Investment-Linked Long Term Insurance Products and Product Features
What the exam tests
Paper 5 treats an investment-linked assurance scheme (ILAS) as a long term insurance policy whose value is linked to underlying funds, not as a mutual fund. Questions test the insurance wrapper, unit mechanics, death benefit, premium allocation, and the risk borne by the policyholder. You must be able to separate product features from fund performance.
Core features
An ILAS is Class C (linked long term) insurance business under the Insurance Ordinance. The policyholder chooses one or more underlying funds; the policy value is the number of units multiplied by the unit price (usually the bid price). Units are created when premiums are allocated, after charges. The insurer deducts a premium charge and may apply a bid-offer spread, so the amount actually invested is lower than the premium paid. Regular premium products often use initial units in early years, carrying higher charges, and accumulation units later.
The death benefit is an insurance element. A common formula is the higher of the policy value or a guaranteed sum assured, such as 101% of premiums paid, subject to a minimum death benefit of 105% of policy value under the applicable requirements. Guarantees are obligations of the insurer, not of the fund. Investment risk, including loss of capital, rests with the policyholder. There is usually no guaranteed surrender value.
Worked example
A single premium of HK$100,000 has a 5% premium charge, leaving HK$95,000. A 5% bid-offer spread means units are bought at the offer price, so the initial value at bid price is about HK$90,250 before fund-level fees. If the fund then falls 10%, policy value is about HK$81,225. If the death benefit is the higher of policy value or 101% of premium (HK$101,000), the death benefit is HK$101,000. The policyholder bears the HK$18,775 investment loss while alive; the insurance floor only operates on death.
Traps
Do not treat premium paid as policy value. Do not ignore the bid-offer spread or fund management fee. Do not say the sum assured is always payable on surrender. Do not confuse insurer insolvency risk with market risk. Do not assume a "guaranteed fund" guarantees the policy value.