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The total fees and charges disclosure (TFCD) requirement of investment-linked assurance schemes (ILAS) took effect after the Securities and Futures Commission (SFC) rolled out requirements in enhancing ILAS product disclosure in 2013.

The total policy level fees and charges as a percentage of the total premium(s) to be paid by an ILAS policyholder to the insurance company (TFCD percentage) is an important disclosure made in the ILAS product key facts statement (KFS).

The TFCD percentage is required to be disclosed upfront in the "Fees and charges" section under "Important" in the KFS of any ILAS product available to the Hong Kong public.

  • Computation of TFCD percentage

    The TFCD percentage stated in the product KFS is calculated based on certain assumptions (TFCD Assumptions), including the life insured being a non-smoking 40 year-old male, payment of single premium of HKD1,000,000/regular premium of HKD100,000 per annum, holding period of 20 years and an assumed rate of return of 3% p.a. of the policy value . It may be higher/lower than the actual amount of policy fees that a particular policyholder pays (as a percentage of the premium). (Learn more)

  • Cost of insurance protection

    Cost of insurance protection is one of the policy level fees of an ILAS and will be included in the calculation of the ILAS TFCD percentage. It varies with the circumstances of individual policyholders. ILAS with higher insurance coverage generally have higher TFCD percentages. (Learn more)

  • Upfront charges

    Premiums may be deducted upfront as charges in early policy years of an ILAS. Such fees would be included in the computation of the TFCD percentage. (Learn more)

  • Surrender or withdrawal charges

    ILAS is designed to be held for long term and you should note that surrender charges (which can be significant) may apply in the event of an early policy termination. The TFCD percentage does not take into account these surrender charges as it is computed under the assumption that there is no early policy termination. (Learn more)

  • Investment options charges

    If the investment options of an ILAS are linked to portfolios internally managed by the insurance company on a discretionary basis, then the related fees and charges payable to the insurance company will be reflected in the TFCD percentage according to the TFCD Assumptions. (Learn more)

  • Different premium payment options

    The premium payment option chosen (be it single or regular) will affect the TFCD percentage. If an ILAS has multiple premium payment options, then the TFCD percentages applicable to different options are set out in the KFS separately. (Learn more)

  • Using TFCD to help you compare across different ILAS products

    It is in your best interest to know how the TFCD may help you make comparison across different ILAS products. This way, you can choose the suitable one if you decide to invest in ILAS as part of your overall financial plan after considering carefully the product features and related risks. To learn more about the TFCD percentage calculation, you should consult your intermediary or check with the product issuer via the intermediary. (Learn more)

Key questions to ask

  • 1. What does ILAS's TFCD percentage mean? How is it computed?
    • ILAS' total fees and charges are expressed as a percentage of the total premiums paid by the ILAS policyholder to the insurance company (ie the product issuer) at policy level. The TFCD percentage is computed as follows:

    • The computation is based on certain assumptions including the age, gender and smoking habit of the life insured, the level of sum insured, the amount of premiums paid, the holding period as well as the rate of return throughout the period. Some assumptions may vary from one ILAS product to another (due to differences in the product features of the ILAS concerned) and such variations must be noted when comparing TFCD percentage across products.
    • You should not take the TFCD percentage at its face value. Your individual circumstances may be different from the circumstances assumed for the purpose of computing the TFCD percentage of any particular ILAS that you are considering. Therefore, the actual percentage applicable to you as a policyholder may differ from the TFCD percentage specified in the KFS of that ILAS and may be significantly higher if, for example, the premium amount is lower, the sum insured is higher and/or the underlying investments of the policy concerned are making losses. For details, please read the disclosures under "Fees and charges" in the section of "Important" in the KFS.
    • If the TFCD Assumptions differ from your personal circumstances, you should ask your intermediary to further explain. If you do not understand or are not satisfied with the information provided, you may consider if you should buy the ILAS product or buy it through the intermediary.
    • Notwithstanding the above-mentioned variations, the merit/usefulness of stating the TFCD percentage in the KFS of an ILAS product is that it provides a basis for financial consumers to compare the fees and charges payable to the insurance company across different ILAS products.
  • 2. What do the ILAS fees and charges cover? Are there any other fees and charges involved in an ILAS product?

    There are generally two levels of fees and charges under an ILAS: (i) the policy level and (ii) the underlying or reference funds level.

  • 3. How is the cost of insurance protection reflected in the fees and charges disclosure?
    • The TFCD percentage already takes into account fees and charges payable by the policyholder to the insurance company for the insurance coverage provided under the ILAS policy (ie cost of insurance protection) based on the TFCD Assumptions.
    • Cost of insurance protection (COI): The insurance company will generally deduct the COI from policy value and this will reduce the amount applied towards investment and thus affecting the return of your ILAS policy. Depending on the level of insurance coverage, the COI varies from one ILAS policy to another. You should note the following:

      1. Some ILAS policies provide higher insurance coverage than others, e.g. those with a designated sum insured. Accordingly, their COI may be higher than those with less coverage for including extra benefits payable at the death of life insured. Likewise, policies with higher insurance coverage tend to have higher TFCD percentages since policyholders need to pay more for the insurance protection.
      2. The COI will increase with the age of the life insured and will increase significantly at the later years of the policy.
      3. The COI may increase significantly if the underlying investments of the policy concerned are making losses.
      4. The COI may vary depending on individual circumstances (e.g. age, gender and smoking habit of the life insured and the death benefit option selected).
      5. If the value of an ILAS policy becomes insufficient to cover all the ongoing fees and charges, including COI, then the policy may be terminated by the insurance company and policyholders could lose all premiums paid and benefits.
    • The COI is required to be disclosed in the KFS as a percentage of the premium(s) paid by policyholders (COI percentage). As insurance protection has a cost, you should carefully consider if the level of protection under an ILAS policy meets your personal needs.

      You should also note that the actual COI depends on the individual circumstances of policyholders and varies from one policyholder to another. If you want to compare the non-insurance-related costs of different ILAS policies, you may refer to the TFCD percentage net of COI percentage.

  • 4. What are upfront charges and how are they reflected in the TFCD percentage?

    For some ILAS products, up to a certain percentage of the premium(s) paid by the policyholder will be deducted upfront as charges. These upfront charges, which may be more significant in the early policy years and may thus substantially reduce the amount of premium(s) made available for investment, are fees and charges payable at the policy level that need to be included in the computation of the TFCD percentage.

  • 5. What are surrender or withdrawal charges and how are they reflected in the TFCD percentage?
    • As ILAS is a long-term life insurance policy and the policyholder is typically expected to hold it throughout the policy term, there may be a surrender charge or withdrawal charge of up to a certain percentage of the policy value (or other bases depending on the feature of the ILAS) in case the policy terminates or policyholder surrenders the policy or partially withdraws during the policy term. The TFCD percentage does not take into account these charges as it is computed under the assumption that there is no early withdrawal/termination of policy.
    • However, surrender or withdrawal charges may be up to a significant percentage of the policy value or withdrawal amount (as the case may be) if a policyholder surrenders or withdraws in the initial policy years (eg the first five years of the policy term). As such, the amount obtained net of surrender charge may be significantly less than the premiums paid. In such cases, the policyholder may also lose the entitlement to any loyalty bonus (if any).

  • 6. What are the investment options charges and how are they reflected in the TFCD percentage?
    • In general, ILAS products provide a range of investment options for the policyholders to choose from.
    • If the investment options are linked to SFC-authorized funds, the fees and charges payable to the underlying/reference fund management companies are normally reflected in the unit price of the respective underlying/reference funds. As such fees and charges are not payable to the insurance company, they are not reflected in the TFCD percentage.
    • If the investment options are linked to portfolios internally managed by the insurance company on a discretionary basis, then the fees and charges (e.g. investment management fee) levied are included in the total fees and charges payable to the insurance company based on the TFCD Assumptions and are thus reflected in the TFCD percentage. As a result, the TFCD percentage of an ILAS with investment options linked to internally managed portfolios may be much higher than that of an ILAS with investment options solely linked to external underlying/reference funds.
    • As such, you will have to consider the separate fees and charges payable to the external fund management companies in the latter case. You can find information about such fees and charges in the section of "What are the fees and charges?" in an ILAS' product KFS and the offering documents of underlying/reference funds which are available from the insurance company upon request.

  • 7. Do the different premium payment options affect the computation of the TFCD percentage?
    • You may pay the premium of an ILAS policy in different ways. The premium options include single premium which is usually paid one-off at the beginning of the policy term and regular premium which is paid on a regular basis over the premium payment period.
    • Different premium options provide different bases for the computation of the TFCD percentage. Therefore, you should only compare the total fees and charges disclosure of different ILAS products with the same premium payment option, i.e. single or regular.
    • You may find that in the KFS of an ILAS product, if an ILAS has multiple premium options, then the TFCD percentages that are applicable for different premium options are set out separately.
    • The TFCD percentage may increase significantly for ILAS with a prolonged holding period because some fees at policy level are charged as a percentage of the policy value that would generally increase significantly due to the assumed rate of return adopted under the TFCD Assumptions, particularly at the later stage of the policy term.
    • The examples below illustrate how the premium payment options and the timing of premium payment will affect the TFCD percentage. These scenarios share the following assumptions:

      1. you pay an aggregate investment premium amount of HK$2,000,000;
      2. the policy has a term of 20 years and you hold the policy upon maturity;
      3. the assumed rate of return and the rate of policy level fees and charges are set at 3% p.a. and 1.5% p.a., respectively, throughout the policy term; and
      4. the policy level fees and charges are paid in arrears on a yearly basis.
      Scenario Total fees and charges paid to
      insurance company (at end of policy term)
      TFCD percentage
      (at end of policy term)
      Single premium of HK$2,000,000
      paid in the first year of policy term
      $711,364 35.57%
      Regular premium of HK$100,000
      paid annually throughout policy term
      $346,026 17.30%
      Note: The above examples are hypothetical and for illustration purpose only.

      On the assumptions stated above, if you pay all the premium at the beginning of the 20-year policy term, the TFCD percentage at the end of the policy term will be 35.57%. If you choose the regular premium payment option by contributing HK$100,000 per year, with the assumptions remaining unchanged, the TFCD percentage by the end of the policy term will be 17.30%.

  • 8. What should I take note of when comparing the total fees and charges of different ILAS policies given that there are variables in the computation of the TFCD percentage?

    As an astute financial consumer, you should study the fees structures of different ILAS products carefully. When examining the total fees and charges paid to the insurance company, you should:

    1. understand the assumptions of the calculation of the TFCD percentage, and find out the level of total fees and charges payable to the insurance company taking into account your own personal circumstances;
    2. assess whether the level of the sum insured and the death benefit options available under the ILAS can meet your need for life insurance protection;
    3. be clear about the impact of any upfront charges on the amount of premium(s) available for investment;
    4. know any additional fees (e.g. a surrender or withdrawal charge) deductible from the policy value if you are not able to make contributions for the whole of your chosen premium term, and/or if you are not able to hold the policy till maturity;
    5. check whether the policy contains any special features (e.g. provision of internally managed portfolios as investment options offered by the insurance company) which will affect the computation of the TFCD percentage given the TFCD Assumptions;
    6. ask your intermediary to explain further or provide additional information about the calculation of the TFCD percentage, if necessary;
    7. always refer to section "What are the fees and charges?" in the product KFS as well as the offering documents and Important Facts Statement for more details of the various levels (ie policy level and underlying/reference funds level) and types (e.g. upfront charge, surrender or withdrawal charge, cost of insurance protection) of fees and charges of an ILAS;
    8. consider whether other alternative ILAS products may suit you better by comparing the total fees and charges disclosure of other different ILAS products in their respective product KFS (click here for the offering documents including product KFS of ILAS policies available to the Hong Kong public); and
    9. if you are not satisfied with the explanation or the information provided to you by the intermediary for an ILAS product, you may consider whether you should purchase this product or purchase it through this intermediary.