Technical Savings and Investments Information

Knowing the technical details of savings and investments are important when choosing a plan or giving advice.  Alliance Insurance Services believes that any person involved in any aspect of the management process should learn and fully understand the different types of policies that are available.  The technical details shown here are provided by the Office of the Commissioner of Insurance and are provided as a learning and information tool only.  These extracts are from the IIQE General Insurance Examination Study Notes, for full details or to download the full study notes please visit:

http://www.peak.vtc.edu.hk

INTRODUCTION TO INVESTMENT-LINKED LONG TERM INSURANCE POLICIES

DEFINITION

As specified in Part 2 of Schedule 1 to the “Insurance Companies Ordinance” (Cap 41), investment-linked long term insurance policies fall within Class C of Long Term Business – Linked Long Term. Linked Long Term Business is defined as the business of effecting and carrying out of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified).

In order to minimize the confusion with the classification of business between Class A (Life and Annuity) and Class C (Linked Long Term), the Insurance Authority, after consultation with the Life Insurance Council and the Securities and Futures Commission (SFC), has issued a “Guidance Note on Classification of Class C – Linked Long Term Business” (GN11) which highlights some of the predominant features of Class C Linked Long Term policy. In GN11, it is stated that Class C policy must either be a life or annuity contract and possess one or more of the following features:

(a) The benefits of the policy are calculated in whole or in part by reference to the value of, or the income from, specified assets or group of assets or by reference to movements in a share price or other index, whether or not subject to deductions in respect of expenses or charges;

(b) The policyholder is given the options to choose the underlying investment assets from a range of investment fund options;

(c) Market Value Adjustment or adjustment of similar nature is applied under the terms of policy for the calculation of surrender/withdrawal value with the exception of where the market value adjustment is applied to single premium non-linked policies for refund of premium during the Cooling-off Period (please refer to section 4.13.4 for details); and

(d) The policy is designed in such a way that the policyholder is contractually bound to bear partly or wholly the risk of the investments to which the benefits are linked.  In other parts of the world, investment-linked insurance policies are also known by the following terms:

1. Unit-linked life/annuities: This is a common term used in the UK. The term “unit-linked” illustrates that the values of the policies are linked to the price of the units.
2. Variable life/annuities: This is the common term used to describe investment-linked business in the US. The term “variable” illustrates that the returns vary with the value of the underlying investment. There are two different types of variable life insurance. 
   1. Fixed premium variable life is based on whole life. When talking about this product, people generally drop the “fixed premium” qualifier and refer to the product simply as variable life. It provides a fixed premium payment schedule. 
   2. Flexible premium variable life is based on universal life (a flexible premium derivative of whole life). This product may also be called “variable universal life” or “universal variable life.” When talking about this product, people generally retain the “flexible premium” or “universal” qualifier since “variable life” alone usually indicates the fixed premium version of the product. It combines the premium and face amount flexibility of universal life insurance and adopts its unbundling of the pricing factors with the investment variables characteristics of variable life policies.

In Hong Kong, investment-linked annuities are not commonly found. The most popular type of investment-linked insurance product is flexible premium variable life insurance (also called "variable universal life" or "universal variable life").