Legal aspects of pension product review of the clients rights and tax incentives related to voluntary pension insurance business

Pension insurance means a class of insurance in case where the insured person reaches a determined age shall be paid insurance money by insurance enterprise as agreed inthe insurance con

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF

ECONOMICS HO CHI MINH CITY

-HOANG THI HONG HA

LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES RELATED TO

VOLUNTARY PENSION INSURANCE BUSINESS

MASTER THESIS IN LAW

Ho Chi Minh City, May 2017

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF

ECONOMICS HO CHI MINH CITY

-HOANG THI HONG HA

LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES RELATED TO

VOLUNTARY PENSION INSURANCE BUSINESS

Major: Economic Law Code: 60380107

MASTER THESIS IN LAW

SUPERVISOR: ASSOC PROF PHAM DUY NGHIA

Ho Chi Minh City, May 2017

DECLARATION III

PREFACE IV ABSTRACT V LIST OF DEFINITION AND ABBREVIATIONS VI CONTENTS IX

LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX

INCENTIVES TO ENCOURAGE VOLUNTARY PENSION INSURANCE BUSINESS IX

CHAPTER 1 INTRODUCTION 1

CHAPTER 2 OVERVIEW INSURANCE BUSINESS: THE POLICY AND PENSION 11

2.1 POLICY AND ITS FEATURES 11

2.1.1 What’s life insurance contract 11

2.1.2 Features of life insurance contract 12

2.1.2.1 Insurable interest 13

2.1.2.2 Utmost good faith 16

2.1.2.3 Warranties 16

2.1.2.4 Assignment and nomination 16

2.1.2.5 Return of premium 16

2.2 PENSION POLICY AND ITS FEATURES 17

2.2.1 Pension policy 17

2.2.2 Legal characteristics of pension contract 18

2.3 PROCEDURE OF LAUNCHING PRODUCT 20

2.4 RIGHTS OF P OLICY OWNER ( CLIENT ) TOWARD POLICY 20

2.4.1 Free-Look Provision 21

2.4.2 Entire Contract Provision 21

2.4.3 Grace Period Provision 21

2.4.4 Reinstatement Provision 22

2.4.5 Policy Withdrawals 22

2.4.6 Nonforfeiture Provision 23

CHPATER 3 REVIEW THE CLIENT’S RIGHT OF TERMINATION/ CANCELLATION AND WITHDRAWAL 24

3.1 REVIEW OF T ERMINATION / C ANCELLATION RIGHTS 24

3.1.1 Analysis of the current unsound regulations 24

3.1.2 Other policies reference 28

3.1.3 International reference 30

3.2 REVIEW OF THE RIGHT TO WITHDRAW MONEY IN ADVANCE 34

3.2.1 Analysis of the current unsound regulations 34

3.2.2 Other policies reference 35

CHAPTER 4 REVIEW TAX INCENTIVE REGULATIONS APPLIED FOR CORPORATE AND EMPLOYEE CLIENTS BUYING PENSION PRODUCT 37

4.1 A NALYSIS OF THE CURRENT UNSOUND REGULATIONS – T HE NEED TO ENCOURAGE VOLUNTARY PENSION PRODUCT 37

4.1.1 Corporate Income Tax (CIT) 37

4.1.2 Personal Income Tax (PIT) 40

4.2 OTHER POLICIES REFERENCE 43

i

4.2.1 Corporate Income Tax (CIT) 43

4.2.2 Personal Income Tax (PIT) 44

4.3 I NTERNATIONAL REFERENCE 46

CHAPTER 5 PROPOSAL ON LEGAL REFORM TO ENHANCE CLIENT RIGHTS AND TAX INCENTIVES FOR PENSION BUSINESS 50

5.1 T ERMINATION / C ANCELLATION RIGHTS 50

5.2 R IGHTS OF WITHDRAW MONEY IN ADVANCE 51

5.3 T AX INCENTIVE 52

5.3.1 Corporate Income Tax (CIT): 52

5.3.2 Personal Income Tax (PIT): 53

ANNEX 01 54

PENSION CONTRACT IN HONGKONG – PRUMYRETIREMENT RMB ANNUITY INCOME – GENERAL PROVISIONS 54

ANNEX 02 57

PENSION CONTRACT IN SINGAPORE - PRUGOLDEN INCOME 57

ANNEX 03 59

PROCEDURE OF APPROVED PRODUCT 59

REFERENCES 61

ii

I, HOANG THI HONG HA, trainee code: 7701240806A, a trainee of LLM 24 ofEconomic University in HCMC, an author of this Thesis on Legal aspects of Pensionpolicy – Review of the Client’s rights and tax incentives to encourage voluntarypension insurance business (hereinafter called ―Thesis‖)

I hereby declare that all content presented in this thesis is the result of personallyindependent research under the guidance of the Mentor In the thesis there are used,quoted some ideas, scientific view of some authors These information sources arecited specific, accurate and verifiable The data and information used in the thesis iscompletely objective and honest

Author

HOANG THI HONG HA

iii

In the first place, I would like to express my genuine appreciation to my Mentor,Professor Pham Duy Nghia, for his valuable commentaries, constantly guiding andencouraging me through the whole process of working on this thesis I would also like

to thank the Prudential Life Vietnam Company and Cathay Life Vietnam Company fortheir ideal working environment, for a practical repertory, for giving me a lot ofpractical experience, which is an important part of the success of this thesis Inaddition, I am also grateful to my esteemed chief, Mr Robin, Director of PolicyAdministrative / Finance & Accounting / Legal Department of Cathay Life Vietnam,for his strong assistance in providing me the valuable data and documents in Taiwan.Dear Mr Nguyen Viet Hai, a former Secretary Deputy General of InsuranceAssociation of Vietnam, it was a great experience and a great pleasure to work withyou, for your worth sharing on life insurance market in Vietnam, particularly for thestate policies under the regulator perspective Last, but not least, I would like to offer

my warm thanks to my colleagues, my friends and my family for being with me

Ho Chi Minh City, May 2017

iv

Since 2013, Vietnam had adopted regulation to promote voluntary pension policy.Despite the high expectation, after more than three years of deployment, the marketfor pension insurance remains very limited This thesis aims to explain the legalcontracts which impede the development of pension insurance The thesis alsoanalyses the right of clients to terminate the pension contract and to withdraw money

in advance of pension contract

Finally, the thesis reviews tax implications on current policies of corporate income taxand personal income tax applied for corporate and employee clients

As a result, this thesis proposes that pension regulation should admit the client right oftermination of pension contract; extend the client right of withdrawal of money inadvance in any circumstances And last but not least, tax policies should be adjusted toensure the fair tax treatment between voluntary pension and social pension

In this thesis, research instruments are used including survey, statistics, comparisonand analysis to support for the persuasion

v

LIST OF DEFINITION AND ABBREVIATIONS

Policy Owner / Policy Holder are organizations or individuals that enter into insurancecontracts with insurance enterprises and pay premium An insurance buyer may also

be concurrently the insured or the beneficiary

The Insured / Life Assured means organizations or individuals that have property,civil liabilities and/or life are insured under insurance contracts The insured may also

be concurrently the beneficiary

The Beneficiaries mean organizations or individuals designated by the insurancebuyers to receive insurance money under person insurance contracts

Insurable interests mean the rights to ownership, the rights to possession, the right touse, the property rights; the rights and obligations to foster and provide financialsupport for insured objects

Insured events mean objective events mutually agreed upon by the parties orprescribed by law upon the occurrence of which the insurance enterprises shall have topay the insurance money to the beneficiaries or pay indemnities to the insured

Premium means a sum of money to be paid by the insurance buyers to insuranceenterprises according to time limits and by modes mutually agreed upon by the parties

in the insurance contracts

Pension insurance means a class of insurance in case where the insured person reaches

a determined age shall be paid insurance money by insurance enterprise as agreed inthe insurance contract

Surrender Value means an amount of money the Policy Owner will receive if thePolicy Owner terminates the Policy while the Policy is on effective period

Free-look period / Cooling-off period means an individual life insurance policytypically includes a free-look provision, some- times referred to as a free-examinationprovision or a cooling-off provision, which gives the policy owner a stated period of

vi

time—usually at least 10 days—after the policy is delivered within which to cancelthe policy and receive a refund In most jurisdictions, this period of time ranges from

10 to 30 days The free-look period begins on the date the policy is delivered to thepolicy owner, not on the date of issue Insurance coverage is in effect throughout thefree-look period or until the policy owner rejects the policy, whichever occurs first.Grace period means a length of time following each renewal premium due date withinwhich the premium may be paid without loss of coverage The specified time (often

31 days) following each premium due date during which the contract remains in effectregardless of whether the premium is paid

Reinstatement means the conditions that the policy owner must meet for the insurer toreinstate a policy

Defined-benefit plan means a pension plan with a guarantee by the insurer or pensionagency that a benefit based on a prescribed formula will be paid Such plans can befully funded or unfunded

Defined-contribution means the contributions that the plan sponsor agrees to make tothe plan The benefit that a participant will receive is not determined in advance of theparticipant’s retirement but depends on the investment performance of the funds in theplan

PAYG (Pay as you go) means a withholding tax which requires you to payincremental amounts which accumulate towards your expected end of year income taxliability

MOF: Ministry of Finance

ISA: Insurance and Supervision Authority

MOLISA: Ministry of Labor, War Invalid and Social Ware fares

MOIT: Ministry of Industry and Trade

CIT: Corporate income tax

vii

PIT: Personal income taxULP: Universal life productILP: Unit link life product

viii

LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES TO ENCOURAGE VOLUNTARY PENSION INSURANCE BUSINESS

CHAPTER 2 OVERVIEW OF INSURANCE BUSINESS: THE POLICY AND PENSION POLICY

2.1 Policy and its features

2.2 Pension policy and its features

2.3 Procedure of launching product

2.4 Rights of client toward pension policy

CHAPTER 3 REVIEW THE CLIENT’S RIGHT OF TERMINATION AND

WITHDRAWAL OF MONEY IN ADVANDE

3.1 Review of termination rights

3.1.1 Analysis of the current unsound regulations

3.1.2 Other policies reference

3.1.3 International reference

3.2 Review of the right to withdrawal money in advance

3.2.1 Analysis of the current unsound regulations

3.2.2 Other policies reference

CHAPTER 4 REVIEW TAX INCENTIVE REGULATIONS APPLIED FOR

CORPORATE AND EMPLOYEE CLIENT BUYING PENSION PRODUCT

4.1 Analysis of the current unsound regulations – the need to encourage

voluntary pension policy

4.2 Other policies reference

4.3 International reference

ix

CHAPTER 5 PROPOSAL ON LEGAL REFORM TO ENHANCE CLIENT RIGHTS AND TAX INCENTIVES FOR PENSION BUSINESS

5.1 Termination rights

5.2 Rights of withdrawal money in advance

5.3 Tax incentive policy

x

CHAPTER 1 INTRODUCTION

The rapid increase in the aging rate of global population has affected

tremendously on economic, social and political situations of nations Vietnam is

regarded as one of the countries with the population’s greatest aging pace

which places first in Asia and seventh in the world

Vietnam’s remarkable economic growth which has been achieved in the past

two decades has contributed vastly to the enhancement of citizens’ living

standards which creates healthier lifestyles This has led to the increase in life

expectancy from 69.2 years in 2001 to 73.2 years in 2014 It is projected that

this trend will continue to 80.4 years in 2050

Graph 1.1: Vietnam's life expectancy trend from 2001 to

2050 (years)

82.0 80.0 78.0 76.0

70.0 68.0 66.0 64.0 62.0

2001 2009 2010 2011 2012 2014 2020 2050 Life expectancy 69.2 72.8 72.9 73.0 73.0 73.2 75.0 80.4

(Source: General Statistics Office, 2014)

Consequently, the number of people aged range from 60 almost doubled

between 1990 and 2015 (from around 5,6 million to approximately 9,7 million

people) and are forecast to triple in the next 20 years Conversely, the number

of newborns and under-15-year-old children fell sharply The graph below

shows the proportions made up by people aged above 60 and fewer than 15

during the period from 1990 to 2025

1

Graph 1.2: Vietnam's age proportion trend

from 1990 to 2025 (%)

40 35

10 5 0

1990 2000 2005 2010 2015 2020 2025 Under 15 37.4 31.6 27.1 23.5 22.4 21.3 19.4 Above 60 8.1 8.6 8.6 8.9 10.4 12.8 15.5

(Source: World Bank, UN, BMI, 2014)

As it can be seen, Vietnam has experienced the demographic transition from a

young to an aging population within the last 25 years

Although life expectancy increases over time, it is reported that elderly people

have been living under limited health and financial conditions According to

Vietnam Association of the Elderly, 73% of the elderly do not have social

insurance/pension benefit As a result, they remain working or rely on their

adult children However, that remaining working or being dependence is

inadequate benefits to prevent old-age poverty Because Vietnam is still a lower

middle-income country compared to the world The average income per capita

in 2014 is $2.0521 Today, the rate of extreme poverty has fallen to 3 percent

The proportion of the population living below the national poverty line

(GSO-WB Poverty line) reached 13.5 percent in 20142 Given such fact, the status of

economic growth and thus income per-capita levels are not at par with the pace

of Vietnam demographic transition While Western world developed first, thenaged; Vietnam will age while it is still developing Vietnam is currently trying

to address the challenges created by this phenomenon through the reform of

1 reach-upper-middle-income-status-in-20-years

http://www.worldbank.org/en/news/press-release/2016/02/23/new-report-lays-out-path-for-vietnam-to-2 http://www.worldbank.org/en/country/vietnam/overview

2

pension systems that help the population cope with the risk of poverty in oldage.

This exposes an alert and also a challenge to the national social welfare system

in general

The social welfare systems

Overall, the two major objectives of social welfare systems are providing forconsumption smoothing (i.e protecting against the risk that there will be anabrupt drop in consumption when income ceases or saving are depleted) andprotecting against the risk of old age poverty

At present, the insurance system in Vietnam consists of (i) mandatory funded pension fund, known as a compulsory retirement pension (called asSocial Security), (ii) supplementary pension funds controlled by the state, and(iii) voluntary pension funds managed by the private (called as Pension) Inwhich, Social Security can be considered as the first pillar and Pension can beconsidered as the third pillar of the social security system in line with internationalstandards

public-Currently, MOLISA has completed the process of studying and drafting the draft of the pilot project on supplementary pension policy as follows (Figure 1)

3

Pension and Supplementary pension are a portion income of the retirement age.Everyone has a separate retirement account Assets accumulated and formed in

a retirement account are owned by the insured person and are entitled to use atretirement age Form of payment is DC (Defined Contribution) However, thesetwo insurance kinds have many different points as follow:

Figure 2

Principle A life insurance product A social insurance policy

4

Payment Depend on the will of Contribution rate specified in

individual or employer labor contract/ collective

agreement

Benefit Besides the protection benefit, All profits from the

insurers commit a minimum investment will be paid to theinterest rate and the interest participant

share of insurers’ profit, if any

Withdrawal Limitation in 3 cases: (i) All paid contribution of

in advance reduced working capacity at employee will be returned

61% or more; (ii) suffers adangerous disease; (iii) citizen

of Vietnam is permitted abroadresidence legally by competentauthority of such country

Management Insurers and Management fund Management fund companies,

financial intermediation

Regulation Law on insurance business and Labor Code, Law on social

Tax policy Tax incentive for employee and MOLISA’s suggestion, tax

pension will be higher thanthe one of Pension

5

The current trend is that most countries have reformed their pension systemfrom a single pillar to a multi-pillar system The reason is because the reliance

on a single pillar has certain limitations Vietnam’s pension policy is anevidence for this trend

So far, the key pension system in Vietnam is the state-run social insurancesystem, mainly mandatory This mandatory scheme includes a contributionrequirement of 26% of monthly salary (in which 18% is borne by employersand 8% is borne by employees)3 The restriction of single pillar in Vietnam asfollows:

 Firstly, the participation rate of the mandatory social system is relativelyslow According to statistics from The Social Welfare system, in 2013, there were10.6 million contributors to the system However, this was mainly from state-runorganizations and the number of contributions to voluntary pension system wasstill limited

 Secondly, the fund deficit can be attributed to the lack of capacity for management and implementation of the fund

Apart from the above, the current Social Insurance system also has the

following limitations:

 The annual pension benefit from Social welfare system is capped at75%*20 months of basic salary (currently about 21 million) per capita which isinsufficient to maintain employees’ lifestyle after retirement

 Pension benefit from Social Welfare system is not inflation-protected.Therefore, this amount will not be sufficient to maintain the lifestyle in the period

retirement age for men is 60 and women 55, the Social Insurance Departmentsaid at a meeting on October 26th, 2015 The number of people receiving pay-outs has increased faster than the number of contributors In 1996, there were

217 contributors for 1 retiree In 2010, this ratio fell to as low as 10.7/1 (see thetrend is shown in the Figure 3 below) and now the ratio plummet to 8.13:1:

Chart 2.1: Ratio of contributors per retiree

(Source: Vietnam Social Insurance, 2011)

Unless this trend is reversed, it is projected by MOLISA that by around 2034,the number of retirees would be equal to that of social insurance payers Thisexposes a threat to the balance of Funds’ cash inflow and outflow ―Sooner orlater, the social insurance fund will fly off balance‖, said by Mr Tran Huy Lieu,Deputy Head of the Social Insurance Department4

Therefore, measures have been taken to reform the current social insurancesystem, some of which include expanding retirement age, increasing thecontribution ratio of both employers and employees into the fund etc However,these are merely short-term solutions that are unable to instantly solvesystematic problems and the Government of Vietnam have been looking atalternative pension funds to reinforce the social insurance fund

4 pension-fund-3490583.html

http://e.vnexpress.net/news/news/half-of-vietnam-s-workforce-opts-for-early-retirement-threatening-7

Given with the above situations, the Government has taken actions in order toreform the pension funding system in a way that ensures long-termsustainability of the system The State launches the roadmap to encouragepeople to take care of themselves after retirement through voluntary pensioninsurance Accordingly, MOF and the MOLISA have developed two pensionsystems in parallel called Supplementary pension and Pension product asintroduced above.

Pension, according to the Circular 115/2013/TT-BTC (in the following calledfor short as Circular 115), is defined as life insurance products issued by insurer

to provide additional income to the insured during retirement period In which,participants contribute in a regular basis in order to receive pay-out from theVoluntary Pension Fund when they reach retirement age

Currently, there are six insurers providing pension products in the market,namely: Prudential, AIA, PVI-Sunlife, Manulife, Dai-ichi Life and Bao Vietlife The total sales volume is still very limited5 Concretely, Pension insurancerevenue in 2015 reached nearly VND 279 billion and 20,000 clients As a result

of 2015, the second year of implementation, pension premiums account for lessthan 2% of the total new market premiums The first year premium for thisproduct as of September 2016 was less than 1% of the total new marketpremium According to data of the ISA, total premiums of new life insurance inthe first nine months of 2016 were estimated at over VND 11,466 billion, upnearly 30% over the same period of 2015 Term life, endowment insurance anduniversal life still account for a large share of total new premium revenue6 Itmeans that despite the potential value, after more than three years ofdeployment, the existence of Pension has not expanded compared with the otherinsurance products

5 muc-tieu-doanh-thu-phi-tang-186-42049.aspx

http://thoibaotaichinhvietnam.vn/pages/tien-te-bao-hiem/2017-03-31/nam-2017-thi-truong-bao-hiem-dat-6 muc-tieu-doanh-thu-phi-tang-186-42049.aspx

http://thoibaotaichinhvietnam.vn/pages/tien-te-bao-hiem/2017-03-31/nam-2017-thi-truong-bao-hiem-dat-8

When drafting the Circular 115, MOF found that workers wanted morebenefits, less money Therefore, they supposed that this Circular 115 is mainlyaimed at workers/employees, with the support of employers However, thereality is not as predicted by the regulator due to mainly reasons as follows:

 Pension add up to employers’ total labor cost given that they alreadyhave to absorb other similar expenses including making contribution on behalf ofemployees to the current mandatory social security fund While there are manyway of retention the key manpower

 Due to the nature of pension product, which is rather rigid as regulated inthe Pension circular, the product design has to be standardized and homogeneouswith several limitations (early withdrawals and surrender are not allowed, firstpayout can only be made from 55 or 60 years old, payout period must be at least 15years etc.)

 The current tax advantage is considered rather limited to both employers and employees

 For insurers: they find no demand of the market And because it requires

a complicated system to split the fund employer and the fund of employeeseparately to deduct the tax when insurers pay the benefit to clients, hence insurershave to invest the system to operate this Pension, which take lots of cost while theeffect of sale pension is so low

 For employees: clients in general and employees in particular are notonly allowed to cancel/ terminate the Pension policy but also withdraw the money

at any time For tax incentive, although employees are exempted from taxes, thecurrent tax policies are not attractive enough for employees to commit a long-termcommitment with the company Contrary to this, employees prefer to receive alump sum of payment, such as a bonus rather than a long-term pension

 For agents, Pension product is not attractive them due to commission scheme

9

Although there are many reasons listed above, the current unsound regulationsstipulated in Pension are the most important issue In this thesis, I will focus ontwo research issues:

1 Review the rights of termination and withdrawal of client in pension contract;

2 Review tax incentive regulations applied for corporate and employee clients

In order to reach the research purpose, in this thesis common used researchmethods include: statistical analysis, policy and legal comparison andevaluation of secondary resources Accordingly, I analyse the key facts first,then compare them in relation to other Vietnam regulations/ principles, evenforeign regulations are used to show what the limitations of prevailing pensionregulations are and how they should be revised Concurrently, a small andquick survey of YES/NO questions around some countries is used in thispresentation to support more the persuasion of this thesis

10

CHAPTER 2 OVERVIEW INSURANCE BUSINESS: THE POLICY AND PENSION

2.1 Policy and its features

Currently in Vietnam, there is no definition, formal concept for life insurancecontract but instead only have definition on life insurance, types of insurancecontract, object of life insurance contract and insurance contract

An insurance contract is an agreement between an insurance buyer (client) and

an insurer, in which the insurance buyer pays premiums while the insurancecompany agrees to pay insurance monies to the beneficiary or indemnify theinsured on the occurrence of an insured event

Life insurance means a class of insurance provided to cases where the insured isalive or dead.7

The objects of human insurance contract shall be the human age, life, healthand accidents.8

Combination all above definitions, there are some concepts of life insurancecontract at the practical study as below:

 Life insurance or life assurance, especially in the Commonwealth, is a

contract between an insurance policy holder and an insurer, where theinsurer promises to pay a designated beneficiary a sum of money (thebenefit) in exchange for a premium, upon the death of an insured person(often the policy holder) Depending on the contract, other events such asterminal or critical illness can also trigger payment The policy holder

7 The Article 3.12 of Law on insurance business

8 The Article 31.1 of Law on insurance business

11

typically pays a premium, either regularly or as one lump sum Other expenses (such as funeral expenses) can also be included in the benefits.9

 Life policies are legal contracts and the terms of the contract describe thelimitations of the insured events Specific exclusions are often written into thecontract to limit the liability of the insurer; common examples are claims relating

to suicide, fraud, war, riot, and civil commotion

 Life-based contracts tend to fall into two major categories:

 Protection policies – designed to provide a benefit, typically a lumpsum payment in the event of specified event A common form of a protectionpolicy design is term insurance

 Investment policies – where the main objective is to facilitate thegrowth of capital by regular or single premiums Common forms (in the U.S.) arewhole life, universal life policies

 A life insurance policy is a contract with an insurance company Inexchange for premium payments, the insurance company provides a lump-sumpayment, known as a death benefit, to beneficiaries upon the insured's death

 Life insurance contract is an agreement between two parties wherebyparty insurance (insurance companies) are responsible for and shall pay to theinsured when the insured event occurs, and the insured is responsible and obliged

to pay insurance premiums as agreed under the law

2.1.2 Features of life insurance contract

Since the life insurance is not an indemnity contract, the insurer, in his part, isrequired to pay a definite sum of money agreed on maturity of policy at thedeath or an amount in installment for a fixed period or during life As such,contrary to other insurance policies, it has some distinct features The essentialfeatures of life insurance are as follows:

9 https://en.wikipedia.org/wiki/Life_insurance

12

2.1.2.1 Insurable interest

The insured or policyholder must have an insurable interest for a valid lifeinsurance contract Insurable interest arises out of pecuniary relationship whichexists between the insurer and policy holder, the former or insurer stands to lose

by the death of the policy holder or latter and or continuous to gain by hissurvival

In life insurance contract, a person may have insurable interest for his own life

as well as lives of his relatives such as wife, son, daughter etc No person canpurchase life insurance policy for a third person unless he has financial interest

in his life

According to Vietnamese laws, insurable interests mean the rights toownership, the rights to possession, the right to use, the property rights; therights and obligations to foster and provide financial support for insuredobjects.10

Insurable Interest Requirement

As noted earlier, insurance is intended to compensate an individual or abusiness for a financial loss, not to provide an opportunity for gain At one time,however, people used insurance policies as a means of wagering In eighteenth-century England, for example, people frequently purchased life insurance on thelives of famous people, especially those who were reportedly ill, hoping tomake a profit if the insured person died

The practice of purchasing insurance as a wager is now considered against publicpolicy As a result, laws in the United States and many other countries require that

a policy owner have an insurable interest in the risk that is insured at the time the

policy is issued An insurable interest means that the policy owner

10 The Article 3.9 Law on insurance business

13

must be likely to suffer a genuine loss or detriment should the event insured against occur.

To understand how insurable interest requirements are met, we need to considertwo possible situations: (1) an individual purchases insurance on her own lifeand (2) an individual purchases insurance on another’s life In both cases, theapplicant for life insurance must name a beneficiary

All persons are considered to have an insurable interest in their own lives Aperson is always considered to have more to gain by living than by dying.Therefore, an insurable interest between the policy owner and the insured ispresumed when a person seeks to purchase insurance on her own life

Insurable interest laws do not require that the beneficiary have an insurableinterest in the policy owner and/or life insured In other words, the laws allow aPolicy owner or life insured to name anyone as beneficiary Most insurancecompany underwriting guidelines, however, require that the beneficiary alsohave an insurable interest in the life of the insured when a policy is issued As aresult, insurers typically inquire into the beneficiary’s relationship to theproposed life insured and may refuse to issue the coverage if the beneficiarydoes not possess an insurable interest in the proposed life insured

In the case of a third-party policy, laws in many countries and in most states inthe United States require only that the policy owner have an insurable interest inthe insured’s life when the policy is issued Most insurance companyunderwriting guidelines and the laws in some states, however, require both thepolicy owner and the beneficiary of a third-party policy to have an insurableinterest in the insured’s life when the policy is issued

Certain family relationships are assumed by law to create an insurable interestbetween an insured and a policy owner or beneficiary According to the laws inmost jurisdictions, the insured’s spouse, mother, father, child,

14

grandparent, grandchild, brother, and sister are deemed to have an insurable

interest in the life of the insured Figure 4 illustrates the family relationships

that create an insurable interest

An insurable interest is not presumed when the policy owner or beneficiary is

more distantly related to the insured than the relatives previously described In

these cases, a financial interest in the continued life of the insured must be

demonstrated to satisfy the insurable interest requirement

The insurable interest requirement must be met before a life insurance policy

will be issued After the life insurance policy is in force, the presence or

absence of insurable interest is no longer relevant Therefore, a beneficiary need

not provide evidence of insurable interest to receive the benefits of a life

Spouse

Grandchild

15

2.1.2.2 Utmost good faith

The life insurance requires that the principle of utmost good faith should bepreserved by both the parties; insurer and insured Utmost good faith betweenthe parties is necessary in all kinds of contracts The insured in particular, mustdisclose all facts accurately and completely with respect to the object of lifepolicy

Warranties are the representations in life insurance which are embodied in thepolicy and expressly or impliedly forming part of the basis of the contract.Warranties are the integral part of the contract These are the bases of thecontract between insured and insurer and if any statement or information orpresentation, whether material or non-material, is untrue the contract may bevoid and the premium paid by insured may be forfeited by the insurancecompany or insurer

The life insurance policy can be assigned free for a legal consideration or loveand affection The insured may assigned to anybody on any ground As such,the assignment shall be complete and effectual only on the execution of suchendorsement either on the policy itself or by a separate deed

Generally, the amount of premium paid cannot be refunded However, for thereason of equity, the premium may be refunded If it is the case ofmisrepresentation or breach of warranty, the insured, in the absence of anyexpress condition to the contrary, can claim for return of premium paid But, in

16

case of guilty of fraud in obtaining policy, the insured cannot claim the amount

Pension insurance is a life insurance product that is implemented by the insurerfor the purpose of providing the life assureds with additional income at the end

of their working age

Pension insurance includes pension insurance for individuals and pensioninsurance for a group of employees In case of pension insurance for a group ofemployees (hereinafter referred to as ―Group Pension insurance‖), thepolicyholder is the employer and employees shall be entitled all benefits of theinsurance policy after a certain period of time according to agreement betweenthe parties as specified in the insurance policy

Based on the premiums paid the policyholder, the life assured starts receivingpension benefits when upon attaining certain age as specified in the insurancepolicy, but not earlier than fifty- five (55) years old for female and sixty (60)years old for male13

Pension insurance policy must be compliant with the regulations of laws andfully has the below information:

 Premium contributions of the policyholder, the life assured;

11 http://marketinglord.blogspot.com/2012/08/features-of-life-insurance-contract.html

12 https://stats.oecd.org/glossary/detail.asp?ID=6290

13 Article 2 Circular 115/2013/TT-BTC

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 The policy term includes the premium payment period and the benefit payout period;

 Responsibilities of parties relevant to group pension policy;

 Options and benefits of the life assured upon participating group pension policy;

 The rate, specific amount, maximum limit and method of calculating premiums relevant to pension insurance policy;

 Rights and obligations of the parties in accordance with regulations of laws;

 Enclose the insurance benefit illustration in the insurance policy;

 Specify the right of transferring pension insurance account according to Article 15 of this Circular.14

In distinction to another life insurance contract, pension contract has someunique nature Among others:

The life assured is not permitted to withdraw the pension insurance accountbefore reaching a certain age according to agreement in the insurance policy,excepting the case stated below

The life assured has the right to request for partial withdrawal or full surrender

of pension insurance account in the following cases:

 The life insured loses working capacity by 61% or more according to the regulation of current law;

 The life assured suffers from critical illness according to the regulation

of current law;

 The life assured is legal residence in oversea.15

14 Article 18 Circular 115/2013/TT-BTC

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According to the above stipulation, the surrender of pension policy is prohibitedwhile this is the basis right of policy owner (the life assured) which is admitted

by Law on insurance business

The policy owner has the right to request for surrender of policy (life insurancecontract) at any time and will be returned surrender value by the insurer if thepolicy owner has already paid the insurance premiums for two years or more.For pension policy, there is not surrender value but pension account value.Pension account value is the sum of regular premium and excess premium afterdeduction of related charges

In general, once policy owner cancel the policy, he/she will receive a certainamount which is calculated upon the operation specification of such product.The consequence of being not allowed to cancel the policy is the policy owner

is not able to withdraw the pension account value but waiting for reaching theretirement age

Even where the policy owner cannot afford to pay insurance premiums, thepolicy owner cannot cancel the pension policy but can ask temporarily close thepension account value Upon this request, the life assured is not allowed forreceiving any insurance benefits during this period, excepting the payment ofperiodic pension benefits when the life assured reaches the certain age or thepayment of total pension account value accumulated until the time the lifeassured dies or suffers from total and permanent dismemberment.16

The above prohibition is not included the case of free-look period Although it

is not stipulated in the law, the life insurance practice allows a period where anew insurance policy owner is able to terminate the contract without penaltiessuch as surrender charges

15 Article 13, 14 Circular 115/2013/TT-BTC

16 Article 16 Circular 115/2013/TT-BTC

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2.3 Procedure of launching product

Former procedure of approval on product is so simply, insurer just submits thedossier to MOF, a unit competent authority, to approve the product Since 2015,not only MOF but also MOIT is involved to check the Terms and Conditions ofpolicy Therefore, the procedure for approval a product is quite complicated.Hence, in practice, it is pended until at the end of March 2017, a joint guideline

of MOF and MOIT is issued The description of this procedure is enclosed asAnnex 03

2.4 Rights of Policy owner (client) toward policy

To protect policy owners and beneficiaries, insurance laws in many jurisdictionsrequire insurers to include certain standard provisions in individual life insurancepolicies Examples of provisions required in all individual life insurance policiesare the free-look provision, entire contract provision, grace period provision,reinstatement provision, Policy Withdrawals, and Nonforfeiture Provision.Although the specific wording of these provisions may vary from policy to policy,from insurer to insurer, and from jurisdiction to jurisdiction, they are

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similar in principle Vietnam’s life insurance contract is not out of scope of thisprovision.

2.4.1 Free-Look Provision

An individual life insurance policy typically includes a free-look provision,sometimes referred to as a free-examination provision or a cooling-offprovision, which gives the policy owner a stated period of time after the policy

is delivered within which to cancel the policy and receive a refund The look period begins on the date the policy is delivered to the policy owner, not

free-on the date of issue Insurance coverage is in effect throughout the free-lookperiod or until the policy owner rejects the policy, whichever occurs first

The entire contract provision defines the documents that constitute the contractbetween the insurance company and the policy owner The entire contractprovision limits the terms of the contract to specific written documents, therebypreventing oral statements from altering the terms of the policy The provisionthus helps policyowners and insurers avoid misunderstandings regarding theterms of the contractual agreement

The specific wording of the entire contract provision varies depending onwhether the policy is a closed contract or an open contract A closed contract is

a contract for which only those terms and conditions that are printed in orattached to the contract are considered to be part of the contract Most individuallife insurance policies are closed contracts The entire contract provision inthese policies typically states that the entire contract consists of (1) the policy,(2) any attached riders, and (3) the attached copy of the application forinsurance The entire contract provision ensures that policyowners have access toall of the terms of the contractual agreement

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The grace period provision specifies a length of time following each renewalpremium due date within which the premium may be paid without loss ofcoverage The specified time following each premium due date during whichthe contract remains in effect regardless of whether the premium is paid isknown as the grace period If the insured dies during the grace period, then theinsurer will pay the death benefit to the beneficiary The insurer, however,usually deducts the amount of any unpaid renewal premium from the amount ofthe death benefit.

in effect; the insurer does not issue a new policy

A policy withdrawal provision, which is often called a partial surrenderprovision, permits the policyowner to reduce the amount of the policy’s cashvalue by withdrawing up to the amount of the cash value in cash Insurers donot charge interest or expect repayment on policy withdrawals; the amount ofthe cash value is simply reduced by the amount of the withdrawal However,many policies impose an administrative fee for each withdrawal and limit thenumber of withdrawals allowed within a one-year period Withdrawals mayalso reduce the amount of the policy’s death benefit

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The cash payment nonforfeiture option states that a policyowner whodiscontinues premium payments can elect to surrender the policy and receivethe policy’s cash surrender value in a lump-sum payment When a policyownerdecides to surrender a cash value policy, the insurer first subtracts any surrendercharges, which are specific charges imposed if the owner of a cash valueinsurance policy surrenders the policy for its cash surrender value.

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CHPATER 3 REVIEW THE CLIENT’S RIGHT OF

TERMINATION/ CANCELLATION AND WITHDRAWAL

According to Article 16 of Circular 115 on temporarily closing the pension insurance account:

1 The insurance buyer and the insurer may agree on temporary closure of pension insurance accounts in case of being not able to pay premiums.

2 During temporarily closing the pension insurance account, the insurers are not allowed calculating any charge for the insurance buyer Value of pension insurance account will be accumulated according to the invest rate announced annually by the insurer in accordance with agreements in insurance contracts The insurers will have no obligation to pay insurance rights and benefits during this time, except for case of paying periodical pension rights and benefits when the insured person reaches a defined age or pay all value of pension insurance account accumulated till time when the insured person dies or suffers permanent and entire injury.

3 The insurance buyer may request the insurers to recover pension

insurance account and continue submission of insurance premium.

With this provision, client is not allowed to terminate/ cancel the pension policybut temporarily closing the pension insurance account by the way of stoppaying premium

This limitation is not only contrary to the basic rights of policyowner as said inthe point 2.4.6 (Nonforfeiture provision) above but also against the generalprinciple of transaction stipulated in Civil Code 2015 that (i) Each personestablishes, exercises/fulfills and terminates his/her civil rights and obligations

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on the basis of freely and voluntarily entering into commitments and/or

agreements17 and (ii) hardship circumstances

Freedom of contract is one of the three pillars of the existence and development

of an economy Freedom promotes the creativity of individuals, and motivatesthe development of business activities The freedom of contract is interpreted inthe law by openly regulate contractual issues into basis principals and protectweaker parties in transactions

Contractual freedom was first recognized in the laws of Vietnam from theConstitution 1992, and continued being recorded in the Constitution 2013,which was developed into the detailed provisions of the Civil Code 1995, 2005,and the latest is Civil Code 2015 Accordingly, the scope of freedom of contractincludes the following contents: (i) the right to be equal and voluntary incontracting, (ii) the right to select partners entering into contracts, (iii) the right

to freely make the agreement, change, suspend, postpone, cancel or terminatethe content of the contract, (iv) the right to agree on conditions to guaranteecontractual performance, and (vi) the right to agree on choosing tribunals andmethods of resolving on contractual disputes

Freedom to enter into contract is expressed in Vietnamese contract law quiteconsistently Accordingly, individuals and entities are free to sign contractswhich are not contrary to the laws and social ethics Besides, in order to bevalid, contractual parties must comply with the principals of the voluntary,equality, goodwill, honesty and uprightness in contracts.18

17 Article 2 Civil Code 2015

18 Tan P.P Nguyen, Contract law of Vietnam: an evaluation approached by the transaction cost theory, in 2016

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According to Article 420 of Civil Code 2015, performance of contract upon the basic change of circumstances:

1 The change of circumstances shall be deemed basic when it meets all

d) The continuation of the contract without the change in the contract would cause serious damage to one party;

dd) The party having interests adversely affected has adopted all the necessary measures in its ability, in accordance with the nature of the contract, cannot prevent or minimize the extent of effect.

2 In the case of basic circumstances change, the affected party may request the other party to the re-negotiate the contract in a reasonable period of time.

3 If the parties cannot reach an agreement on amending the contract within a reasonable period of time, any of the parties may request a court to:

a) Terminate the contract at a specific time;

b) Amend the contract to balance the lawful rights and interests of the parties due to basic change of circumstances.

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The court may only decide to amend the contract in the event that the termination of the contract would cause greater damage than the cost to perform the contract if it is modified.

4 In the process of negotiating amendments and termination of the contract and the court handling the case, the parties must continue to perform its obligations under the contract, unless otherwise agreed.

Given such regulation, the following analysis shall help to understand moreeach element being applicable:

a Events occur or become known after conclusion of the contract

According to sub-paragraph (a) of this Article, the events causing hardshipmust take place or become known to the disadvantaged party after theconclusion of the contract If that party had known of those events whenentering into the contract, it would have been able to take them into account atthat time In such a case that party may not subsequently rely on hardship

b Events could not reasonably have been taken into account

by disadvantaged party

Even if the change in circumstances occurs after the conclusion of the contract,sub-paragraph (b) of this Article makes it clear that such circumstances cannotcause hardship if they could reasonably have been taken into account by thedisadvantaged party at the time the contract was concluded

Sometimes the change in circumstances is gradual, but the final result of thosegradual changes may constitute a case of hardship If the change began beforethe contract was concluded, hardship will not arise unless the pace of changeincreases dramatically during the life of the contract

c Events beyond the control of disadvantaged party

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