SCI M9A – Life Insurance And Investment-Linked Policies II

It is to be acknowledged that “Portfolio bonds” offer a broad variety of investment options. Investment in cash and deposits, shares , bonds, derivatives, and pooled investment schemes may be made. Where CIS is wrapped within the portfolio, SFA criteria apply.

It is stated that ihe International Portfolio Bond is a single premium investment bond made available to UK citizens, intended for medium to long-term investments of at least five to ten years or longer. The minimum contribution for the Family or select funds is £15,000 (or currency equivalent), or £50,000 if invested in External Funds or Cash deposits. To increase flexibility, the Bond will be made up of a series of 12 identical policies, called segment.

Structured products, called “wrappers” can be produced and sold in various formats. One potential wrapper in the form of unsecured debenture, i.e. a bond, is the equity-linked bond outlined above. Others still exist. Wrapper preference depends on a number of factors including regulatory constraints on issuers, the required investment flexibility, the required degree of accountability (e.g. structured fund requires independent valuation with a periodically reported Net Asset Valuation (NAV)), the expected level of returns (e.g. some type is more costly than others); and tax consideration in a specific jurisdiction.

Please note that an unsecured debt instrument is an inverse convertible bond, just like all other structured products. This is published as a note relating to a single stock. This has the features of a fixed income bond under normal circumstances: periodic interest payments (if the note so provides), and payment of the par value of the note upon maturity.

It is stated that unless the correspondence is 0, the securities movements have no correlation; they are completely random. Perfectly correlated securities are infrequent in real life. Also within the same sector, individual stock prices are in some degree linked because they are subject to common market risk factors but in complete equilibrium they do not go up and down.

There is no such thing as a financial investment outside the economy. The general economic conditions and the business outlook influence them. Since today’s global globalization, consumer prices are influenced not only by domestic factors but also by the global climate. Factors like interest rates, inflation, exchange rates, commodity prices and so on can cause price fluctuations.

Please note that the purpose of providing a PHS is to highlight the key characteristics and risks inherent in the under consideration ILP sub-funds. The prospective policy owner will first read the product description, obtain a clear understanding of the functionality of the program, and then read the PHS that is prepared in question-and – answer format to answer any questions he might have.

It is stated that a financial derivative (or pure derivative) asset is a financial asset in that you accept a contract making a legal argument, except that the value of the derivative is based on the success of an underlying financial asset that you do not yet own. This simple agreement between you and your roommate is only one of the ways that derivatives can be constructed. There are two particularly important types of derivatives, options, and futures. Many other types exist, but they can usually be created from these two basic building blocks.

Please note that a traditional life insurance policy has an element of cover and an element of savings/investment. Part of the health insurance is used to include cover against death or other misfortunes, such as injury or terminal illness. The remainder of the premium is paid, payable at the program maturity, early termination of the program, or other times in compliance with policy conditions.

Please learn that a coefficient of -1 indicates that the two securities are in perfect correlation with each other. When one security’s price is moving up or down, the other security’s price moves in the opposite direction, by the same percentage. If the correlation is 0 the securities movements have no correlation; they are completely random. Perfectly correlated securities are uncommon in real life.

It is to be acknowledged that the responses and explanations given in the PHS should be straightforward and they should use plain language to promote comprehension. To this end, the insurer will consider and be encouraged to use diagrams (graphs, maps, flowcharts, tables) and numerical examples to illustrate the mechanisms and benefits of the understanding of the investor’s product aids.

It is to be acknowledged that structured products that aim to preserve capital typically use bonds as the underlying structure to provide return of all or part of capital at maturityThere are various ways of obtaining the same risk-return profiles using different financial instruments. Reverse convertible is designed by bonding and placing option.

It is to be learned that usually, there is no need to include fixed income instruments for the main component of those products without any downside security factor in participation products. Alternatively, derivatives contracts are used to achieve the optimal risk-return pattern for both the principal and return elements. Within this group, there are several examples of the products.

It is stated that the primary risk to the portion of return is market volatility. All derivative contracts have expiry dates suggested. On the expiry date, the contract value of the underlying assets determines the amount of return if the rights under the contract were not exercised prior to expiry. A sudden drop in the value of the underlying assets at the expiry date will wipe out the entire lifetime of contract accumulated benefit.

It is stated that financial institutions are required to train their Advisers on the features and risk-return profile of any investment products that they recommend. Although the financial institutions have the duty to provide the training, the responsibility of product knowledge resides with the Advisers. All financial products have trade-offs between risk and return. Advisers should present products in a balanced way, highlighting the benefits, as well as the risks.

Please learn that life insurance typically invests the premiums in general funds obtained from all policies. Insurance funds investment is at the discretion of the insurer, subject to specified investment goals and regulatory solvency requirements. Like unit trusts, each policy does not have units allocated based on the premiums collected. Separate funds are maintained based on the nature of the policies issued. An insurer must maintain separate funds for participating (par) policies, non-participating (non-par) policies, and Investment-linked Life policies (ILPs).

It is to be acknowledged that the prospective policy owner will first read the product description, obtain a clear understanding of the features of the product, and then read the PHS that is prepared in question-and-answer format to answer any questions he might have. There should be no details in the PHS which is not in the description of the drug.

Please notice that SIP compiles the advantages of (A) the annual feature of a bond payment; (B) future stock capital appreciation; and (C) the feature of fixed-deposit capital guarantee. Compared to the prevailing fixed deposit rate, the guaranteed annual return of 1 per cent is attractive, but not high, with the added upside potential if the six stocks perform well.

It is mentioned that there is typically no need to include fixed income instruments in participation products for the main component of those products without any downside factor in the protection. Alternatively, derivative contracts are used to achieve the optimum return-risk pattern for the main and return components. There are many examples of the products within this category.

It is to be acknowledged that Products which are structured are very complex. The degree to which the consumers understand the goods depends on their investment knowledge and financial literacy level. It is difficult for the customers to understand the workings of structured goods , for example, without previous experience with derivatives.

It should be recognized that the way to handle collateral risk is to maintain an appropriate level of collateral needed, and provide additional collateral after its value has been depreciated. Since most organized goods are non-standard OTC contracts, the sum of collateral is subject to private bargaining.

A security’s market price is the current price the security can buy or sell at. Market price is, in theory, the present value of future profits for the issuer. Profitability-related considerations-existing and future-impact the current market price. In reality, supply and demand are, to a large degree, dictated by the market price.

A CIS’s assets are held by a custodian of third parties such as the trustee. Therefore, investors in structured funds do not need to be worried about the product issuer’s credit risk, although they are also subject to CIS investment default risk. By comparison, investors in structured deposits and structured notes are general creditors of financial institutions selling the securities in the event of bankruptcy.

Please learn that the risk drivers for the derivatives component are linked to the derivatives contracts’ underlying assets, as the price movement of the derivatives contracts follows the price movement of the underlying assets, whether it is an equity index or a specific commodity, or a stock or currency basket. The price of the derivatives is often determined by the counterpart’s creditworthiness.

It is to be acknowledged that financial institutions are expected to train their Advisors on the characteristics and risk-return profile of any investment products they suggest. While the financial institutions have the responsibility to provide the preparation, the Advisors are responsible for product information. All financial products show trade in risk and return.

This is suggested that advisors will assist clients on the basis of their personal circumstances and risk appetites in deciding their investment objectives. The pool of structured goods is broad enough to match most combinations of health, income, and development goals. However, most structured goods are not liquid and the “fair” market value can hardly be calculated.

It is to be acknowledged that a discount certificate has the same risk-return profile as a reverse conversion, except that it is uniquely configured. A discount certificate allows investors to participate up to a pre-determined maximum point in the performance of the underlying stock, called the “price-strike” or simply “limit.” The drug is being sold at a discount to counter the caped upside.

Please learn that both reverse convertible bonds and discount certificates offer capped upside potential with no defense against downside. We share the same risk-return characteristics, though somewhat different in form. Discount certificates are formed when two different types of choices are combined. (Transaction costs will decrease actual product returns.)

Future contracts are sold on a spread, i.e. buyers only have to put up a fraction of the contract’s value to enjoy the full price appreciation, or suffer the full price decline. Margin investing is analogous to equity lending, where the lender borrows from the broker in essence. Interest on margin accounts is paid, which affects overall returns on investment.

It is to be acknowledged that an investment portfolio with an insurance element is generally understood as an insurance wrapper product which provides flexibility for a wide variety of investment choices. This product may be called “portfolio bond” or “insurance cover.” It comes under the concept of an ILP.