| |
PERSONAL
INVESTING
COVER STORY
A different
option
A new breed
of investment product has entered the local market, in the form
of investment-linked life insurance plans. Jenny
Ng speaks with industry players to find out how it works.
The improving economic environment seems to have given insurers
the impetus to introduce, one after another, new investment-linked
life insurance plans. In
the last four months since the new year, consumers have been inundated
with new investment-linked products, from the plain vanillas to
sophisticated offshore plans. To date, nine insurance companies
are selling 20 investment-linked products offering a total of 39
funds.
This is good news for Malaysians but such policies are nothing new
in developed markets. In the UK, the first investment-linked policy
was introduced by London & Manchester in 1957. In the US, investment-linked
insurance was first made available to the public in 1976, long after
the product was introduced in the UK, Canada, Australia and the
Netherlands.
In neighbouring Singapore, the first investment-linked policy was
sold in 1973 although the market’s development gained momentum
only in the 1990s. In Malaysia, Prudential Assurance Malaysia Bhd,
then known as Berjaya Prudential, offered what is believed to be
the country’s first investment-linked plan in 1997.
“We are playing catch-up with the West and Singapore, where
investment-linked plans have been around for more than 15 years.
Here, the product is only two to three years old,” says Chris
Ng, department manager, life investment-linked development of Malaysian
Assurance Alliance Bhd (MAA).
What is investment-linked life insurance? As the name denotes, it
is a life policy directly linked to investment performance. The
value of the policy is linked to units held in a special investment
fund or funds managed by the insurer or external fund managers.
The value of the units is reflected by the net asset value (NAV)
of the fund, which fluctuates according to the fund’s performance.
Like traditional insurance, the policyholder pays a premium. Depending
on the features of the plan, part or all of the premium (usually
after deductions for the insurers’ initial costs) will be allocated
for investments, that is to purchase units in investment funds offered
by the insurance company. The number of units held by a policyholder
is determined by the amount available for investments and the prevailing
offer price per unit at the time of purchase.
Investment-linked insurance plans come in two types — single
and regular premium plans.
Foong:
Traditional insurance funds' asset allocation is governed by
Bank Negara Malaysia's guidelines, giving rise to stable returns,
unlike investment-linked insurance products that are invested
predominantly in equities |
A single premium
plan is essentially a policy that allows you to pay one lump sum
for both life insurance protection and investment. The insurer’s
initial cost and insurance or mortality charge are debited from
the policyholder’s account at the inception of the policy or
at regular intervals throughout the life of the policy. The balance
is used to purchase units in the investment-linked funds. The policyholder
is allowed to top up the policy at any time.
“Every month, units in the policyholder’s account are
sold to cover the cost of the insurance coverage. If the fund is
performing well, we will deduct fewer units for the insurance coverage.
When the value of the investments in the fund exceeds the sum assured,
we will stop deducting for insurance coverage,” says Alex Foong,
chief executive officer of Great Eastern Life Assurance (Malaysia)
Bhd.
The regular premium plans work on the same principle as single premium
plans, except that the policyholder is required to make regular
premium payments. The frequency of payment is at the policyholder’s
discretion; the more often he pays, the more administrative charges
are incurred. Premium allocation also varies from plan to plan.
With regular premium investment-linked policies, the policyholder
may vary the sum assured from time to time without changing the
level of his regular premiums.
In determining the benefit or insurance cover for investment-linked
insurance products, Teh Loo Hai, appointed actuary of Great Eastern
Life, says two models are available. In the first model, the benefit
is the total of the sum assured plus the value of investment units.
The insurance charge for this model will be higher. Alternatively,
some insurers prefer the second model where the benefit is the higher
of sum assured or value of investment units.
The minimum sum assured for single premium policies following the
industry’s proposed guidelines on investment-linked products
is 125 per cent of the premium, although the requirement for offshore
funds is much lower as they are regulated differently. For regular
premium plans, the minimum sum assured is five times the annualised
regular premium.
In short, the single premium policy is very much an investment product
providing minimal insurance protection while the regular premium
provides both investment features and insurance protection.
With investment-linked insurance, there is no fixed term although
investors are advised to take a medium- to long-term view.
“An investment-linked account is similar to a savings account,
the policyholder decides on the term. You can put in and withdraw
money and even cancel the account whenever you want,” says
Teh.
Investment-linked
versus traditional
Bush:
Life is a two-edged sword; with investment-linked products come
flexibility, but you give up a bit of the security in terms
of stable returns that are available in traditional policies.
Investment-linked products give you potentially-higher investment
gains but you also have to live with the higher risks. |
How is investment-linked
insurance different from traditional insurance?
According to Edward J Bush, senior vice-president and general manager
of American
International Assurance Company Ltd (AIA), traditional life insurance
policies have savings and protection elements bundled together,
whereas investment-linked life insurance policies unbundle these
elements and allow policyholders to decide their own level of protection
and investments. Flexibility also comes with choice where policyholders
are offered a variety of funds to invest in.
“But flexibility comes with a little risk. Traditional policies
may have lower returns but provide more guarantees. Life is a two-edged
sword; with investment-linked products come flexibility, but you
give up a bit of the security in terms of stable returns that are
available in traditional policies. Investment-linked products give
you potentially-higher investment gains but you also have to live
with the higher risks,” says Bush.
Great Eastern Life’s Foong explains that traditional insurance
funds’ asset allocation is governed by Bank Negara Malaysia’s
guidelines, giving rise to stable returns, unlike investment-linked
insurance products that are invested predominantly in equities.
Ng Keng Hooi, chief executive officer of Prudential Assurance Malaysia
Bhd, uses the analogy of a cookie jar to illustrate the difference
between traditional and investment-linked policies.
“The traditional product is a smooth product where the policyholder
is protected from the ups and downs of the market. During the good
times, the surplus from profits are put into a cookie jar and given
out when times are bad. But for investment-linked policies, whatever
the company makes is given to the policyholder,” he says.
Policyholders’ aptitude for higher risks and returns led to
the creation of investment-linked insurance. According to Ng, with
traditional insurance, policyholders felt they were not getting
the exciting returns that came with the risks of investing in equities.
Hence, to meet consumer demands, the cash value of regular products
are put into funds to be invested in a combination of assets that
yield higher returns.
“In the US, investment-linked products came about as a result
of competition from mutual funds and the stock market. It was a
natural evolvement of the insurance industry to satisfy the desire
of people not only to have insurance but also to see their cash
value or wealth accumulation follow the stock market’s growth.
People wanted to have the protection of insurance and participation
in growth and flexibility,” says AIA’s Bush.
Indeed, investment-linked insurance allows the policyholder to reap
the benefits of both insurance protection and higher investment
returns. One of the most prominent benefits of investment-linked
plans is the flexibility to adjust the insurance cover and investments
as one progresses through life. The policyholder may also vary his
sum assured by topping up his investments. Prudential’s Ng
says that with traditional insurance, policyholders may have to
surrender the existing policy or take up a new one if they intend
to vary the sum assured. With investment-linked plans, policyholders
do not have to cancel their existing insurance policies when they
feel the need to make changes to their insurance cover.
He explains that traditional life policies, like endowment plans,
whole life and term life offer different levels of savings and insurance
cover. As an individual’s insurance needs change through the
different stages of his life, he will need different insurance plans.
For example, a young executive may want an endowment plan that offers
high savings and low insurance cover, while an older person may
prefer a term life policy offering higher insurance cover to provide
for his family in the event of his untimely demise. Ng fears that
consumers may be influenced to cancel or surrender their existing
policies when they find that the policies no longer meet their insurance
needs.
“People don’t realise that money is wasted when they cancel
their policies. With investment-linked policies, you can change
the level of benefits. With the same policy, if you want something
similar to an endowment plan, you can bring down the insurance cover.
As you advance in life and have a family, you may want to increase
the insurance cover and decrease the investment portion.
Some underwriting may be required but you don’t have to let
go of the existing policy,” says Ng.
Aside from flexibility, investment-linked policies offer a choice
of instruments from which policyholders can choose according to
their risk appetite, unlike traditional plans where the investment
decision is made by the insurer.
Policyholders can choose from equity, fixed income, growth, balanced
and Syariah funds. Most plans available in the market offer a choice
of investment funds to choose from. For those who wish to park their
hard-earned money outside the country, they can put them in offshore
funds. There are two plans in the market offering this option —
Maybank Global Invest and MNI International Portfolio.
Another advantage or benefit of investment-linked insurance, Ng
claims, is the transparent charging mechanism, where the policyholder
is aware of what goes into the purchase of investment units, insurance
charges, insurer’s administrative costs, initial costs and
fund management fees. Great Eastern Life’s Teh says these charges
are made known in statements sent to the policyholder. This is an
improvement from traditional policies where these costs are not
known to the policyholder.
Taxpayers should be happy to know that investment-linked life insurance
premiums qualify for tax relief, although the amount is limited
to RM5,000 only and includes contributions to the Employees Provident
Fund.
Since investment-linked products offer such attractive features,
will it mean the end of traditional life insurance?
Most industry players disagree and recommend both products as part
of a balanced investment portfolio. Bush of AIA offers a conservative
view and suggests starting off with some savings in the bank to
build liquidity, followed by a traditional insurance policy. Subsequently,
one could invest extra income in a variety of assets such as investment-linked
products, fixed deposits, equities, unit trusts and property.
Prudential’s Ng says traditional life insurance is not a must
prior to taking up an investment-linked plan. The consumer decides,
depending on his appetite for risk, taking into consideration the
security that comes with traditional policies as well as the high
risks and high returns of investment-linked products.
“I don’t think investment-linked products will replace
traditional insurance. I’d expect a normal person to hold some
insurance products, investment-linked products as well as unit trusts.
You’d want to have a few of these assets in your portfolio,”
says Toi See Jong, general manager/appointed actuary of Mayban Life
Assurance Bhd.
Toi adds that unit trusts are similar to units invested in investment-linked
funds, except that unit trusts do not provide the guarantee of the
sum assured in investment-linked plans. “With investment-linked
policies, the policyholder is not exposed to downside risks but
participates in the upside.”
Performance
measurement
Unlike unit trust funds, however, investment-linked funds are presently
not ranked by any independent organisations, so it’s not easy
to track the performance of these products. Industry sources have
noted that there are too few investment-linked funds at the moment
for performance ranking to be done on a regular basis. Furthermore,
the market for investment-linked products is still relatively new
compared to unit trusts.
Toi:
I don't think investment-linked products will replace traditional
insurance. I'd expect a normal person to hold some insurance
product, investment-linked product as well as unit trusts. You'd
want to have a few of these assets in your portfolio. |
When choosing
an investment-linked policy, Toi advises investors to look into
the insurance companies and fund managers’ track record. Where
funds are managed by external fund managers, it is possible to evaluate
their performance by referring to investment performance measurement
reports done by independent parties such as Watson Wyatt.
The daily newspapers publish the net asset values (NAVs) of the
various investment-linked funds in the country, but Toi cautions
that this raw data is not an indication of how the funds are performing.
Nevertheless, it is possible to track funds’ performance by
calculating their returns over the long term — a tedious but
necessary task for the serious investor.
This can be achieved through simple mathematics and dogged determination
in following the funds’ NAV per unit as published in the papers.
Great Eastern Life’s Teh says one way is to tabulate the rise
or fall in percentage terms of the funds’ NAV per unit using
their NAV per unit on a common date as the base. By doing that over
a period of time, a layman should be able to analyse the funds’
performance quite easily.
Teh adds that the investor could also track the funds’ NAV
per unit performance based on a self-created index of the funds.
Industry players say there is more to come in the investment-linked
market. Consumers can also expect more innovative plans to be launched
in the future as insurers, banks and unit trusts companies compete
for their deposits. This competition will ultimately lead to more
efficiency and better customer service.
FACTORS TO
CONSIDER
PAGE 2 >>
List of investment-linked
insurance available in Malaysia
CLICK HERE TO DOWNLOAD TABLES >>
|
|
|
Personal Money / May 1, 2000
