - statements made with the intention of deceiving and known by the person making them to be false or made recklessly without any faith in their correctness
The basis clause also converts any statements made by the applicant into a warranty. A warranty is a statement by which the applicant undertakes that a particular thing shall or shall not be done, or that a particular fact exists or not, or that some condition shall be fulfilled. A statement which has been made to be the subject of a warranty must be strictly true and correct. Any error in such a statement is sufficient to void the policy, however trivial it may be.
Third party policies will only be valid if the policy-owner has an insurable interest in the life of the proposed insured when the policy is issued.
Policy-owner. The person who purchases the policy owns the policy; also usually responsible for the payment of the premium on the policy.
Life insured. the person on whose life the insurance cover is based on.
Contract of Indemnity. The contract is based on the actual amount of financial loss as determined at the time of loss with the condition that the amount of benefit payable cannot exceed the maximum amount stated in the policy. E.g. Property and casualty policies.
Valued Contract specifies in advance the amount of the benefit that will be payable when a loss occurs. E.g. Life insurance contracts.
Classes Of Relationship In Which Insurable Interest Need To Be Proven:
- Creditor-debtor relationships
- Key-person insurance
Financial Market and Investments
Types Of Financial Claims
- Claim is for a fixed amount - Debt or fixed income market
- Claim is for a residue amount – Equity Market
- Claim is dependent on an underlying asset - Derivative market
- Financial market for short-dated financial assets: money market (maturities of less than a year)
- Financial market for longer-dated financial assets: capital market (maturities of more than a year.)
- Interest Rate Risk – risk of sensitivity of bond prices to change in market interest rates, bond prices will change in the opposite direction from a change in interest rates
- Default Risk - risk that the issuer will fail to make timely principal and coupon interest payments as contracted
- Reinvestment Risk - risk that the coupon interest on a bond may have to be reinvested at a lower interest rate
- Currency Risk – risk that investor’s total return may be affected by foreign exchange rate prevailing when the coupon and principal payment are received
Investment-linked Life Insurance policies (ILP) are designed mainly for investment purposes.
Annuities are insurance contracts that provide a person with an income for life or for a specified period of time.
Risk refers to the variability of returns associated with a given investment. In simple terms, risk is the volatility or degree of fluctuations in the value of assets such as stocks. The most widely used statistical measure of risk is the variance or standard deviation.
The Real Risk-Free Rate. In an inflation-free economy, where there is no risk, the real risk-free rate is the minimum return expected by the investor. This return is also referred to as the pure time value of money because it represents the trade-off of present consumption for a higher level of future consumption.
The Nominal Risk-Free Rate. If investors expect a rise in general price level of goods and services, they will increase the required rate of return to reflect the higher inflation rate. This is called the nominal risk-free rate of return:
Nominal Rf = [1 + real Rf][1 + expected Inflation] - 1
If there is uncertainty about the amount and timing of future cash flows from the investment, the investor will demand a return greater than the pure time value of money plus the inflation rate. The excess return above the nominal risk-free rate of return is known as the risk premium.
Life Insurance Premiums
The premiums of life insurance companies are calculated by professionals called actuaries. Actuaries predict ahead of time the average number of people who will die each year at each age based on the large number of people and deaths recorded by their company over the years. Having decided on the number of deaths, the actuary then divides it by the total number of people of that age to arrive at the mortality rate. They then compile the mortality rates into a table categorised by age, called the Mortality Table.
Morbidity rate is used to determine the premiums for Health Insurance such as Critical Illness Insurance. It is the rate at which sickness, injury and failure of health occur among a defined group of people.
When an insurance company uses just the rate of mortality/morbidity and investment income to calculate premiums, it is actually calculating net premiums, i.e. the amounts needed just to pay for insurance protection.
Classification Of Life Insurance Products
Classification by Statutory Insurance Fund. Life insurers generally establish and maintain separate insurance funds for the following types of life policies:
- Investment-linked;
- Participating; and
- Non-participating.
Non-participating policies (aka without-profits policies) refer to life insurance products that do not share in the profits or surplus of the insurance fund, i.e. not entitled to any bonus payments.
Participating policies (aka with-profits policies) refer to life insurance products that share in the profits or surplus of the insurance fund.
Investment-linked life insurance policies are primarily investment products with an insurance protection element.
Classification by Product Type. Life Insurance Products can be classified according to the purposes they serve.
- Term. Mainly for death protection needs
- Whole Life. For death protection and savings needs
- Endowment. Mainly for savings needs
- Investment-Linked. Mainly for investment needs
- Annuities. For protection against outliving one’s resources
- Riders. For providing financial protection in addition to that of the basic policy at a low cost
- Single Premium policy
- Recurring Single Premium policy. It allows its policy-owner to make single premium payments on a regular basis to his policy. Policy-owner has the flexibility of discontinuing future premium payments without affecting the policy, as it will be treated as a fully paid-up policy.
- Regular Premium policy.
- Yearly Renewable Premium policy.
- Limited Payment policy. This is applicable to the Limited-Payment Whole Life policy where the insured needs only to pay the premiums for a specified number of years or up to a specified age (e.g. age 55).
- Single Life policy
- Joint-life policy. It can be issued in one of the following ways: First-to-die Life Insurance - the death benefit is paid to the surviving insured and the policy cover ends, or Last Survivor Life Insurance - only pays out the death benefit when both the insureds have died i.e. on the second death.
- Third-party policy. Usually issued to the husband on the wife’s life and vice versa or parent on child’s life.
- Group policy. It is a policy which covers a large number of lives, usually issued to employers covering the employees’ lives.
Cash Value (or Cash Surrender Value) is the amount of money, before certain adjustments, that the policy-owner will get in the event that he surrenders his policy to the insurer for cancellation.
Participating Life Insurance (aka With Profit Policies)
Participating policies pay annual compound bonuses which are tax-free, and enable the policy-owner to enjoy capital growth.
Bonuses are declared on an annual basis and are guaranteed once they have been declared. It also has a non-guaranteed component which is the future bonus.
Cash value always lower than the reserve for non investment-linked policies because:
the heavy expenses incurred in the first policy year is recovered over the period of insurance and, therefore, the surrender values paid will have to take into account this amount
to deter those in good health from terminating their policies and thus reducing the chances of anti-selection.
Annuity
Type of Annuity:
Permanent Annuities
- Straight Life Annuity - no guarantee nor refund features provided.
- Guaranteed Minimum Payout Annuity - guaranteed payments equal to the purchase price.
- Life Annuity With Period Certain
- Life Income With Refund Annuity
Temporary Annuities
- Fixed-Period Payments
- Fixed-Amount Payments
Joint-life and Survivor Annuity provides an efficient way of addressing the financial needs of the lives involved when one of them passes away.
Fixed Annuity - Fixed payments
Variable Annuity - Annuity linked with ILP
to Investment Linked Policy (ILP)
Investment-linked policy (ILP) means any policy which provides benefits calculated by reference to units, the value of which is related to the market value of the underlying assets [The Insurance Act (Cap 142), revised ed. 2002]
Premium Allocation refers to the percentage of the premium that is used to purchase units from the underlying investment funds.
Reduced Allocation Period refers to the period of time during which less than 100% of the premium from the client will be used to purchase units.
Unallocated premiums are applied to meet the life company's expenses.
front-end loaded plans allocate less than 100% of premium allocation to purchase units from the first year.
Back-end load refers to the charges that are imposed when policy-owners wish to partially or fully surrender their policy within a stipulated time frame, due to a 100% premium allocation from the start.
Valuation date is the date that the insurer will determine the value of the underlying assets in the investment funds.
Premium Holiday - periods when policy-owners do not pay any premiums and yet enjoy the benefits that are defined in the policy contract insurers will sell away existing units from the policy to pay for all the benefits charges. A premium holiday charge is levied on the policy-owner for the utilisation of this premium holiday feature
Fund Management Fee - paid to the fund manager for portfolio supervision and for general management of the fund's affairs, and serves to compensate the manager for the expenses incurred in providing its services. It may range from 0.5% to 2% per annum.
Benefit/Insurance Charges - charges incurred by the client for the insurer to provide coverage for certain events like death, total and permanent disability or critical illness, etc. occurring during the period of cover.
Policy Fees - covers the administrative expenses of setting up the policy as well as the regular running expenses of administering the policy.
Administrative Charges - cover the initial expense of the policy; incurred largely to provide record-keeping and transaction services to fund shareholders.
Surrender Charges - charges that a client would incur if he decides to cash out a portion or all of his units before a certain period of time.
Fund Switching Charges - the fund switch feature of an ILP allows the policy-owner to switch all or a portion of his holdings from one fund to another.
Death Benefit - death benefit or sum assured can be expressed in two ways:
DB1: the value of the units in the policy-owner account plus the chosen death cover
DB2: the higher of the value of units or the chosen death cover
2 Methods to Calculate the Policy Value of a Single Premium Plan:
- Method 1: The most common method of applying policy fees, administrative fee and mortality charges is to deduct these charges from the investment account after the single premium paid is used to purchase units in the investment account
- Method 2: Another method of charging for policy fee, administration fee and mortality charge is to deduct these charges from the single premium before it is used to purchase units.
Regular Premium ILP have 2 types of loading policy:
- Front-end loaded policy: the amount of premiums allocated to purchase units will vary by policy year; the allocation percentage will vary from company to company
- Back-end loaded policy: the full amount of premiums will be used to purchase units but a surrender charge applies if the policy-owner surrenders the policy in the early years.
- Accumulation Units - the investment income of these funds is ploughed back into the fund. Hence the unit prices will be enhanced.
- Distribution Units - the investment income of these funds is distributed to the policy-owner. The policy-owner will regularly receive income in the form of additional units or cash payment.
Managed Portfolios (also known as Risk Rated or Lifestyle Funds) - a pre-set mix of funds to investors (based on the investor’s investment and risk profile)
Capital guaranteed funds are funds that promise to return a minimum amount, usually after a certain period of time or at particular points of time.
Capital protected funds work in a similar manner but have no explicit guarantee – they rely on the performance of the underlying assets.
Needs Analysis
Risk Averse Persons - prefer low risk products and are willing to sacrifice some expected return in order to reduce the volatility in returns.
Cautious Persons - are willing to accept some short-term fluctuations if the return of the investment over the medium- to long-term is higher than fixed interest deposits.
Balanced Persons - are prepared to accept some losses as long as the expected return of the investment over the medium to long term is positive and significantly higher than that of fixed interest deposits.
Risk-seekers - prepared to accept losses of part of their investments in order to maximise the returns on their investment over the long-term.
Tax relief on insurance premium - amount of relief that a person can claim is:
- up to 7% of the capital sum assured; or
- the difference between the maximum relief of $5,000 and the annual CPF contributions.
Disclosure Requirements
Three compulsory documents to all clients at the time of selling a life insurance policy:
- Your Guide to Life Insurance
- Product Summary
- Benefit Illustration
Reduction in Yield (applies to ILPs only). It shows the difference between the projected investment rate of return and the rate of return that the client will receive based on the benefit illustration. For Endowment Investment-Linked policies, the reduction in yield is 9% less the yield to the maturity of the policy. For Whole Life Investment-Linked policies, the reduction in yield is 9% less the yield or surrender value at the end of the 20th policy year or age 65, depending on whichever is later.
Insurance Underwriting
To effect a life insurance policy, the applicant must apply to the insurer by completing a life insurance application form (or proposal form)
The insurer would communicate the underwriting decision to the applicant in the form of a letter called the letter of acceptance.
Conditional Receipt - Life insurance is in force immediately, if:
- information in the application is true and complete
- proposed insured is not required to go for medical examination (non-medical cases)
- proposed insured is insurable and accepted at standard rates.
Premium notice is sent to clients who pay their premium by cash or cheque to remind them of the premium due.
The transfer of rights from one party to another under an insurance policy is called an assignment. The person who transfers the rights is known as the assignor and the person to whom the rights are transferred is called the assignee.
Insurance Claims
Coroner's Report - usually required when death resulted from unnatural or accidental causes.
Joint Tenancy: Joint-life policies are usually issued on a joint tenancy basis, whereby the surviving life acquires legal title to the claim proceeds.
Tenancy In Common: On the death of one of the tenants, the title of the deceased’s share of the property passes to his legal personal representative and then to his beneficiaries in the normal course of administration.
Insurance Act (Cap. 142), revised ed. 2002, enables an insurer to make a payment of up to a prescribed amount to the proper claimants on the death of an insured, without insisting on any grant of probate or letter of administration.
Law of Contract
Waiver is the intentional relinquishment of a known right.
Estoppel arises when an insurance professional (intentionally or unintentionally) creates the impression that a certain fact exists when it does not and an innocent third party relies on that impression and suffers a damaged as a result, the insurer will be estopped (prevented) from denying this fact.
Operative Clause provides information on the sum assured to be paid in the event of the happening of the insured event.
Grace Period. A period of time (usually 30 or 31 days from the premium due date) given by the insurer to the policy-owner to pay the renewal premium which has been due but not yet paid.
Suicide. If the life insured commits suicide within a specified period of time (usually one year) from the issue date of the policy or the date of reinstatement of the policy, the policy will be void; the insurer will refund all the premiums paid from the effective date or date of reinstatement.
Incontestability Clause. Insurer undertakes not to dispute the validity of a life insurance contract and voiding it after the policy has been in force for a specified period of time (normally one or two years) with the exception of fraud.
Endorsements are amendments to an insurance policy that becomes a part of the insurance contract and expands or limits the benefits payable.
Law related to annuity
Benefit Provision informs the annuitant how the annuity payments will be paid to him and when the payment will stop. It also informs the annuitant that proof of his survival may be called for before the payment of the benefit.
Death Benefit Provision describes how the annuity benefits will be paid upon the death of the annuitant.
Surrender Provision specifies the conditions under which an annuity owner may surrender his policy and the amount payable under such circumstances.
Free-look Provision. Annuitant is given a specified number of days (usually 14 days) to go through the policy; should he decide to cancel the annuity within this period, he will be given a full refund of the premiums paid less any medical fees incurred in assessing the risk.
Law of Agency
An agency is a legal relationship by which one party is authorised to perform certain acts on behalf of another party. The party granting the authority is called the principal whilst the party that receives the authority is called the agent.
Express agency is created when the principal or some person authorised by him expressly appoints the agent by way of a deed, a written contract or orally. Where insurance is concerned, agents are usually contracted by the insurers by way of a written contract.
Usual Authority: a representative has the usual authority to explain the meaning of questions in a proposal form or terms in the policy. However, he does not have the usual authority to enter into, renew or revive contracts of insurance on behalf of the insurer, to vary the terms of the contract or waive conditions in the contract, etc.
Apparent Or Ostensible Authority - arises where the agent appears to be clothed with a certain authority. It is created when the principal allows conditions to exist that lead a third party to reasonably believe that actual authority exists.
There may be circumstances whereby the principal may wish to accept the benefit brought about by the unauthorised act and retroactively claim that the person is his agent when carrying out the act. This is known as ratification.
Rights of an agent:
Right To Remuneration: determined by the terms of his contract with his principal, e.g. an insurer
Right To Indemnity: If an agent incurs liability or pays out money in the performance of his duty as an agent, he has a right to be indemnified by the principal unless the agency agreement provides otherwise.
Income Tax
Assessable Income - refers to the aggregate of taxable income from all sources, net of deductible expenses and capital allowances, less trade losses and donations to approved charities and institutions.
Chargeable Income refers to the remainder of the assessable income after deducting all personal reliefs and allowances, such as earned income relief, wife relief, child relief, deductions for CPF contributions, deduction for SRS contributions.
Personal Reliefs and Deductions:
Earned Income Relief
NSmen Relief
Wife Relief
Child Relief
Working Mother’s Child Relief
Handicapped Sibling Relief
Aged Parents Relief
Grandparent Caregiver Relief
Reliefs For Insurance Premiums And CPF Contributions
Course Fees Relief
Foreign Maid Levy Relief
Relief For Contributions To The Supplementary Retirement Scheme (SRS)
A rebate is a reduction of tax otherwise payable by a taxpayer.
Beneficiary, Wills and Trust
Insurance Act allows the insurer to make payment to any proper claimants a prescribed amount of the policy moneys of policies (only applicable to Life or Personal Accident policies) issued by the insurer on the deceased insured without the need for a grant of probate or a letter of administration.
If the insurer is a co-operative, under the Cooperative Societies Act, the client may name any person regardless of whether the person is his next-of-kin; this nomination is effective and will override provisions in a Will. A nomination under the Cooperative Societies Act is not automatically revoked upon marriage.
The Will should indicate who the executor of the estate is and who the guardian of the minor children in case neither parent survives should be.
A Grant of Probate must be obtained from the court to enable the executor to administer of the deceased’s estate according to the directions contained in his Will.
Executor is the person nominated to administer the deceased’s estate according to the Will. If no executor is appointed by the testator (the person who has made a Will), then the court will appoint one after his death.
A trust can be defined as a legal arrangement where one party (grantor) transfers his property to someone else (trustee) who holds the legal title and manages the trust property for the benefit of others (beneficiaries).
If no trustee is appointed till the policy moneys become payable, the insured (or if he passed away, his personal legal representative) is deemed to be the trustee.
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