Have you ever been asked by a bank salesperson to purchase an ILAS product? Did you purchase the product because you were attracted by the notion that ILAS is an investment as well as insurance product?
The fact is, ILAS, as in the case of those sold by banks, is essentially an investment product with an insurance wrapping. Many of the features and risks of ILAS products are in fact quite different from investment funds and traditional life insurance policies in general. The value of death benefits (i.e. life insurance element) is usually subject to investment risks. While the return of an ILAS product is often linked to or dependent on the performance of the selected investment choices, ILAS products do not give you a direct investment in the underlying or reference funds. You cannot exit from an ILAS product in the same way as a mutual fund or unit trust.
Certain features of some ILAS products such as loyalty bonus and free switching of investment choices may look attractive. However, before deciding to take up an ILAS policy, you should understand the important facts about the ILAS product.
New “Important Facts Statement” to be adopted by banks in the sale of ILAS products
Having regard to the unique features of ILAS products that may not be easily understood by customers, the Hong Kong Monetary Authority has worked with the Office of the Commissioner of Insurance, the Securities and Futures Commission, and the industry practitioners to enhance the disclosure of ILAS products related information in the selling process.
Starting from end of June this year, banks will be subject to a new requirement to make use of a standardised Important Facts Statement (IFS), which will be set out as Part I of the “Important Facts Statement and the Applicant’s Declarations” form of ILAS products, to:
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- facilitate going through a number of specified important facts about the ILAS product with the client, such as impact of upfront charges, early surrender/withdrawal charges, consequences of premium holiday, where applicable;
- disclose the remuneration (including monetary and non-monetary benefits) receivable by the bank from the insurer in relation to the ILAS transaction;
- request the client to set out in writing the reasons/considerations for procuring the ILAS product;
- facilitate due consideration of the client’s written reasons/considerations, among other relevant factors, in assessing the product suitability for the client;
- obtain the client’s signed acknowledgement to confirm that he/she has read, understood and agreed to be bound by the above information.
THE GOLDEN RULE :
If you do not understand any of the information in the IFS and cannot get a satisfactory explanation from your intermediary, don’t sign to give your acknowledgement and don’t take up the ILAS policy.
Important tips for using the IFS
The HKMA has drawn up some tips to help potential investors understand how they can benefit from the IFS. These tips should be considered before you decide whether or not to procure an ILAS policy. The following are among the key points to which the potential investors should pay special attention :
(a) You should seriously consider your intended purpose(s) as well as ability and willingness to pay premiums for procuring the relevant ILAS policy taking into account your own circumstances.
(b) You should not wait until the cooling-off period to consider the investment decision.
(c) Do not base your decision solely on the rates of returns used in the illustration document.
(d) Consider carefully the long-term nature of ILAS products. It usually involves long-term premium commitment, long policy tenor, long lock-in period (redemption charges could be as substantial as 100% in early policy years for some plans) and/or significant upfront charges.
(e) Fees and charges are complex, and reduce the amount of investment and return. Some ILAS products do not entail payment of fees and charges for switching of investment choices. However, free switching of investment choices together with bonus/dividend may not outweigh the overall fees and charges.
(f) Understand whether the ILAS policy allows the policyholder to take a “premium holiday”. If this is allowed, watch out for the meaning and consequences of “premium holiday”.
(g) Find out the conditions under which automatic early termination of the ILAS policy may be triggered. You could be subject to charges and losses in such a scenario.
(h) Consider the remuneration receivable by the bank from the insurer in respect of your intended ILAS transaction.
Please read the attached table (PDF File, 47 KB) for the detailed tips for potential investors.
Meena Datwani
Executive Director (Banking Conduct)
22 April 2013
