CEILI - SET 1. Anticipated Questions with Answers CEILLI SET The public generally invest their money to provide.

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1 EILLI SET EILI - SET 1 nticipated Questions with nswers 1 The public generally invest their money to provide. I. funds for a company II. comfortable standard of living III. income in retirement IV. funds for the education and up-bringing of their children I 2 epending on the investment objective, a person would need to choose. investing in asset that yield less regular income or those that have better for capital gain investing in asset that yield more regular income or those that have less for capital gain investing in asset that yield less regular income or those that have less for capital gain investing in asset that yield more regular income or those that have better for capital gain 3 Important considerations of an individual s decision in investment include. I. the individual s attitude towards risk II. the accessibility of fund III. the taxation liability IV. the individual s employer performance I I Premier cademy Page 1

2 EILLI SET person s horizon will greatly depend on. the investment objectives, age of investor and the current financial condition of investor the education background, sex and occupation background of investor the taxation treatment, moral characteristics of the investor and age of investor the process of investment, the fund for paying financial expenses and age of investor 5 The performance of an investment depends on. I. a country s economy factors and past experience of the invested company II. the competencies and capability of the invested company management team III. the number and spread of small-time investors choosing to invest IV. the invested company s level of cost and the life cycle of the investment I 6 The factors that may influence the choice of deposits in a bank include. I. fund available for investment II. the length of time the funds can be in the account III. whether emergency withdrawal are likely IV. the age of depositor I I Premier cademy Page 2

3 EILLI SET mong the advantages in investing in shares are: I. investors are able to participate directly in the future of the invested company II. shares provide good dividends and capital appreciation III. shares are very liquid and can be traded in open market IV. the value of the shares can never go beyond the price at which the shares are bought. I I, II, and IV 8 Unit trust is essentially for: two-way arrangements between the investors and the fund manager two-way arrangements between the investors and the trustee three-way arrangements among the investors, the trustee and the fund manager three-way arrangements among the investors, the trustee and the supervisory authority 9 The function of investment trust include: I. making investment simpler to small-time investors II. making investment accessible to small-time investors III. making investment more cost effective to small-time investors IV. making investment a definite profitable transaction for small-time investors I 10 n example of investment trust is: that of manah Saham National that of KL Mutual Fund the listed Seacorp Schroders that of Mayban Management hd I Premier cademy Page 3

4 EILLI SET What are derivatives? They are real estate investment providing good capital appreciation and high flow of income They are pools of fund introduced to many investors kept in trust by bank managed by a professional fund manager They are preference shares that give the holders the right to a fixed dividend provided that have been made They are financial instruments whose values are linked to the price of underlying instruments in the cash market 12 Investors purchasing call option will be hoping that: the share price will fall when option is exercised, the premium and the fixed price will be more than the values of the share the share price will rise when option is exercised, the premium and the fixed price will be more than the values of the share the share price will fall when option is exercised, the premium and the fixed price will be less than the values of the share the share price will rise when option is exercised, the premium and the fixed price will be less than the values of the share 13 Warrants or TSR are: I. seldom issued on their own II. often issued free and attached to rights or loan stocks III. often issued as an added attraction or sweetener allowing a corporate issuer to obtain a lower financing costs IV. not permitted to be detached from the loan stock and sold separately in the securities market I 14 Hedging can be described as: assuming of present position opposite to future positions in an attempt to maximize financial gains from price stability assuming of future positions opposite to cash position in an attempt to minimize the risk of financial loss from adverse price changes making money by selling a physical commodity immediately to a buyer for his immediate enjoyment shifting of the risk of price fluctuation from participants who are willing to assume risks to those who are not I Premier cademy Page 4

5 EILLI SET Life insurance can be described as: I. a means of alleviating of the financial distress that death may bring II. a means of spending and divesting when death occurs III. a pool of fund into which a large numbers of policyowners jointly contribute in relation to their risk exposures IV. a contract dependent in human life I 16 The first investment-linked life insurance contract in the United Kingdom transacted some 30 years ago was a group retirement annuity for the self-employed an individual retirement annuity for the self-employed introduced by the London & Manchester ssociation ompany Limited in 1953 linked to an internal unit trust administered by the London & Manchester ssociation ompany Limited 17 The Investment ompany ct 1940 of United States regards entities that invest assets of variable life insurance policyowners as investment companies and regulates the companies management and operations requires that potential clients be provided with a prospectus that among others discloses the identity and nature of the insurer s business requires that potential clients be provided with a prospectus that among others discloses the financial information of the insurer requires that insurance agents and agency office employees dealing with variable life insurance must pass an examination in securities business and be registered with the National ssociation of Securities ealers 18 One of the factors which has contributed to the expansion of the investmentlinked life insurance business in Singapore was the requirement of the Securities Exchange ct 1934 that all insurance agents and agency office employees dealing in variable life insurance must pass an examination in securities business the regulations of investment company s management and operation including that of how the premiums are going to be invested, financial information of the insurer, chargeable fees and expenses and rights of policyowners the introduction of the Enhanced Investment Scheme (EIS) by the entral Provident Fund (PF) in 1993 the introduction of the new generation of investment-linked life insurance products, the Hambro Whole Life Plan in 1997 I Premier cademy Page 5

6 EILLI SET How are the premiums under investment-linked life insurance policies apportioned? major portion of the investment-linked life insurance policies premium are allocated for the mortality protection aspects under the policy and the lesser part of the premium are used to purchase units in the investmentlinked fund managed by the life offices Investment-linked life insurance policies premium will be divided equally in both mortality protection aspects and to purchase units in the investment-linked fund managed by the life offices major portion of the investment-linked life insurance policies premium are used to purchase units in the investment-linked fund and a lesser portion for the mortality protection aspects under the policy The whole Investment-linked life insurance policy premiums are used to purchase units in the investment-linked fund, and the mortality aspects is given free 20 Each premium that an investment-linked life insurance policyowner makes is. allocated to units at the life office s selling price called offer price prevailing on each investment date allocated to units at the life office s selling price called offer price prevailing on each cash-in-date allocated to units at the life office s selling price called bid price prevailing on each investment date allocated to units at the life office s selling price called bid price prevailing on each cash-in-date 21 In respect of investment-linked life insurance funds, the difference between the offer and bid prices in normal market condition is. 10% - 20% of offer price, and this difference is known as the offer-bid spread 10% - 20% of bid price, and this difference is known as the offer-bid spread 5% - 6% of offer price, and this difference is known as the offer-bid spread 5% - 6% of bid price, and this difference is known as the offer-bid spread 22 One fundamental difference between traditional with profit life insurance policies and investment-linked life policies is. investment-linked life insurance policies aim to produce a steady return by smoothing out market fluctuations traditional with-profit life insurance policies aim to produce a steady return by smoothing out market fluctuations investment-linked life insurance policies do not offer the potential for higher returns traditional life insurance policies offer the potential for higher returns I Premier cademy Page 6

7 EILLI SET The expenses of running a life office and acquiring investment-linked life insurance business are covered by making certain charges on the policies issued both upfront and regular policy charges not specifically detailed in the policy items are borne in part by the policyowners directly in relation to the particular policies and in part taken out of the life fund as a whole are levied on the policies through open stipulation in the policies including the types and level of charges imposed cannot be determined by a careful study of the policies document and policies statement 24 If the offer price in an investment date is RM2.50 and the premium amount of RM is used to buy units, it will buy unit 10 units 100 units 100 units less the unallocated premium 25 Investment-linked funds can be structured into 2 ways: Warrant units and right units Investment units and mortality units ccumulation units and distribution units Term units and annuity units 26 s the value of Investment-link policy depends on the performance of financial instrument in which the investment is invested, fund manager bears the risk and the policyowner bears the benefit of the policy the life office bears the risk and policyowner bears the benefit of the policy the invested company bears risk and life office bears the benefit of the policy policyowner bears both risk and benefit of the policy 27 urrently, financial instrument which Investment-linked Funds are invested include: I. ash Fund II. Equity Fund III. Property Fund IV. iversified Fund I I and II I, I I Premier cademy Page 7

8 EILLI SET The switching facility in Investment-linked fund allows a life office to switch on Investment-linked life insurance policy to a traditional with profit endowment policy a life office to switch a single premium Investment-linked whole life insurance plan to a regular premium Investment-linked whole life insurance plan a policyowner to switch part or all of his investment from one Investmentlinked fund to another policyowner to switch part or all of his investment from one life office s policy to another life office s policy at the same premium 29 If the number of unit in an Investment-linked Fund is 100,000 and the value of the total value of the fund at x point in time is RM1 million, the value of each unit can be calculated by multiplying number of unit in existence with value of the total fund subtracting the number of unit existing before x point from the 100,000 unit multiply the number with the value of total fund dividing the value of the total fund by the sum of the number of units in existence dividing the value of the total fund by the sum of the number of units existing before x point in time 30 Under traditional with-profit life insurance policy, I. the life fund maintains a reserve to help level out the short term fluctuation in value of the life fund s investment II. maintaining a reserve could mean that the policyowner does not receive the full value in a year of high investment gains III. maintaining a reserve could mean that the policyowner does not suffer in a year of poor investment conditions IV. maintaining a reserve could mean that the full impact of the changes in investment conditions will be directly borne by the policyowner I I Premier cademy Page 8

9 EILLI SET major difference between traditional with-profit life insurance product and Investment-linked life insurance policy traditional with-profit life insurance policy can reduce in value particularly when the life fund is being transferred to policy reserve traditional with-profit life insurance policy can never reduce in value, provided that the life office is solvent the value of traditional with-profit life insurance policy will fluctuate greatly depending on the investment performance of the life office the value of Investment-linked life insurance policy can never fluctuate once the units are added to the policyowner s policy 32 The value of investment depend on 2 factors: the offer price and bid price disability income and cash value cash value plus protection cost the value of each of the units plus number of units the policy has accumulated to date 33 The phrase "Top-Up" in Investment-Linked Life Insurance means: the policyowners pay further premium to purchase additional units of the investment-linked fund which will be added to the existing units in the policyowner s account the life office maintain reserves to level out short term fluctuation in the value of Investment-linked fund when the Investment-linked fund value increases, the value of the fund will also increase the policyowner can change his investment fund to another fund which he believes to have great opportunities for higher return 34 With dual pricing method, hmad has paid RM4,000 premium to buy his single premium investment-linked policy. The offer price is Rm1 and bid offer spread is 5%. ssuming the unit price never change, what is the bid price and the amount that hmad will get if he cash in or claim the policy and RM3,800 respectively 0.95 and RM3,800 respectively 0.05 and RM2,000 respectively 0.50 and RM2,000 respectively 35 Under single premium pricing method, Joo Hin bought a single-premium investment-linked policy. He hold 3,800 units at RM1.00 unit price. With 1% mortality charge and policy fee of RM100, what is the cash value of his policy? RM3,938 RM3,800 RM3,700 RM3,662 I Premier cademy Page 9

10 EILLI SET The formula for nnual Yield for single premium fund is (RGP) 1/n + 1,n = number of units (RGP) 1/n + 1,n = number of year (RGP) 1/n - 1,n = number of units (RGP) 1/n - 1,n = number of years 37 The benefits of investing in investment-linked funds. I. It offers the policyowner an access to a "pooled" or "diversified portfolio" of investment. II. Investment-linked products have simple design with clear structure which caters separately for investment and insurance protection. III. Policyowners can access to the investment-linked fund managed by professional fund manager with unproven track record. IV. Investors can buy investment-linked life insurance policy with an initial investment at as low as RM4000. I 38 well-diversified investment-linked fund has. many professional fund managers who take care of many funds a better risk characteristic than a less-diversified fund a simple designed product which cater separately for investment and insurance protection provision of flexibility to change the level of premium payment and take premium holidays 39 The flexibility of investment-linked fund are. I. investment-linked products have simple product design which cater separately for investment and insurance protection II. policyowner can easily change the level of his premium payment and add single premium top-ups III. policyowner can buy an investment-linked life insurance policy with an initial investment at as low as RM4,000 IV. policyowner can easily change the level of sum assured and switch investment between funds I I Premier cademy Page 10

11 EILLI SET The following statements about investment expertise in investment-linked is FLSE. Investment-linked funds have professional fund managers who have the investment expertise to invest the fund to achieve high return over the long term. Investment-linked funds have professional fund managers who have the investment expertise to invest the fund to always achieve high return over the short term. n ordinary policyowner does not normally has good knowledge of financial market to invest his money effectively. Investment-linked fund have professional fund manager to manage the fund. 41 The criterias for comparing traditional life insurance products with investmentlinked life insurance products include I. the products investment returns and risks. II. the policy premium computation. III. the death benefit. IV. the life offices management expertise. I 42 Investment-linked life insurance products benefits are solely dependent on fixed income securities in which the funds invest. comprise the investment returns only. wholly or partly determined by referring to the value of or income from property of any description or by referring to the fluctuation in or in an index of, the value of property of any description. are determined and fixed at the inception of the policy contract. 43 Under traditional without-profit life insurance products, the amount payable to the policyowners does not depend on the investment performance of the life office as it is fixed at the inception of the policy thus there are no investment risks. Includes bonuses which are allocated to the policyowner in the form of additions to the sum assured but these allocations are not directly linked to the life office investment performance. vary according to the performance and values of the underlying assets of the life offices investment. vary according to the performance and values of the underlying assets that the policies are tied to. I Premier cademy Page 11

12 EILLI SET Investment-linked life insurance policies are said to be account driven. This means that I. the premiums charged and the benefits under the policy are fixed base on specific sum assured and stated in the policies at their inceptions. II. Policyowner have the flexibility in changing their premium payments. III. Life offices may retain the right to vary some of the changes made under the policies. IV. If the future experience differs from what is assured when the policies are priced, the life offices may depart from their intended policies and change the offer and bid prices. I 45 The following statements concerning taxation in respect of investment-linked life insurance policies are true. I. surpluses generated from writing investments-linked life insurance products are already taxed at the level of the life insurance companies. II. Proceeds distributed to policyowner of investment-linked life insurance policy are tax free in the hands of policyowner. III. isposal of units in investment-linked life insurance should attract tax as they are capital receipts. IV. The tax laws currently governing other forms of life insurance apply to investment-linked life insurance. I I Premier cademy Page 12

13 EILLI SET What are the stages involved in providing effective advice to investment-linked life insurance customers? I. conducting the fact-finding II. marketing qualification III. assessing and satisfying customers IV. making recommendation to customers I I, I 47 fter the financial needs of a customer is assessed, what must an investmentlinked life insurance agent do? I. consider the most appropriate means to satisfy those needs offered within the investment-linked insurance. II. onsider the most appropriate means of satisfying those needs which may involve financial products other than investment-linked life insurance. III. Refer the customer to another person with better expertise in certain areas of financial services, should the need arise. IV. If the financial needs fall outside the scope of the insurer s portfolio the agent must discontinue his finding. I and IV II and III II and IV II 48 What do you understand by the phrase " conducting the fact-finding" which is done by an investment-linked insurance agent? Gathering all information of the investment available by the insurer. Gathering all relevant information about the customer before making recommendation. Gathering all information about the various plans offered by other insurers in the market. Gathering as far as possible all elements that will affect the customer s investment. 49 Under the sales-oriented basis. What technique is frequently used? Product Sales Technique Market Sales Technique Hand Sales Technique Forced Sales Technique I Premier cademy Page 13

14 EILLI SET For a company to be successful in selling the products, the most important thing to have is : Market-oriented agency force. ompetitive products. edicated Staff. Good working environment. 51 n agent who engages in personal selling requires the following process: I. conducting fact finding. II. ssessing/satisfying customers needs. III. Making recommendation to the customer. I and II I and III II and III 52 What are the important ingredients in a successful sales interview? The agent s skill in handling objections from a prospect. The reduction of the product price. hange in sales plan The agent making objections and drawing the prospect s attention to the advantages of the product. 53 What is the main reason of insurance agent in participating in the planning of new product? Feedback on the market. To establish a goal for the agency and ways to achieve it. New ideas are established. To promote self esteem and confident in agent. I Premier cademy Page 14