Insurance Concepts Review
TRADITIONAL LIFE & VARIABLE UNIVERSAL LIFE
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Course Content
Part 1: TRADITIONAL LIFE
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Part 2: VARIABLE UNIT-LINKED
a.
Insurance Commission
a.
Concept of Variable Universal Life
b.
Insurance Commission Exam (IC)/Insurance
Institute for Asia and the Pacific (IIAP) Examination
Process
b.
Financial Planning Process
c.
Types of Investment Assets
d.
Types of Funds
e.
Types of Variable Contract
f.
Definition of Terms
g.
How does VUL work?
h.
Basic Computation of Units
c.
Concepts of Life Insurance
d.
Premium, Basic Plans and Riders
e.
Legal Aspects of Life Insurance
f.
Policy Provisions
g.
Annuities
h.
Ethics
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Insurance Concepts Review
PART 1: TRADITIONAL LIFE
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Insurance Commission
• Regulatory government
agency
• Executes all laws
pertaining to insurance
• Regulates insurance
companies
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Insurance Commission
Functions of the Insurance Commission
• Issues licenses to insurance companies
• Reviews policy contracts and premium rates
• Examines the financial condition of insurance companies to
ensure solvency
• Renders assistance to the public on matters pertaining to
insurance
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Insurance Commission
Location of the Insurance Commission
1071 United Nations Avenue cor. Romualdez St., Ermita, Manila
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Insurance Commission
Insurance Code of the Philippines
• Rendered the provisions of Presidential
Decree No. 612
• Promulgated in 1978
• Also known as Presidential Decree No.
1460
• Special law to govern insurance
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Insurance Commission
Built on Trust
• Between the company, the advisor
and the client
• Importance of upholding
professionalism and proper ethics
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IC and IIAP Examination Process
INSURANCE CONCEPTS REVIEW
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IC and IIAP Examination Process
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✓
IC – Offsite Special Exam (BGC)
✓
IC Online Agents’ Computerized
Examinations (ONLINE ACE) System
✓
IIAP Online Exam
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IC – Offsite Special Exam (BGC)
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IC-Offsite Special Exam (BGC)
Procedure and Requirements
1. Survey Alchemer for IC Special Exam schedule and registration will be emailed by Licensing
Team to all FMs and SSAs
2. Kindly ensure completion of requirements:
o Insurance Concepts Certificates
o Proof of Exam Payment
✓ Traditional: Ps. 1,010
✓ VUL:
Ps. 1,010
✓ Both:
Ps. 2,020
3. This is on a First-come-First-served basis with 330 slots per day.
4. Please note that only FULLY VACCINATED examinees are allowed take the exams. Partially
vaccinated examinees may still register as long as they are scheduled to have the 2nd dose
before their desired exam date
Please advise to only register on one date, otherwise you must pay exam fees for all registrations made
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IC Online Agents’ Computerized
Examinations (ONLINE ACE) System
(for Provincial-Based Examinees)
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IC ONLINE ACE System
Requirements
1. Completion of Insurance Concepts Training – Life and Variable
2. Payment of Exam Fees
o Life:
o Variable:
o Both:
Ps. 1,010
Ps. 1,010
Ps. 2,020
3. Transfer or deposit payment to
o BPI Account Name: Sun Life of Canada (Phils.), Inc.
o Account Number: 0993015679
Proof of payment must be submitted. This can be a screenshot of the online bank transfer/
payment confirmation or validated deposit slip. No need to request for original receipt
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IC ONLINE ACE System
System Requirements for the Examinee
PARAMETER
MINIMUM REQUIREMENTS
Web Browser
Latest version of Mozilla Firefox & Chrome
Operating System
Windows 7, MacOS 10.12 “Sierra”, Linux
Processor
Dual-core
RAM
2GB
Network bandwidth
1 Mbps
Cisco Webex Meetings. Cisco Webex Meetings is available for Windows and MacOS through
this link: htts://www.webex.com/downloads.html
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IC ONLINE ACE System
Procedure
1. Recruiting Manager to email COMPLETE requirements to respective Licensing Associate:
o Completely filled-out IC-ACE Excel Information sheet (Please check with SSA for copy)
o Proof of Payment
o 2x2 ID Picture in business attire, with white background and name plate
o Insurance Concepts (Life and Variable) Certificate of Completion
2. Licensing Associate will assign the online exam schedule based on the available slots in the ICACE system. Licensing Associate will advise the requesting recruiting manager, through email,
the following information: exam schedule, username, and password of their examinee, two (2)
working days after the receipt of the complete requirements.
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IC ONLINE ACE System
Procedure
3. Licensing Associate will remit licensing exam fees to IC three (3) days before your exam
date. Refunding of exams fees is not allowed once paid to IC. “No Show” means
forfeiture of payment.
4. Insurance Commission will directly email the examinee the IC- registration link. The
examinee must register not later than one (1) day before the scheduled examination
date.
5. Once the registration is approved, IC will send another email to the examinee with the
Joint Meeting/ Meeting Link, which will be used to enter the (online) examination
room.
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IC ONLINE ACE System
On the Exam Day
1. Examinees are advised to join the meeting 30 minutes before their scheduled batch. (Cisco
Webex).
2. A pop-up dialog will appear once the examinee has clicked the link for the meeting.
3. The examinee must change the Display Name and Email Address with this format :
Insurance Company – Type of Exam- Examinee’s Name
4. Access the Online IC-ACE through https://web.insurance.gov.ph/ace-monitoring/
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IC ONLINE ACE System
On the Exam Day
5. The examinee does not require using any paper, pen, pencil, or calculator.
6. The exams will be proctored through the camera and microphone of the
laptop/desktop device.
7. The proctor will ask examinee to present to the camera a valid government ID will full
name, year of birth, country, issue date, and expiration date.
8. Examinee may send a message to the proctor using the chat box for assistance.
9. Turn-around-time for the release of the results may vary.
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IC ONLINE ACE System
Important Reminders
1. The exam shall be taken in well-lit, quiet, and private room (alone). The following should be
removed from the workspace (other laptops/desktops, mobile phones, smart devices, calculators, papers,
reviewers/books, any object that may contain writing ).
2. All programs, applications and websites must be closed except for WebEx application, and web
browser used to access the Online ACE.
3. Once the exams start, do not refresh the browser, or navigate away from the exam as this may
result in the loss of progress and will not be recoverable, even by the proctor.
4. Individuals who are not taking the examination are prohibited from entering the room.
5. The face of the examinee should be fully visible the entire duration of the examination.
6. Hats, sunglasses, headphones are prohibited during the exam.
7. If hearing aid is required, examinee must inform Licensing Associate 48 hours prior to the exam
starting time.
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IC ONLINE ACE System
Important Reminders
8. Bathroom breaks are not permitted.
9. In cases where the proctor suspects that cheating or any other act of impropriety may
be occurring, the proctor may request the examinee to share screen and will provide
instructions for doing this.
10. The online examination room is recorded upon entry of the examinee until the
submission of the last examinee of their exam.
11. If an act of impropriety has been deemed to have taken place, IC reserves the right to
apply the appropriate disciplinary policy.
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IIAP Online Exam
(for Provincial-Based Examinees)
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IIAP ONLINE EXAM
Requirements
1. Completion of IIAP Online Training. Recruiting Manager to enroll the Advisor
Candidate by registering thru https://survey.alchemer.com/s3/5206975/Online-CoursesEnrollment-Form.
2. After completion of training, Recruiting manager should make a separate e-mail
request to Phil.ELearning@sunlife.com for:
o IIAP Application Form 0930, and
o IIAP Exam Undertaking
3. Payment of Online Exam Fee of PhP 1,200.00
o BPI Account Name: Sun Life of Canada (Phils.), Inc.
o Account Number: 0993015679
No need to request for Original Receipt. Instead, proof of payment such as screenshot of
confirmed transfer details or copy of validated deposit slip will be required for submission.
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IIAP ONLINE EXAM
Procedure
1. Advisor Candidate to complete the IIAP Online Training. .
2. Advisor Candidate to accomplish/fill out, scan, and email the following to the recruiting manager.
Each of the examinees must put their requirements in one/continuous PDF to ensure that the
documents are readable, accessible and in uniform format. (1 pdf file= 1 examinee).
o
o
o
o
o
o
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IIAP Application Form 0930 (PDF Format)
IIAP Exam Undertaking (PDF Format)
1x1 recent ID photo (JPEG Format) (yellow color background)
Scanned copy of any government-issued ID (PDF Format)
Proof of Exam Payment PDF format (PDF Format)
IIAP online Examinees Template
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IIAP ONLINE EXAM
Procedure
3. Recruiting manager to check completion/correctness of requirements and email the
same to Licensing Associate* / Recruitment Specialist concerned:
Email Subject: IIAP ONLINE EXAM REQUIREMENTS XXXX NBO
4. Licensing Associate to email IIAP the list of all online examinees two (2) workings days
after receipt of all the requirements.
5. Licensing to prepare and remit check payment to IIAP within two (2) working days from
date the list of online examinees was submitted to IIAP.
6. IIAP will send directly to the examinee’s email address the exam verification code
within 24hours upon receipt of payment from Sun Life. Please ensure correct e-mail
address of examinees in all forms.
7. Verification code will only be valid for seven (7) days from the date of receipt of email.
Once accessed, examinee must finish the exam within one (1) hour.
*Licensing Associate may vary from time-to-time
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IIAP ONLINE EXAM
Procedure
8. IIAP to release the exam results to Sun Life five (5) working days after the exam.
Licensing will email the recruiting manager of the results.
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Concept of Life Insurance
TRADITIONAL LIFE
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Concept of Life Insurance
Man at Work
INCOME
OLD AGE
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DISABILITY
EXPENSES
DEATH
SICKNESS
Concept of Life Insurance
Man at Work
INCOME
“Life Insurance is against all
O.D.D.S!”
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EXPENSES
LIFE INSURANCE
Concept of Life Insurance
THREATS
SERVICE
BENEFIT
Family
Protection
Death
Benefit
Retirement
Income
Maturity
Benefit
Guaranteed
Savings
Cash
Values
DEATH
OLD AGE
SICKNESS & DISABILITY
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Concept of Life Insurance
Human Economic Value
•
Human life has an economic value
•
The capitalized monetary worth of the earning capacity of an individual
devoted to the support of his family during his working lifetime
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Concept of Life Insurance
Life Insurance
A
RISK–SHARING
BUSINESS
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Concept of Life Insurance
Risk Sharing
• A group of people places a fund together in preparation for
an uncertain event.
•
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Everyone is prepared to accept a small loss to compensate
the unfortunate from the effect of a larger loss.
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Concept of Life Insurance
What is Risk?
• Chance of loss.
• Exists when there is uncertainty
about the future.
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Concept of Life Insurance
Types of Risk
1. SPECULATIVE RISK – involves three possible outcomes: loss,
gain, or no change.
2. PURE RISK – is a risk that involves no possibility of gain; there
is either a loss or no loss. May be insured.
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Concept of Life Insurance
Law of Probability
• A likelihood that a given event will occur in the future.
• This is used in determining the number of people dying &
living at a particular age within a given period.
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Concept of Life Insurance
Law of Large Numbers
•
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The more frequent a particular event is observed, the more
likely that the observed results will approximate the true
probability of the event happening.
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Concept of Life Insurance
Risk Selection/Underwriter
•
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A systematic evaluation of an insurance
applicant for the purpose of determining
the classification of risk for possible
coverage.
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Concept of Life Insurance
Anti-Selection
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•
The high pre-disposition for those with impairments to
purchase life insurance
•
Can be prevented through proper Risk Selection/
Underwriting.
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Concept of Life Insurance
Factors in Risk Selection
PHYSICAL
OCCUPATION
FINANCIAL
MORAL HAZARD
AVOCATION
RESIDENCE/TRAVEL
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Concept of Life Insurance
Sources of Information
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•
Application Form
•
Medical Examination Report
•
Agent’s Confidential Report
•
Medical Information Database (MID)
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Concept of Life Insurance
RISK CLASSIFICATION
ACCEPT
STANDARD
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SUBSTANDARD
DECLINE
Concept of Life Insurance
Basic Insurance Terms
• Life Insurance Policy
• Face Amount
• Insurer
• Premium
• Insured
• Death Benefit
• Policyowner/ Applicant
• Maturity Benefit
• Beneficiary
• Cash Values
• Dividends
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Concept of Life Insurance
Basic Insurance Terms
Life Insurance Policy
as defined by the Insurance Code P.D. 1460
A contract whereby a PARTY for a CONSIDERATION
agrees to pay ANOTHER a SUM OF MONEY in the
event of his DEATH FROM ANY CAUSE NOT
EXCEPTED IN THE CONTRACT, or upon surviving a
SPECIFIED PERIOD, or otherwise on the
CONTINUANCE or cessation of life.
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Concept of Life Insurance
Life Insurance Policy
as defined by the Insurance Code P.D. 1460
Party – Insured & Insurer
Consideration – premium payment/policy payment
Another – Beneficiary
Sum of Money – proceeds/face amount/face value
Death from any cause not excepted in the contract – excluded risks
Specified period / Continuance – Maturity period
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Concept of Life Insurance
Insurer
o The insurance company
Insured
o The person whose life is covered under the insurance policy.
Policyowner/Applicant
o The person who is buying or applying for life insurance.
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Concept of Life Insurance
Beneficiary
o The person who is designated to receive the
insurance proceeds upon death of the
insured.
Face Amount
o The amount stated in the policy as payable under a life
insurance policy if the insured dies while the policy is in force.
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Concept of Life Insurance
Premium
o A sum of money given by the insured as a
consideration for the insured’s promise to
indemnify or replace the loss.
Death Benefit
o The amount payable upon death of insured. The sum assured
the beneficiary (ies) would receive in case the insured dies
during the protection period.
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Concept of Life Insurance
Maturity Benefit
o The amount payable if the insured outlives
the protection period.
Cash Values
o The guaranteed amount received in case the plan is
terminated prior to the death of the insured or maturity of
the policy.
o Legal reserves or the savings element of the policy.
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Concept of Life Insurance
Dividends
o Return of excess premium paid annually to owner of
insurance policy based on insurer’s performance and
experience over a given year.
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Concept of Life Insurance
Cash Needs: CReFaLEER
C
Clean Up Fund
Fund to pay hospital bills, funeral expenses, and taxes
Re
Readjustment Fund
Fund used to cushion immediate lifestyle adjustment that family must make if the insured dies
Fa
Family Dependency Fund
Fund to provide for the family’s needs while the children still dependent
L
Life Income for the Widow
Lifetime fund for the widow
E
Educational Fund
Fund that will ensure the education of children
E
Emergency Fund
Fund that is designed to provide financial back up for unexpected
R
Retirement Fund
Fund that gives security and peace of mind who have outlived their earning years
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Concept of Life Insurance
Life Insurance gives certainty
to uncertainty
Death is a certainty
When, is an uncertainty
To live is one’s right
How long isn’t one’s choice
Life insurance cannot prevent your death
It prevents your plans from dying with you
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Premiums, Basic Plans & Riders
TRADITIONAL LIFE
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Premiums, Basic Plans & Riders
Concept of Premium
• An ACTUARY is the /a company officer that determines the
premium rates with respect to the principal elements of the
life insurance.
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Premiums, Basic Plans & Riders
Factors that affect the premium:
1. Mortality
2. Interest
3. Expense
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Premiums, Basic Plans & Riders
Mortality + Interest = NET PREMIUM
Expense + (Safety Margin Requirement) = LOADING
Net Premium + Loading = GROSS PREMIUM
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Premiums, Basic Plans & Riders
Types of Premium
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•
Natural Premium
o premiums that increase each year as the age of the
insured increases.
•
Level Premium
o premiums that remain the same from year to year
throughout the premium paying period.
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Premiums, Basic Plans & Riders
CLASSIFICATION OF
BASIC PLANS
According to
NATURE
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According to
PARTICIPATION
According to
COVERAGE
Premiums, Basic Plans & Riders
CLASSIFICATION OF
BASIC PLANS
According to
NATURE
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According to
PARTICIPATION
According to
COVERAGE
Premiums, Basic Plans & Riders
ACCORDING TO NATURE
TEMPORARY / TERM
LEVEL TERM
DECREASING
TERM
PERMANENT
ORDINARY /
WHOLE LIFE
Limited Pay Life
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ENDOWMENT
Regular
Endowment
Pure
Endowment
Anticipated
Endowment
Premiums, Basic Plans & Riders
Temporary or Term Plan
•
Life Insurance that remains in force for a specified period or
term.
•
Term pays the face amount only in the event of death.
•
There are no cash values, no profit sharing, and is the
cheapest in terms of initial premium outlay.
•
Renewable & Convertible.
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Premiums, Basic Plans & Riders
Renewable
Example: Yearly Renewable Term
Protection Period
Age 30
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Renewable for another year
Age 31
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Age 32
Premiums, Basic Plans & Riders
Convertible
Example: 5 Year Convertible Term
Protection Period
Age 30
Age 33
Age 35
May be converted in
whole or in part
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Premiums, Basic Plans & Riders
Types of Term Plans
1. Level Term
o
the death benefit remains constant over the term of
coverage.
2. Decreasing Term
o
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the death benefit starts at the set face amount and then
decreases over the term of the coverage.
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Premiums, Basic Plans & Riders
Types of Term Plans
1. Level Term
Example: 5 Year Level Term
Face Amount
Php 3M
Php 3M
5 Years
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Premiums, Basic Plans & Riders
Types of Term Plans
2. Decreasing Term
Example: 5 Year Decreasing Term
Face Amount
Php 5M
Php 2.5M
Death Benefit
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5 Years
Premiums, Basic Plans & Riders
Whole Life Plan
•
Life Insurance that remains in force during the insured’s
lifetime.
•
The face amount is paid whenever death occurs up to the age
of 100 of the insured.
•
There are cash values as well as profit sharing and dividends.
•
The initial premium outlay is higher than term insurance but is
lower than endowment.
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Premiums, Basic Plans & Riders
Whole Life Plan
Protection Period & Premium Paying Period
Age 30
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Age 65
LB = CV+AD
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Age 75 (RIP)
DB = FA+AD
Age 100
MB = FA+AD
Premiums, Basic Plans & Riders
Limited Pay Life Plan
•
Provides lifetime protection with premiums payable for
limited term of years.
•
Life Insurance that remains in force during the insured’s
lifetime.
•
The face amount is paid whenever death occurs up to the age
of 100 of the insured.
•
There are cash values as well as profit sharing and dividends.
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Premiums, Basic Plans & Riders
Limited Pay Life Plan
Example: 10 Year Limited Pay Life Plan
Protection Period
Age 30
Age 40
Premium Paying Period
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Age 65
LB = CV+AD
Age 75 (RIP)
DB = FA+AD
Age 100
MB = FA+AD
Premiums, Basic Plans & Riders
Endowment Plan
•
Pays the face amount whether the life insured lives to the end
of a specified period or dies during that period.
•
It has cash values, profit sharing or dividends.
•
Initial premium outlay is the highest compared to term and
permanent plans.
•
Allows for faster accumulation of funds, making it ideal for
saving for future needs.
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Premiums, Basic Plans & Riders
Endowment Plan
Example: 20 Year Endowment Plan
Protection & Premium Paying Period
Age 40
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Age 50 (RIP)
DB = FA+AD
Age 60
MB = FA+AD
Premiums, Basic Plans & Riders
Types of Endowment Plan
1. Regular Endowment
a. Age-based
b. Term-based
2. Pure Endowment
3. Anticipated Endowment
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Premiums, Basic Plans & Riders
Types of Endowment Plan
1. Regular Endowment
a. Age-based - provides maturity benefit
at a specified age (Ex. Endowment at 65)
b. Term-based - provides maturity benefit at the end of a
specified period (Ex. 20 Year Endowment)
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Premiums, Basic Plans & Riders
Types of Endowment Plan
2. Pure Endowment
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•
Promises to pay the face amount only if the insured
survives up to the end of the endowment period.
•
Nothing will be paid if death occurs before the end of
the endowment period.
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Premiums, Basic Plans & Riders
Types of Endowment Plan
3. Anticipated Endowment
•
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Policy owner does not have to wait for the maturity date
of before a portion of the face amount is given.
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Premiums, Basic Plans & Riders
CLASSIFICATION OF
BASIC PLANS
According to
NATURE
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According to
PARTICIPATION
According to
COVERAGE
Premiums, Basic Plans & Riders
ACCORDING TO PARTICIPATION
PARTICIPATING
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NON
PARTICIPATING
Premiums, Basic Plans & Riders
Participating vs. Non-participating
• Non-Participating
o is one in which the policy owner does not share in the
insurer’s dividends.
•
Participating
o is one under which the policy owner shares in the
insurance company’s dividends.
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Premiums, Basic Plans & Riders
CLASSIFICATION OF
BASIC PLANS
According to
NATURE
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According to
PARTICIPATION
According to
COVERAGE
Premiums, Basic Plans & Riders
ACCORDING TO COVERAGE
INDIVIDUAL LIFE
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JOINT LIFE
GROUP LIFE
Joint Life
Contributory
Joint and Last
Survivor
NonContributory
Premiums, Basic Plans & Riders
Individual Life
•
Provide protection to one person only. There is only one
Insured in this type of plan.
•
May be payable annually, semi-annually or quarterly basis.
•
Individual policies may also be paid on a monthly basis in the
form of Salary Savings insurance.
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Premiums, Basic Plans & Riders
Joint Life
•
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Joint Life plans provide protection to two or more persons,
allowing a single plan to have 2 or more Insureds.
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Premiums, Basic Plans & Riders
Types of Joint Life
• Joint Life
o Death benefit payable at first death, after which the
policy terminates.
• Joint and Last Survivor
o Insurance coverage is extended until the last person
being covered in the policy dies.
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Premiums, Basic Plans & Riders
Group Life
•
Provides protection to a group of people
•
A single master policy under which individuals in a natural
group (such as employees of a business firm) are insured
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Premiums, Basic Plans & Riders
Types of Group Life
•
Non-contributory
o employer pays for the premium; 100% of the employees
are included in the policy
•
Contributory
o employer and the employees share in the premium
payment; at least 75% should be enrolled
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Premiums, Basic Plans & Riders
Riders
•
Are supplementary contracts that when attached to the basic
policy, will provide additional benefits at minimal cost.
•
It is referred to as a rider because it needs a basic policy to
“ride on” to be effective.
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Premiums, Basic Plans & Riders
Types of Riders
• Accidental Death Benefit
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•
Waiver of Premium Due to Disability
•
Payor’s Benefit
•
Guaranteed Insurability Option
•
Term Insurance Rider
•
Family Income Rider
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Premiums, Basic Plans & Riders
Accidental Death Benefit (ADB)
•
Provides an additional amount equal to the coverage in the
event of accidental death of the insured.
•
Limited within the period of 90 days from the date of the
accident.
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Premiums, Basic Plans & Riders
Waiver of Premium due to Disability (WPD)
• Provides for a waiver of premium if the insured suffers from
a total and permanent disability.
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Premiums, Basic Plans & Riders
Payor’s Benefit
•
Provides waiver of premium during the rider term when the
payor dies or becomes totally and permanently disabled.
•
Waives premiums until the time the insured child reaches the
age where he can earn and pay for the premiums of the policy.
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Premiums, Basic Plans & Riders
Guaranteed Insurability Option (GIO)
•
Provides an opportunity for people to buy specific amounts of
additional life insurance coverage at stated future intervals
without the need to show evidence of insurability.
•
This means that the insured will automatically pay the
standard rate since there would be minimal underwriting
requirements.
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Premiums, Basic Plans & Riders
Term Insurance Rider
•
Provides an additional amount of coverage for a minimal cost.
•
The rider has its own face amount separate from the coverage
of the basic policy, but cost of coverage is lesser since it is a
term coverage.
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Premiums, Basic Plans & Riders
Family Income Rider
•
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A form of decreasing term rider that provides the family of
the insured monthly income from the insured’s date of death
until the duration of the rider.
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Legal Aspects of Life Insurance
TRADITIONAL LIFE
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Legal Aspects of Life Insurance
Types of Contracts
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•
Valued Contracts and Contracts of Indemnity
•
Informal and Formal Contracts
•
Unilateral and Bilateral Contracts
•
Aleatory and Commutative Contracts
•
Contracts of Adhesion and Bargaining Contracts
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Legal Aspects of Life Insurance
Valued Contract vs. Contract of Indemnity
LIFE INSURANCE
NOT LIFE INSURANCE
✓VALUED CONTRACT
CONTRACT OF INDEMNITY
Specifies the amount of benefit
that will be payable when a
covered loss occurs, regardless
of the actual amount that was
incurred.
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The amount of policy benefit
payable for a covered loss is
based on the actual amount of
financial loss, as determined at
the time of loss.
Legal Aspects of Life Insurance
Informal Contract vs. Formal Contract
LIFE INSURANCE
NOT LIFE INSURANCE
✓INFORMAL CONTRACT
FORMALCONTRACT
o Parties met requirement
o
98
concerning the substance of
the agreement.
It may be expressed in a
verbal or written fashion.
Life insurance contracts are
typically written.
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o Parties met certain formalities
o
concerning the form of the
agreement.
Contract should be written
and should have a seal to be
enforceable.
Legal Aspects of Life Insurance
Unilateral Contract vs. Bilateral Contract
LIFE INSURANCE
NOT LIFE INSURANCE
✓UNILATERAL CONTRACT
BILATERAL CONTRACT
Only one of the parties
(insurer) to the contract has
legally enforceable promises.
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Both parties to the contract have
legally enforceable promises.
Legal Aspects of Life Insurance
Aleatory Contract vs. Commutative Contract
LIFE INSURANCE
NOT LIFE INSURANCE
✓ALEATORY CONTRACT
COMMUTATIVE CONTRACT
o One party provides
o
100
something of value to
another party in exchange
for a conditional promise
One party may receive
something of greater value
than that party gave.
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o an agreement which the
o
parties specify in advance the
values that they will
exchange
parties exchange items or
services of relatively equal
value.
Legal Aspects of Life Insurance
Contract of Adhesion vs. Bargaining Contract
LIFE INSURANCE
NOT LIFE INSURANCE
✓CONTRACT OF ADHESION
BARGAINING CONTRACT
One party prepares the
contract and the other may
accept or reject as a whole,
without any bargaining
between the parties to the
agreement.
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Both parties, as equals, set the
terms and conditions of the
contract.
Legal Aspects of Life Insurance
Offer and Acceptance
• For a contract to be valid there must be:
An OFFER and ACCEPTANCE
102
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Legal Aspects of Life Insurance
Conditional Receipt
• In most cases when an advisor receives the premium
payment from the client, he/she issues a conditional receipt
to acknowledge payment.
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Legal Aspects of Life Insurance
Legal Capacity
•
Policyowner
o Must be of legal age
o Must have sound mind and body
•
Insurance Company
o Registration and Regulation
o Capitalization
104
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Legal Aspects of Life Insurance
•
Insurable Interest
o Insurable Interest exists when a policyowner has
reasonable chance of suffering financial loss if the
person who is insured dies.
o It should also exist between the insured and the named
beneficiaries.
o Its existence during inception of the policy is required.
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Legal Aspects of Life Insurance
Every person has an insurable interest in the life and health:
1. Of himself, of his spouse and of his children;
2. Of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
3. Of any person under a legal obligation to him for the payment of
money, or respecting property or services, of which death or illness
might delay or prevent the performance; and
4. Of any person upon whose life any estate or interest vested in him
depends.
106
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Policy Provisions
TRADITIONAL LIFE
107
Policy Provisions
While the insured lives and the policy is active..
o
Entire Contract Clause
o
Assignment
o
Ownership
o
Dividend Options
o
Premium Payment
o
Grace Period
o
Policy Loan
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Policy Provisions
Entire Contract Clause
o Made up of the policy and the
attached application form
o Includes other reports, amendments
material to the policy
o Cannot be affected by later changes
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Policy Provisions
Ownership
o Right to assign, transfer or have
policies amended.
o Change beneficiaries and exercise
privileges in the contract.
o Right to cash values and dividends.
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Policy Provisions
Premium Payment
o Can be done annually, semi-annually, quarterly
and monthly.
o Payment of the first premium makes the
contract binding.
o Subsequent payments are entirely dependent
on the policyowner.
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Policy Provisions
Grace Period
o
Protects the policy from lapsing
o
Generally, 30 days from due date
o
Right to cash values and dividends
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Policy Provisions
Policy Loan
o Right to loan against the cash value
o Loan within prescribed limits; not exceed the cash value
o Treated as a loan, has interest
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Policy Provisions
Incontestability
o 2 years after the policy has been in
force, the company cannot contest
its validity.
o If the company has no objection
during the period, there can be no
question about the payment of
proceeds.
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Policy Provisions
Dividends
o For participating policyholders
o Dependent on mortality
experience, investment
earnings and expenses
o
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NOT GUARANTEED
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Policy Provisions
Dividend Options
1. Cash
2. Reduced Premium
3. Interest
4. Paid-Up Addition
5. Yearly Renewable Term
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Policy Provisions
When the insured dies…
o Misstatement of age
o Incontestability
o Suicide
o Beneficiary
o Settlement
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Policy Provisions
Misstatement of Age
o Misrepresentation on the matter of age
o Age is increased or decreased
o Amount of proceeds will be adjusted upon death
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Policy Provisions
Assignment
o Right of the policyowner to transfer
or assign the policy
o Two types: Absolute and Collateral
o Must notify the company of any
assignment
o Company will accept without
question
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Policy Provisions
Suicide
o To discourage financially desperate
people from purchasing policies
with suicide in mind.
o If committed within 2 years of the
policy, the company will refund the
premiums.
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Policy Provisions
Beneficiary
o Designated to receive the proceeds of the policy
o Must be identified clearly
o Types of Beneficiary:
✓ Primary or Secondary (Contingent)
✓ Revocable or Irrevocable
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Policy Provisions
Beneficiary
Primary vs. Secondary (Contingent)
✓ PRIMARY- first person in line to receive the death proceeds
✓ SECONDARY (CONTINGENT) - person next in line to receive
the proceeds in case of death of the primary beneficiary
122
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Policy Provisions
Beneficiary
Revocable vs. Irrevocable
✓ REVOCABLE – changes/amendments to the contract may take
effect without consent. Subject to Estate Tax.
✓ IRREVOCABLE - changes/amendments to the contract require
written consent. Not subject to Estate Tax.
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Policy Provisions
Beneficiary
Revocable vs. Irrevocable
Minors are not recommended to
be named as irrevocable
beneficiaries.
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Policy Provisions
Settlement
o Lump Sum
o Interest Option
o Fixed Period Option
o Fixed Income Option
o Life Income Option
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Policy Provisions
Settlement
• Lump Sum
o Single sum payment of the proceeds.
• Interest Option
o The company will hold the proceeds
to earn interest.
o Interest earnings will be paid out
regularly.
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Policy Provisions
Settlement
• Fixed Period Option
o Pays the beneficiary equal
amounts at regular intervals over
a specified period of years.
• Fixed Income Option
o Pays the beneficiary a specified
amount until proceeds are
depleted.
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Policy Provisions
Settlement
• Life Income Option
o Pays the beneficiary regular income for his lifetime, no
matter how long he lives.
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Policy Provisions
When the insured quits paying his premiums..
o Non-Forfeiture Options
o Reinstatement
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Policy Provisions
Non-Forfeiture Options
o Cash Surrender Value (CSV)
o Reduced Paid-Up (RPU)
o Extended Term Insurance (ETI)
o Automatic Premium Loan (APL)
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Policy Provisions
Non-Forfeiture Options
• Cash Surrender Value
o Policyowner claims an immediate cash pay-out for his
policy.
o Once elected, policy is terminated.
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Policy Provisions
Cash Surrender Value
Protection Period
30
No more protection
40
100
Quits paying:
✓ Receive Cash Surrender
Value and Accumulated
Dividends
✓ Policy terminates
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Maturity Benefit
= 0.00
Policy Provisions
Non-Forfeiture Options
• Reduced Paid-Up
o Protection continues for life but for a lower face amount.
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Policy Provisions
Reduced Paid-Up
Protection Period
Protection Period
FA = REDUCED
FA = 1,000,000
30
40
Quits paying:
100
✓ Same Protection Period
✓ Reduced Face Amount
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Maturity Benefit
= REDUCED
Policy Provisions
Non-Forfeiture Options
• Extended Term Insurance
o Protection continues for the same face amount but only
until a certain period of years and days.
o Automatic non-forfeiture option.
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Policy Provisions
Extended Term Insurance
Protection Period
Protection Period
FA = 1,000,000
FA = 1,000,000
30
Until a certain
period of Years
and Days
Reduced Protection Period
40
Quits paying:
✓ Same Face Amount
✓ New Protection Period
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Maturity Benefit =
0.00
Policy Provisions
Non-Forfeiture Options
• Automatic Premium Loan
o The company lends to the insured an
amount from
the cash value to pay for
the overdue premiums.
o Policy has to have a sufficient amount of cash value.
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Policy Provisions
Automatic Premium Loan
• if cash value is sufficient, automatic payment
will be applied on the premium due
• it will be considered as policy loan
Cash Vaue
30
40
41
missed the 30-day grace period:
• SAME protection period
• COVERAGE : Face Amount
less loan (unpaid due)
138
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100
Maturity Benefit = less
any unpaid dues with
interest
Policy Provisions
Reinstatement
o Pure Reinstatement
o Redating
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Policy Provisions
Reinstatement
• Pure Reinstatement
o Pays back all past due premiums plus
o proof of insurability is necessary
140
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interest
Policy Provisions
Reinstatement
• Redating
o New premium would be charged
o Based on new attained age
o New policy effectivity date
141
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Annuities
TRADITIONAL LIFE
142
Annuities
Annuities
o Purchase of income
o Primarily used as an income
stream
143
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Annuities
Types of Annuities
• Fixed
o Single Premium Immediate
o Single Premium Deferred
o Installment Deferred
• Variable
o Conventional Variable
o Deferred Variable
144
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Annuities
So how are annuities different from
life insurance contracts?
145
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Annuities
LIFE INSURANCE
Estate Creation
Premiums
mostly in
installments
Beneficiary or
Insured
Death of the Insured or at
the Maturity of the Policy
146
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ANNUITY
NATURE
Estate Distribution
PAYMENT
Purchase price
mostly paid in
lump sum
RECIPIENT
Annuitant or
Successor
PAYMENT OF
PROCEEDS
While the annuitant
is still alive or until a
specified period
Ethics
TRADITIONAL LIFE
147
Ethics
Unethical Practices
o Twisting
o Knocking
o Overloading
o Rebating
o Misrepresentation
148
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Ethics
Unethical Practices
• Twisting
o persuading the person to lapse or surrender a policy in
order to purchase a new one.
o Also called Replacement
149
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Ethics
Unethical Practices
• Knocking
o Making derogatory remarks about competing policies,
advisors or companies.
150
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Ethics
Unethical Practices
• Overloading
o Selling a person insurance more than
warranted by his resources.
151
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what is
Ethics
Unethical Practices
• Rebating
o Offering part of your
commission to your client.
o Accepting a smaller premium than the one stipulated in
the policy.
o Premium discrimination against
152
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policyholders.
Ethics
Unethical Practices
• Misrepresentation
o Misstatement of material facts for insurance
153
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Insurance Concepts Review
PART 2: VARIABLE UNIVERSAL LIFE
154
Course Content
Part 1: TRADITIONAL LIFE
Part 2: VARIABLE UNIVERSAL LIFE
a.
Insurance Commission
a.
Concept of Variable Universal Life
b.
Insurance Commission Exam (IC)/Insurance
Institute for Asia and the Pacific (IIAP) Examination
Process
b.
Financial Planning Process
c.
Types of Investment Assets
d.
Types of Funds
e.
Types of Variable Contract
f.
Definition of Terms
g.
How does VUL work?
h.
Basic Computation of Units
c.
Concepts of Life Insurance
d.
Premium, Basic Plans and Riders
e.
Legal Aspects of Life Insurance
f.
Policy Provisions
g.
Annuities
h.
Ethics
155
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Concept of VUL
Non-Traditional Policies
Traditional Policies
1.
2.
3.
Premiums, cash values and
death benefits are predetermined.
Policyholders do not have
investment options
Implicit charges
1.
2.
3.
4.
Examples: Term, Whole Life,
and Endowment
156
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Cash Values/Fund Values are
not pre-determined
Additional premiums may
be allowed (on top of
regular premiums)
Policyholders may have
investment options
Explicit charges
Examples: Universal Life, Variable
Life, and Variable Universal Life
Concept of VUL
Variable Life (VL)
Universal Life (UL)
1.
2.
3.
4.
5.
157
Unbundled
Flexible Premiums, Death
Benefit
Seen as savings account plus
term insurance
Interest credited to account
value, usually subject to
minimum interest rate
Policyowner does not have a
choice of the investment funds
We are your Learning partners
1.
2.
3.
Fixed premium, minimum
death benefit
Cash value depends on
investment performance
Policyowner has a choice of
investment funds
Concept of VUL
Variable
Investment
Control
158
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Universal
Premium
Flexibility
Life
Death
Benefit
Concept of VUL
POT OF GOLD ILLUSTRATION
Top-Ups/Excess
Premiums
Single Premium or
Regular Premium
Initial/Premium
Charge
Initial/Premium
Charge
Purchase Units in
Select Funds
Insurance
Charge
159
Periodic
Charge
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VUL Advantages
160
Diversification
Professional
Management
Flexibility
Administration
Transparent
Charges
Investment Risk
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Access
Client is Involved
Peso Cost-Averaging
Peso cost averaging is an investing technique intended to reduce exposure to risk
associated with making a single large purchase. The idea is simple: spend a fixed peso
amount at regular intervals (e.g., monthly) on a particular investment or portfolio,
regardless of the unit price
161
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Peso Cost-Averaging
Example: If you invest Ps. 10,000 today, and the unit price is Ps. 1/unit, you will
receive 10,000 units. If you invest the same amount next month, and the unit
price is 90 centavos/unit, you will have purchased 11,111 units then. By adding
your investment (Ps. 10,000 + 10,000) and dividing the by the total number of
units (10,000 + 11,111), you would end up having an average purchase price of
95 centavos per unit.
Ps. 20,000 investment = 21,111 units
162
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Peso Cost-Averaging
How can we maximize the returns of the fund?
Regular Top-Ups
Habit of Saving
Buy low, sell high!
* It complements peso-cost averaging
163
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Financial Planning
VARIABLE UNIVERSAL LIFE
164
Financial Planning
GOALS
FINANCIAL
RESOURCES
o
o
165
RISK
TOLERANCE
PERSONAL
CIRCUMSTANCES
Managing one’s financial resources in order to achieve specific goals
Necessary to develop a financial plan that is suited to client’s unique requirements
We are your Learning partners
Financial Planning Process
Set Goals
Analyze Resources
Evaluate the Plan
Implement the Plan
166
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Evaluate Investment
Options
Financial Planning Process
To enhance or provide a comfortable standard
of living; to provide for dependents
To improve one’s financial situation
To supplement retirement income
SET
GOALS
To provide funds for the education and bringing up of
children
To provide a fund for paying necessary costs
and taxes when a person dies
To save for the down payment/major purchase
or event (house/car/debut or wedding)
167
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Financial Planning Process
Keep stock of what you already have (cash/
To enhance
or provide
a comfortable
time deposits,
dollar
deposits, real estate)
standard of living; to provide for
The investment decision is greatly affected
dependents
by the level or amount of funds available
To improve one’s financial situation
For the investor: the more funds, the greater/wider is
the choice of investment available
To supplement retirement income
ANALYZE
RESOURCES
To provide funds for the education and
Set aside
the less liquid assets from those you could
bringing
up of children
use for investment purposes & include a contingency
To provide a fund for paying necessary
fund
costs and taxes when a person dies
Review monthly expenses by separating the essential
To save for the down payment/major
or living
expenses
from the non-essential
or
purchase
or event
(house/car/debut
or
wedding)
discretionary expenses.
168
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Financial Planning Process
You will realize that you can’t afford to set
To enhance
or provide
a comfortable
aside funds
for all your
goals at the same time.
standard of living; to provide for
dependents
Categorized goals:
short-term (less than 5 years)
To improve one’s financial situation
medium term (5-10 years)
long term (over
10 years)
To supplement
retirement
income
EVALUATE
INVESTMENT
OPTIONS
169
To provide
the education
and
Tip #1 –funds
Don’tfor
invest
in something
you don’t
bringing up of
children
understand
To provide a fund for paying necessary
• Educate yourself
costs and taxes when a person dies
• Understand the investment product
• Go
yourpayment/major
way to see what investments are
To save
for out
theof
down
available
in the
market
purchase
or event
(house/car/debut
or
wedding)
We are your Learning partners
Financial Planning Process
Evaluate … or provide a comfortable
To enhance
standard
of living;
provide
foryou reasonably expect to earn by
1. Potential
Return to
– How
much can
investing in the product? Historical return on investment or yield on the
dependents
investment.
To improve one’s financial situation
To
EVALUATE
INVESTMENT
OPTIONS
2. Safety – What are the risk involved? Can you lose all or part of your
supplement
investment? retirement income
To provide
funds
for the education
and
3. Liquidity
& Marketability
(Accessibility of
Funds)
- If the
requires the fund in a short time. Can you readily
bringing
upindividual
of children
convert your instrument into cash?
To provide a fund for paying necessary
- Consider the cost or penalty of realizing the investment before its
costs and
taxes when a person dies
maturity period. Are there any penalties for pre-termination?
To save
for the down payment/major
- Is there a ready buyer or a market for your investment? How
purchase
event
or into the
muchor
is the
initial(house/car/debut
cost in setting up or buying
investment? Minimum investment amount?
wedding)
170
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Financial Planning Process
Evaluate … or provide a comfortable
To enhance
standard
of living;
toinvestment
provide for
4. Performance
of the
dependents
- country’s economic factors
To
- competencies/capabilities of the management team
improve
one’scompany’s
financial
situation
- the invested
level
of costs
To supplement
retirement
income
5. Taxation Treatment
– Different
types of investment vehicle/s enjoy (or
burden) a wide range of tax treatment. What are the tax implications? What
provide
funds for
the education
are the subsequent
taxation
liabilities of theand
investor?
EVALUATE
INVESTMENT
OPTIONS
To
bringing up of children
To provide a fund for paying necessary
costs and taxes when a person dies
To save for the down payment/major
purchase or event (house/car/debut or
wedding)
171
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Financial Planning Process
Tip#2 - No Risk , No Gain
To enhance or provide a comfortable
Tolerance
for thetomagnitude
standard
of living;
provide and
for variability of future return loss.
dependents
- The higher the risk, the higher must be the potential
returnone’s
in order
to attractsituation
people into investing in it.
To improve
financial
To supplement
retirement income
2 Types of Investors
1.
EVALUATE
INVESTMENT
OPTIONS
Some investors may be tempted to PLAY it
To provide
for the education
safefunds
– CONSERVATIVE
instrumentsand
(people
bringingwith
up of
lesschildren
financial resources – less tolerance
for Risk).
To provide
a fund for paying necessary
2.
High net worth individuals are the ones who
costs and
when
person
diesmoney to
aretaxes
less averse
to a
risk
– they have
for losses. (people with more money –
To save cover
for the
down payment/major
high tolerance for RISK).
purchase or event (house/car/debut or
wedding)
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Financial Planning Process
To enhance or provide a comfortable
Types of Risk Investment:
standard of living; to provide for
dependents
1. Low Risk investment - Bank deposits/short-term
government
securities
(locked-in at interest)
To improve
one’s financial
situation
EVALUATE
INVESTMENT
OPTIONS
To supplement
retirement
income
2. High Risk
investment
– investment in shares
To provide funds for the education and
Investor’s
of risk averseness depends on…
bringing
up of level
children
To provide
a fund for paying necessary
1. Age
costs2.andInvestment
taxes when
a person dies
Objectives
3. for
Financial
Condition
To save
the down
payment/major
4. Personality
purchase
or event (house/car/debut or
wedding)
173
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Financial Planning Process
Tip#3 - Match the investment product with your
To enhance time
or provide
horizona comfortable
standard of living; to provide for
dependents
- A match between the investment horizon and the
maturity of an investment asset is very important
To improve one’s financial situation
EVALUATE
INVESTMENT
OPTIONS
174
1. Short –retirement
Term Goalsincome
To supplement
- Consider investments that are not risky or
To providehighly
fundsspeculative
for the education
and
(ex. Government
securities,
bringing uptime
of children
deposits, high-grade commercial paper,
mutual
funds &
money market funds)
To providebond
a fund
for paying
necessary
costs and taxes when a person dies
2. Medium – Term Goals
To save for
the down“medium
payment/major
- Objective:
risk-medium return”
purchase- Less
or event
(house/car/debut
or
speculative
investment returns
such as
wedding) blue-chip stocks & balanced mutual funds
We are your Learning partners
Financial Planning Process
3. Medium – Long Term Goals
To enhance
or provide
a comfortable
- Objective:
to MAXIMIZE
investment return
standard ofrather
living;than
to provide
forinvestment risk
MINIMIZE
dependents
- take some risks since you have more time to
make-up for possible losses
To improve one’s financial situation
- establish a portfolio that is heavy on “high-riskhigh return”
(ex: stocks)
To supplement
retirement
income
EVALUATE
INVESTMENT
OPTIONS
To provide funds for the education and
bringing up of children
To provide a fund for paying necessary
costs and taxes when a person dies
To save for the down payment/major
purchase or event (house/car/debut or
wedding)
175
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Financial Planning Process
Tip#4 - Diversification
To enhance
or provide a comfortable
standard of living; to provide for
- Risk are inherent in all types of investments
dependents
To improve one’s financial situation
• Process of investing across different asset classes and
To supplement
retirement
income
across different
market
environments
EVALUATE
INVESTMENT
OPTIONS
176
To provide
funds
for theineducation
and
• Proven
effective
reducing risk
without sacrificing
bringingreturns
up of children
To provide a fund for paying necessary
• “Don’t put all your eggs in one basket.” Spreading of risk
costs and taxes when a person dies
by putting the money under management into several
of investments
such as stocks, bonds and
To savecategories
for the down
payment/major
purchase
or event
(house/car/debut
or
money
market
instruments.
wedding)
We are your Learning partners
Financial Planning Process
To enhance or provide a comfortable
standard of living; to provide for
dependents
Avoid procrastination
To improve one’s financial situation
Achievingretirement
one’s financial
goal is financial discipline
To supplement
income
IMPLEMENT
THE PLAN
To provide
funds
and
Stick to
planforif the
youeducation
haven’t changed
your goals
bringing up of children
or personal circumstances
To provide a fund for paying necessary
costs and taxes when a person dies
To save for the down payment/major
purchase or event (house/car/debut or
wedding)
177
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Financial Planning Process
EVALUATE
THE PLAN
178
A continuing process because the plan has
To enhance or provide a comfortable
to be evaluated regularly
standard of living; to provide for
dependents
The plan may have to be revised from time
to time one’s
due tofinancial
changes in
the market
To improve
situation
conditions & the investor’s needs & wants
To supplement retirement income
Changes……
To provide
funds for the education and
-- in the Market Conditions:
bringing up of children
- new investment products
- revisions
taxpaying
laws necessary
To provide
a fundoffor
- prolonged
period
of economic
costs and
taxes when
a person
dies growth or
difficulties
To save for the down payment/major
-- in the
personal requirements:
purchase
orInvestor’s
event (house/car/debut
or
- being promoted/getting married/ getting older
wedding)
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Types of Investment Assets
VARIABLE UNIVERSAL LIFE
179
Types of Investments
1. Fixed Income Securities
Investments with a fixed principal amount, a fixed period of time
(term) and a specific rate of interest (coupon).
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Types of Investments
1. Fixed Income Securities
A. Money Market Securities
• Commonly referred to as “cash and deposits”
• Any deposit instruments with a maturity of 1 year or less
e.g. Treasury Bills and Bank Deposits
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Types of Investments
1. Fixed Income Securities
B. Bonds
Loan that pays interest over a fixed term or period of time
3 general types of bonds Government Bonds
Corporate Bonds
Convertible Bonds
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Types of Investments
2. Equity Securities (Stocks)
•
•
Pieces of a corporation pie
The ownership interest of shareholders in a corporation
Preferred Stocks
Common Stocks
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Types of Investments
3. Common Trust Fund
•
•
•
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A form of pooled investment maintained by a bank
Sells and buys back units of participation at net asset value
Monitored by Banko Sentral ng Pilipinas (BSP)
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Types of Investments
4. Mutual Funds
•
•
•
185
Open-end investment company
A regulated investment company with a pool of assets that
regularly sells and redeems its shares
Monitored by Securities & Exchange Commission (SEC)
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Types of Investments
5. Property
• Something owned; any tangible or intangible possession that is owned
by someone
3 Types of Properties:
✓ Agricultural Property
✓ Domestic Property &
✓ Commercial/Industrial
Property
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Types of Investments
6. Insurance
A promise of
compensation for
specific potential
future losses in
exchange for a
periodic payment
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Types of Funds
VARIABLE UNIVERSAL LIFE
188
Types of Funds
Stocks or Equity Funds
Bond Funds
Balanced Funds
Money Market Funds
Cash Funds
Specialized Funds
189
189
Types of Funds
Stocks or Equity Funds
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-
invests in shares of stocks- prices
may be volatile.
-
mainly to generate long-term
for capital appreciation through
investment in high-quality equities
diversified across sectors.
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Types of Funds
Bond Funds
-
invests mainly in long-term debt
instruments and high-quality fixed income
instruments that are classified as below
average risk.
- aims to generate fixed regular
income.
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191
Types of Funds
Balanced Funds
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-
invests in both shares of stock and debt
instruments.
-
the allocation my be fixed or may vary
at the portfolio manager’s discretion.
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Types of Funds
Balanced Funds
-
193
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it combines the current income from
bonds and capital appreciation
prospects from stocks. For example,
60% of the funds are in bonds &
40% in equities.
193
Types of Funds
Money Market Funds
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-
invests purely in short-term
(one year or less) debt instruments.
-
may be diversified or specialized
type of money market instrument
(prime commercial paper/shortterm government securities).
194
Types of Funds
Cash Fund
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-
Invests in cash and other forms of
bank deposits.
-
Low risk and relatively safe.
195
Types of Funds
Specialized Funds
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-
Restrict investments to a particular
country or region Income securities.
-
Offers exposure to different markets in
different industry/regions.
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Types of Variable Contracts
VARIABLE UNIVERSAL LIFE
197
Key Features of VUL
Payment
Period
• Single
• Regular (Annual) Pay
For Regular Premium:
• Premiums are paid regularly
• Have flexibility of varying the level of regular premium payments, making
single premium top-ups or taking premium holidays
• If funds are sufficient, the policyowner may stop paying for
premiums
• The policyowner may vary the sum of his policy without changing the
level of his regular premiums
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Key Features of VUL
Currency
Types of
Pricing
Method
Types of
Charges
• Philippine Peso
• US Dollar
• Single Pricing Method
• Dual Pricing Method
•
•
•
•
•
Policy Fee
Mortality/Assurance Charges
Unallocated Premiums
Full Withdrawal Charges
Investment Management Charges
(Bid Offer Spread & Fund Management Fee)
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Type of VUL Contracts
Type of Life Insurance LINKED to Investment Funds
SINGLE PREMIUM INVESTMENT
LINKED WHOLE LIFE PLAN
1. The amount of insurance
protection is a percentage
(usually 125%) of the single
premium paid
2. For long-term savings and
investment; offers nominal
life protection
3. Top-ups are allowed
4. Right to withdraw full or
partial units
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REGULAR PREMIUMS INVESTMENT
WHOLE LIFE PLAN
1. Paid on regular intervals for
investments & life protection.
2. Life protection is the priority.
3. Premium holiday or top-ups
are allowed.
4. Partial & full withdrawal are
allowed.
Type of VUL Contracts
Type of Life Insurance LINKED to Investment Funds
INVESTMENT - LINKED
INDIVIDUAL PENSION PLAN
1. Usually involves a high
allocation of the premium
contributions to investments
through simply accumulating
the fund to retirement.
2. No life insurance cover other
than a return of investment
funds.
3. There are tax advantages
for employees.
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Type of VUL Contracts
Type of Life Insurance LINKED to Investment Funds
INVESTMENT - LINKED
PERMANENT HEALTH INSURANCE
1. Provides health coverage such
as disability income.
2. Contains cash value unlike
the traditional health plans.
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INVESTMENT-LINKED DREAD
DISEASE INSURANCE
1. A policy which advances the
whole sum assured in the
event of the diagnosis of a
critical illness.
Definition of Terms
VARIABLE UNIVERSAL LIFE
203
Definition of Terms
Unit Pricing
is the process whereby the unit price of units is set.
Offer price or Selling Price
the price which the insurer uses to allocate units to a policy
when premiums are paid.
Bid price or Buying Price
the price which the insurer will give for the units if the
policyholder wishes to cash in or claim under the policy.
Top –ups
204
are single premium injections which can be used to buy
additional units.
Premium Holiday
refers to the cessation of premium payments on a variable
life insurance contract for a period, with a view to continue it
later on.
Forward Pricing
is a pricing structure wherein the buying and selling prices of
units are determined at the next valuation date.
Allocation of premiums
means the periodic distribution of premiums to insurance and
units.
15-day cooling-off period
the contract may be returned within 15 days of receipt by
the policyholder.
Grace Period
30 days grace period.
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Definition of Terms
Policy Fee
it covers setting up and administrative expenses
Mortality Charges
it covers mortality cost (dependent on age)
Unallocated Premiums
a part of the premium being deposited for marketing &
setting-up expenses of the policy
Full Withdrawal Charges
deducted when the policy is fully withdrawn
Bid-Offer Spread
difference between bid and offer prices
Fund Management Fee
it is imposed on each investment fund (.5% - 2% per annum)
- used to cover investment expenses
Fund Switching Charge
What is Switching?
- Facility for transferring from one fund to another
- Limited number of switches are usually not charged
- Useful in retirement and education fees planning
Fund Allocation Charge
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changes in fund allocation in the policy
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How does VUL work?
VARIABLE UNIVERSAL LIFE
206
How does VUL Work?
Single Premium
Ps. 100,000
Total Charges
Policy Fee
•
207
Is usually imposed once as a flat
fee at the start of the policy
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Admin & Mortality Charge
•
Covers the cost of providing
life protection for the insured
• Varies according to the age of the
insured
• May be paid once at the start of
the policy or on a recurrent
manner
How does VUL Work?
Single Premium
Ps. 100,000
Total Charges
Policy Fee
Administrative &
Mortality Charge
Ps. 200
Ps. 3% of the Premium
Ps. 100,000 x 3%
= Ps. 3,000.00
Ps. 3,200.00
Ps 96,800 : Net Available for Investments
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How does VUL Work?
Ps 96,800 : Net Available
for Investments
Units Purchased & Remaining
Offer Price
Is the price used to
allocate/create units
@ Ps. 1.50
Purchased Units
Ps. 96,800/Ps. 1.50
64,533.33 units created
Bid Price
Is the price used for
cash-in or claims
@ Ps. 1.40
Note:
OFFER PRICE or SELLING PRICE is the price which the insurer uses to allocate units to a policy when premiums are paid.
BID PRICE or BUYING PRICE is the price which the insurer will give for the units if the policyholder wishes to cash in or claim under the policy.
BID -OFFER SPREAD is the difference between the bid price and the offer price.
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How does VUL Work?
Offer and Bid Prices
REMEMBER
Offer Price is always greater than the Bid Price
Bid Offer spread is expressed in percentages, e.g. 5% or 0.05
Prices (and computation) are rounded down to 4 decimal places
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How does VUL Work?
OFFER Price is the price used to allocate units
Ps 96,800 : Net Available
for Investments
Bid Offer Spread is the
difference between
Offer and Bid Price
Offer Price or
Selling Price
Ps.1.50
6.67%
Policy amount
Ps. 90,346.66
Units bought
64,533.33
Bid Price (buying
price) Ps. 1.40
BID Price is the price for cash-in or claims
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How does VUL Work?
PARTIAL AND FULL
WITHDRAWAL
Ps 96,800 : Net Available
for Investments
64,533.33 Units Purchased & Remaining
Partial Withdrawal
BID PRICE
Is the price used for
Cash-in or Claims @
Ps. 1.40
Ps. 20,000
•
Full of Partial Withdrawal
of Units is Allowed
Units to be CANCELLED
Ps. 20,000/ Ps. 1.40
14,285.7143 units
Units Remaining after Withdrawal
64,533.33 -14,285.7143
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= 50,247.6157 units
How does VUL Work?
Computation of Units
Single Pricing Method
➢ There is only one price quoted whether the policyowner is buying or selling his units.
Dual Pricing Method
➢ The policyowner buys the units at the offer price and sells the units at the bid price.
EXAMPLE:
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How does VUL Work?
Computation of Units
Important Formulas
No. of Units = Single Premium/Unit Price
rounded down to 4 decimal places
Bid Price
= Offer Price (1-Spread%) or BO1S
Offer Price = Bid Price / (1-Spread%) or OB/1S
Yield/Interest = (Full Withdrawal Value / Single Premium) 1/n - 1
Accumulation of Fund = x (1 + i) n
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How does VUL Work?
Single Pricing Method
No. of Units (bought) = Allocated Premium/Unit Price
No. of Units (cancelled) = Amount/Unit Price
Fund Value = No. of Units x Unit Price
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How does VUL Work?
Basic Computation
Single Pricing Method
Example: A policyowner pays a single premium of Php 50,000
and the unit price at that time is Php 1.50. The insurance company
deducts an initial charge of 5% and a mortality charge of 1.6%,
both as a percentage of single premium. The initial charge
is deducted before the premium is allocated while the mortality
charge is deducted by canceling the units.
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How does VUL Work?
Basic Computation
1. The following outlines the steps in the calculating the number
of units bought after all the charges
We calculate the charges first.
Initial Charge (5% Single Premium)
Mortality Charge (1.6% x Single Premium)
Php 2,500.00
800.00
Because the initial charge is deducted before the single premium is used to
buy units, we calculate the remaining single premium.
Single premium
Less: Initial Charge
Single Premium (Net of Initial Charge)
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-
Php 50,000.00
2,500.00
47,500.00
How does VUL Work?
Basic Computation
2. The Single Premium (Net of Initial Charge) will then
be used to buy units
No. of Units Bought = Single Premium (Net of Initial Charge)
/Unit Price
= Php. 47,500.00/ 1.50
= 31,666.6667 Units
3. The Mortality Charge is deducted by canceling units.
The No. of units to cancel (Mortality Charges) is:
(Mortality Charges) = Mortality Charge/ Unit Price
= 800.00/1.50
= 533.3333 Units
31,666.6667 - 533.3333
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= 31,133.3334 units
How does VUL Work?
Basic Computation
Withdrawal Benefit
Partial or full withdrawal of units can be made by the policyholders
at anytime while their policy is in force. Withdrawals are made by
selling (or “canceling”) some or all of the units using the unit price at
the time of withdrawal.
When full withdrawal of units is made, the insurance policy is terminated. All
policy benefits like the sum assured guarantee and other supplementary
benefits will cease.
Example: Suppose that the policyowner has 10,000 units and the unit price is
Php1.97. He wishes to withdraw (partially) Php 10,000 from his policy. The
following steps show how the withdrawal is made and the remaining no. of
units after the withdrawal.
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How does VUL Work?
Basic Computation
Withdrawal Benefit
Because the withdrawals are made by selling units, the no. of units
that needs to be sold to fund the withdrawal is calculated.
No. of Units to sell
= Withdrawal Amount
Unit Price
=
Ps10,000.00
1.97
= 5,076.1421 units
The remaining no. of units after Withdrawal is therefore:
= 10,000 - 5,076.1421
= 4,923.8579 units
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How does VUL Work?
Dual Pricing Method
No. of Units (bought) = Allocated Premium/Offer Price
No. of Units (cancelled) = Amount/Bid Price
Fund Value = No. of Units x Bid Price
Bid Price = Offer Price (1- Spread) or BO1S
Offer Price = Bid Price/ (1-Spread %) or OB/1S
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How does VUL Work?
Basic Computation
Dual Pricing Method
Under the dual pricing method, there are two prices quoted :
-
The price used to create/allocate units (offer price) is higher than the price used
to cancel/cash-in/claim units (bid price).
-
One price can be worked out from the other if the bid offer spread
(Spread %) is known using the formulas:
Bid Price = Offer Price x (1-Spread%) or BO1S
Offer Price = Bid Price/(1- Spread%) or OB/1S
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How does VUL Work?
Basic Computation
Dual Pricing Method
Example: If the offer price is 1.50 and the bid offer spread is 5%, the
bid price can be worked out as:
Bid price = Offer Price (1-spread%) and
= 1.50 (1-5%)
= 1.4250
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How does VUL Work?
Basic Computation
Dual Pricing Method
A policyowner pays a single premium of Php 50,000 and the offer
price at that time is Php 1.50. The company’s bid-offer spread is 4%
The insurance co. deducts an initial charge of 5% and a mortality
charge of 1.6%, both as a percentage of single premium. The charges
and fees are deducted by canceling units after the whole single premium is
used to buy units.
1. We calculate first the number of units allocated without charges:
No. of units allocated
224
=
Single Premium
Offer Price
No. of units allocated
=
No . Of units allocated w/o charges
=
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50,000
1.50
33,333.3333 units
How does VUL Work?
Basic Computation
Dual Pricing Method
2. Because the initial charge and mortality charge are deducted by
canceling units after the single premium is invested, we add the
charges then convert into units using the bid price (bec. the
policyholder, in effect, buying units to pay for the initial and mortality
charges. In the example, only the offer price is given. Thus, we have to
compute for the bid price using the given bid- offer spread.
Bid price = Offer price (1-Spread%)
= 1.50 (1-4%)
= 1.44
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How does VUL Work?
Basic Computation
Cancellation of Units
3. We now calculate for the number of units to cancel:
Initial Charge (5%Single Premium)
Mortality Charge (1.6% x Single Premium)
2,500
800
------------
Total Charges in peso
3,300
Total charges in units
= Total charges
=
Total charges in units
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=
2,291.6667 units
Bid price
3,300
1.44
How does VUL Work?
Basic Computation
Cancellation of Units
Now subtract the total charges in units from the no. of units allocated
for investment.
No. of units bought
Total charges
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33,333.3333
- 2, 291.6667
31,041.6663 units
(after all charges)
How does VUL Work?
Basic Computation
Accumulation of Fund Over a Period of Time
To compute for the accumulation of fund over a period of time
Where the amount is X after n years and it increases by i
(interest rate), we will you use this formula X (1+i) n
Example A:
What is PhP 20.00 after 10 years if it increases by 5% annually?
Using the formula, X (1+i) n
20 (1+ 0.05) 10 = PhP 32.58
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How does VUL Work?
Basic Computation
Accumulation of Fund Over a Period of Time
Example B: Over the next 6 years, the offer price is
projected to constantly increase by 7% annually. Compute
for the bid price and offer price after 6 years if the bid price
now is PhP1.20 and the bid offer spread is 5%.
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Offer Price (present)
= P1.20/unit
(1-0.05)
= 1.26
Offer Price (after 6yrs)
= x (1+i) n
= 1.26 (1+0.07) 6
= P1.89
Bid price after 6yrs
= 1.89 (1-0.05)
= P1.80
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Test Taking Tips
INSURANCE CONCEPTS
230
Test Taking Strategies
Before the Exam
1. Be prepared, Read and Review.
2. Before the test, list everything you will need for it that
is allowed.
3. Review your Traditional Life and VUL Simulated Exams
and Reviewers.
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Test Taking Strategies
During the Exam
1. Read the directions carefully.
2. Get the big picture.
3. Answer easy questions first.
4. Eliminate answers to difficult questions
5. Review your test to make sure that you have
answered all questions.
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THANK YOU!
&
GOOD LUCK!
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