Policy Documentation, Charges, Fees and Premium Allocation
What the exam tests
This domain tests the documents a client receives and the charges that reduce premium before and after units are bought. You must be able to read a benefit illustration and explain why policy value is not the same as premiums paid.
Documents
The product key facts statement summarises the product, risks, charges and fund choices. The offering document or product brochure sets out the full terms. The benefit illustration projects policy values at assumed rates (often 0%, 3%, 6% and 9%) and must show the effect of charges; it is not a forecast. The policy contract contains the provisions, including the death benefit, surrender, cooling-off and fund-switching rules. An investment choice booklet lists the funds. Annual statements show units, transactions, policy value and charges.
Charges and premium allocation
Charges may include a premium charge, bid-offer spread, policy administration fee, mortality and morbidity charge, fund management fee, custodian fee, surrender charge, switching fee and withdrawal fee. Some products use initial units with higher charges in early years. Premium allocation is the process of applying the premium, less charges, to buy units at the offer price. The allocation rate is not an investment return.
Worked example
An annual premium of HK$24,000 has a 6% premium charge (HK$1,440), leaving HK$22,560. A 5% bid-offer spread means the units are bought at an offer price 5% above bid value, so the initial bid value is about HK$21,432. A monthly policy fee of HK$50 and a mortality charge of HK$10 per month reduce units further; a 1.5% annual fund management fee is charged inside the fund. After one year at 0% fund return, the policy value is below HK$21,432, not HK$24,000. If a surrender charge of 5% applies in year one, the surrender value is lower still.
Traps
Do not add the premium charge and bid-offer spread as if they were the same. Do not ignore fund-level fees because they are not shown as policy deductions. Do not present an illustration as guaranteed. Do not forget the surrender charge. Do not say the allocation rate is the return. Do not omit the cooling-off notice when explaining documents.