hk-iiqe-paper-5 cheat sheet

An ILAS is a long term insurance policy whose benefits are linked to the performance of underlying investments chosen by the policyholder; the insurer bears mortality risk, the policyholder bears investment risk.

Core structure: premium is used to buy units in one or more funds; the account value equals units held multiplied by unit price at the relevant valuation point, less applicable charges.

Policy value is not guaranteed; unlike traditional participating or universal life policies, there is no declared bonus or minimum crediting rate on the investment component.

Death benefit is typically the higher of a fixed sum assured percentage and the account value, subject to policy terms; check the percentage and whether it declines with attained age.

Most ILAS offer a limited number of free fund switches per year; additional switches attract a switching fee or bid/offer spread.

Some products provide capital guarantee or minimum maturity benefit riders; guarantees are subject to insurer credit risk and vesting conditions stated in the policy.

Level of investment risk disclosure must be made in the product brochure and illustration; the illustration uses assumed rates of return that are not projections.

Typical fund menu covers equity, bond, balanced, money market and sector/regional funds; the insurer may add, close or merge funds under the policy terms.

Asset allocation should reflect the client's time horizon, risk tolerance and liquidity needs; longer horizons generally support higher equity weight, shorter horizons favour bonds and cash.

Diversification reduces unsystematic risk but not market risk; correlation between funds determines the actual benefit of combining them.

Fund performance is measured net of fund-level charges; compare on a like-for-like basis using the same period and currency.

Currency risk arises where the fund's underlying assets are denominated in a currency different from the policy currency; hedging may or may not be applied.

A fund's stated objective, benchmark and permitted investment range are set out in its offering document; deviations may be permitted within limits.

Asset allocation is not static; rebalancing restores the target mix after market movements and should be reviewed at least annually.

Key documents: product brochure, illustration, policy provisions, investment choice booklet and the fund offering documents; the client should receive and acknowledge them.

Common charges: premium charge, initial/upfront charge, bid/offer spread, fund management fee, policy administration fee, mortality and morbidity charge, surrender charge and switching fee.

Premium allocation: an allocation rate determines the portion of each premium used to buy units; the balance covers charges; allocation rates may step up in later years.

Bid/offer spread is the difference between the price at which units are sold and bought back; it is an implicit transaction cost.

Surrender value equals account value less any surrender charge or market value adjustment; early surrender may return substantially less than premiums paid.

The illustration must show both a low and a high assumed rate of return and must disclose that these are not guaranteed; charges reduce returns.

The cooling-off period runs from delivery of the policy or a notice, whichever is later; a refund of premiums less any market value loss is typically made.

ILAS are long term insurance products regulated by the Insurance Authority under the Insurance Ordinance; they are also registered with the Securities and Futures Commission as collective investment schemes.

Intermediaries selling ILAS must hold an insurance intermediary licence and be registered with the SFC for Type 1 (dealing in securities) regulated activity, or act through a licensed corporate entity.

The Insurance Ordinance, the IA's codes and guidelines, and the SFC's Code on Investment-Linked Assurance Schemes govern product design, disclosure and marketing.

The Code on ILAS requires a product key facts statement, offering document and annual statements to policyholders.

The regulator requires risk disclosure, suitability assessment, and disclosure of remuneration and conflicts of interest to the client.

Marketing materials must be accurate, balanced and not misleading; past performance must be presented with the required warning.

The sales process starts with a financial needs analysis covering objectives, time horizon, liquidity needs, existing portfolio and risk tolerance.

Risk profiling assigns the client a risk score using a documented questionnaire; the recommended product's risk rating must not exceed the client's tolerance.

Suitability is assessed against the client's circumstances; if the product is unsuitable, the intermediary must explain why and record the client's instructions.

Required disclosures: product features and risks, charges, insurer credit risk, the fact that investment risk is borne by the client, and the intermediary's remuneration.

The Financial Needs Analysis and Risk Profile Questionnaire must be completed and signed before application; the client receives copies.

A recorded risk disclosure statement or a signed declaration is required where the sale is not face-to-face or where the client declines advice.

The application, illustration and acknowledgement of the offering documents must be retained for the required record-keeping period.

Death claims require notification, proof of death, policy documents and beneficiary identification; payment is made to the beneficiary or estate.

Partial surrender/withdrawal reduces units and account value; check minimum remaining value and any charge or limit on frequency.

Full surrender terminates cover; the surrender value is paid at the next valuation point less charges, and the client loses insurance protection.

Switching instructions must be received before the cut-off time; the switch is processed at the next valuation point and may attract a fee or spread.

The insurer must send an annual statement showing units held, unit prices, account value, charges deducted and fund performance.

Post-sale obligations include notification of material fund changes, handling complaints within the prescribed timeframe, and maintaining records.

Clients should be reminded to review the policy periodically and to update beneficiary nominations after life events.