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

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


INDEX
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
2.1.2.2
2.1.2.3

2.1.2.4
2.1.2.5

Insurable interest ........................................................................................................................................ 13
Utmost good faith ....................................................................................................................................... 16
Warranties .................................................................................................................................................. 16
Assignment and nomination ....................................................................................................................... 16
Return of premium ..................................................................................................................................... 16

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 POLICY 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

2.2

CHPATER 3 REVIEW THE CLIENT’S RIGHT OF TERMINATION/ CANCELLATION AND
WITHDRAWAL .................................................................................................................................................24
REVIEW OF TERMINATION/ CANCELLATION 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
3.1

CHAPTER 4 REVIEW TAX INCENTIVE REGULATIONS APPLIED FOR CORPORATE AND
EMPLOYEE CLIENTS BUYING PENSION PRODUCT ................................................................................37
ANALYSIS OF THE CURRENT UNSOUND REGULATIONS – THE NEED TO ENCOURAGE VOLUNTARY PENSION

4.1

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
INTERNATIONAL REFERENCE ....................................................................................................................... 46
CHAPTER 5 PROPOSAL ON LEGAL REFORM TO ENHANCE CLIENT RIGHTS AND TAX
INCENTIVES FOR PENSION BUSINESS ........................................................................................................50
5.1
5.2
5.3

TERMINATION/ CANCELLATION RIGHTS....................................................................................................... 50
RIGHTS OF WITHDRAW MONEY IN ADVANCE ................................................................................................ 51
TAX 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


DECLARATION
I, HOANG THI HONG HA, trainee code: 7701240806A, a trainee of LLM 24 of
Economic University in HCMC, an author of this Thesis on Legal aspects of Pension
policy – Review of the Client’s rights and tax incentives to encourage voluntary
pension insurance business (hereinafter called ―Thesis‖).
I hereby declare that all content presented in this thesis is the result of personally
independent research under the guidance of the Mentor. In the thesis there are used,
quoted some ideas, scientific view of some authors. These information sources are
cited specific, accurate and verifiable. The data and information used in the thesis is
completely objective and honest.
Author

HOANG THI HONG HA

iii


PREFACE
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 and
encouraging 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

for their ideal working environment, for a practical repertory, for giving me a lot of
practical experience, which is an important part of the success of this thesis. In
addition, I am also grateful to my esteemed chief, Mr. Robin, Director of Policy
Administrative / 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 Insurance
Association of Vietnam, it was a great experience and a great pleasure to work with
you, for your worth sharing on life insurance market in Vietnam, particularly for the
state 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


ABSTRACT
Since 2013, Vietnam had adopted regulation to promote voluntary pension policy.
Despite the high expectation, after more than three years of deployment, the market
for pension insurance remains very limited. This thesis aims to explain the legal
contracts which impede the development of pension insurance. The thesis also
analyses 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 tax
and personal income tax applied for corporate and employee clients.
As a result, this thesis proposes that pension regulation should admit the client right of
termination of pension contract; extend the client right of withdrawal of money in
advance in any circumstances. And last but not least, tax policies should be adjusted to
ensure the fair tax treatment between voluntary pension and social pension.
In this thesis, research instruments are used including survey, statistics, comparison
and analysis to support for the persuasion.

v


LIST OF DEFINITION AND ABBREVIATIONS
Policy Owner / Policy Holder are organizations or individuals that enter into insurance
contracts 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 insurance
buyers to receive insurance money under person insurance contracts.
Insurable interests mean the rights to ownership, the rights to possession, the right to
use, the property rights; the rights and obligations to foster and provide financial
support for insured objects.
Insured events mean objective events mutually agreed upon by the parties or
prescribed by law upon the occurrence of which the insurance enterprises shall have to
pay 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 insurance
enterprises 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 in
the insurance contract.
Surrender Value means an amount of money the Policy Owner will receive if the
Policy Owner terminates the Policy while the Policy is on effective period.
Free-look period / Cooling-off period means an individual life insurance policy
typically includes a free-look provision, some- times referred to as a free-examination
provision 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 cancel
the 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 the
policy owner, not on the date of issue. Insurance coverage is in effect throughout the
free-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 within
which 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 effect
regardless of whether the premium is paid.
Reinstatement means the conditions that the policy owner must meet for the insurer to
reinstate a policy.
Defined-benefit plan means a pension plan with a guarantee by the insurer or pension
agency that a benefit based on a prescribed formula will be paid. Such plans can be
fully funded or unfunded
Defined-contribution means the contributions that the plan sponsor agrees to make to
the plan. The benefit that a participant will receive is not determined in advance of the
participant’s retirement but depends on the investment performance of the funds in the
plan
PAYG (Pay as you go) means a withholding tax which requires you to pay
incremental amounts which accumulate towards your expected end of year income tax
liability
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 tax
ULP: Universal life product
ILP: Unit link life product

viii


CONTENTS
LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S
RIGHTS AND TAX INCENTIVES TO ENCOURAGE VOLUNTARY
PENSION INSURANCE BUSINESS
CHAPTER 1

INTRODUCTION

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.

Years

Graph 1.1: Vietnam's life expectancy trend from 2001 to
2050 (years)
82.0
80.0
78.0
76.0
74.0
72.0
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


Percentage

Graph 1.2: Vietnam's age proportion trend
from 1990 to 2025 (%)
40
35
30
25
20
15
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 (GSOWB 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, then
aged; 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

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pension systems that help the population cope with the risk of poverty in old
age.
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 for
consumption smoothing (i.e. protecting against the risk that there will be an
abrupt drop in consumption when income ceases or saving are depleted) and
protecting against the risk of old age poverty.
At present, the insurance system in Vietnam consists of (i) mandatory publicfunded pension fund, known as a compulsory retirement pension (called as
Social Security), (ii) supplementary pension funds controlled by the state, and
(iii) voluntary pension funds managed by the private (called as Pension). In
which, Social Security can be considered as the first pillar and Pension can be
considered as the third pillar of the social security system in line with
international standards.
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 at
retirement age. Form of payment is DC (Defined Contribution). However, these

two insurance kinds have many different points as follow:
Figure 2

Criterion

Principle

Pension

A

life

insurance

Supplementary pension

product A social insurance policy

provided by insurers

Contribution

Voluntary

Voluntary

(pre-stage)

and

mandatory (post-stage)

Subject

Employee or group employee

Employee
participating
Security

4

and

employer
in

Social


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 the
interest rate and the interest participant
share of insurers’ profit, if any

Withdrawal

Limitation in 3 cases: (i) All

paid

contribution

in advance

reduced working capacity at employee will be returned

of

61% or more; (ii) suffers a
dangerous disease; (iii) citizen
of Vietnam is permitted abroad
residence legally by competent
authority of such country

Management Insurers and Management fund Management fund companies,
companies

Custodian bank, and other
financial intermediation

Regulation

Law on insurance business and Labor Code, Law on social
its guidance

Tax policy

insurance

Tax incentive for employee and MOLISA’s
employer

suggestion,

tax

incentive of Supplementary
pension will be higher than
the one of Pension.

5


The current trend is that most countries have reformed their pension system
from 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 an
evidence for this trend.
So far, the key pension system in Vietnam is the state-run social insurance
system, mainly mandatory. This mandatory scheme includes a contribution
requirement of 26% of monthly salary (in which 18% is borne by employers
and 8% is borne by employees)3. The restriction of single pillar in Vietnam as
follows:
 Firstly, the participation rate of the mandatory social system is relatively
slow. According to statistics from The Social Welfare system, in 2013,
there were 10.6 million contributors to the system. However, this was
mainly from state-run organizations and the number of contributions to
voluntary pension system was still 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 at
75%*20 months of basic salary (currently about 21 million) per capita
which is insufficient 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 of high inflation.
Besides, though Vietnam has a relatively low retirement age, half of Vietnam’s
employees here continue to opt for an early out, while Vietnam's official
3

Law on Social insurance and Article 43 of Law on occupational safety and health
6


retirement age for men is 60 and women 55, the Social Insurance Department
said at a meeting on October 26th, 2015. The number of people receiving payouts 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 the
trend is shown in the Figure 3 below) and now the ratio plummet to 8.13:1:
Chart 2.1: Ratio of contributors per retiree
217

34

1996

2000

19

14

11

10.7

2004

2007

2009

2010

(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. This
exposes a threat to the balance of Funds’ cash inflow and outflow. ―Sooner or
later, 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 insurance
system, some of which include expanding retirement age, increasing the
contribution ratio of both employers and employees into the fund etc. However,
these are merely short-term solutions that are unable to instantly solve
systematic problems and the Government of Vietnam have been looking at
alternative pension funds to reinforce the social insurance fund.

4

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Given with the above situations, the Government has taken actions in order to
reform the pension funding system in a way that ensures long-term
sustainability of the system. The State launches the roadmap to encourage
people to take care of themselves after retirement through voluntary pension
insurance. Accordingly, MOF and the MOLISA have developed two pension
systems in parallel called Supplementary pension and Pension product as
introduced above.
Pension, according to the Circular 115/2013/TT-BTC (in the following called
for 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 the
Voluntary 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 Viet
life. The total sales volume is still very limited5. Concretely, Pension insurance
revenue 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 less
than 2% of the total new market premiums. The first year premium for this
product as of September 2016 was less than 1% of the total new market
premium. According to data of the ISA, total premiums of new life insurance in
the first nine months of 2016 were estimated at over VND 11,466 billion, up
nearly 30% over the same period of 2015. Term life, endowment insurance and
universal life still account for a large share of total new premium revenue 6. It
means that despite the potential value, after more than three years of
deployment, the existence of Pension has not expanded compared with the

other insurance products.
5

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When drafting the Circular 115, MOF found that workers wanted more
benefits, less money. Therefore, they supposed that this Circular 115 is mainly
aimed at workers/employees, with the support of employers. However, the
reality is not as predicted by the regulator due to mainly reasons as follows:
 Pension add up to employers’ total labor cost given that they already
have to absorb other similar expenses including making contribution on
behalf of employees to the current mandatory social security fund. While
there are many way of retention the key manpower.
 Due to the nature of pension product, which is rather rigid as regulated in
the Pension circular, the product design has to be standardized and
homogeneous with several limitations (early withdrawals and surrender
are not allowed, first payout can only be made from 55 or 60 years old,
payout period must be at least 15 years 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
employee separately to deduct the tax when insurers pay the benefit to
clients, hence insurers have to invest the system to operate this Pension,
which take lots of cost while the effect of sale pension is so low.
 For employees: clients in general and employees in particular are not
only allowed to cancel/ terminate the Pension policy but also withdraw
the money at any time. For tax incentive, although employees are

exempted from taxes, the current tax policies are not attractive enough
for employees to commit a long-term commitment with the company.
Contrary to this, employees prefer to receive a lump 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 regulations
stipulated in Pension are the most important issue. In this thesis, I will focus on
two 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 research
methods include: statistical analysis, policy and legal comparison and
evaluation of secondary resources. Accordingly, I analyse the key facts first,
then compare them in relation to other Vietnam regulations/ principles, even
foreign regulations are used to show what the limitations of prevailing pension
regulations are and how they should be revised. Concurrently, a small and
quick survey of YES/NO questions around some countries is used in this
presentation to support more the persuasion of this thesis.

10


CHAPTER 2
AND PENSION

2.1

OVERVIEW INSURANCE BUSINESS: THE POLICY

Policy and its features

2.1.1 What’s life insurance contract
Currently in Vietnam, there is no definition, formal concept for life insurance
contract but instead only have definition on life insurance, types of insurance
contract, 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 insurance
company agrees to pay insurance monies to the beneficiary or indemnify the
insured on the occurrence of an insured event.
Life insurance means a class of insurance provided to cases where the insured is
alive or dead.7
The objects of human insurance contract shall be the human age, life, health
and accidents.8
Combination all above definitions, there are some concepts of life insurance
contract 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 the
insurer promises to pay a designated beneficiary a sum of money (the
benefit) in exchange for a premium, upon the death of an insured person
(often the policy holder). Depending on the contract, other events such as
terminal or critical illness can also trigger payment. The policy holder

7
8

The Article 3.12 of Law on insurance business
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 the
limitations of the insured events. Specific exclusions are often written
into the contract 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 lump
sum payment in the event of specified event. A common form of a
protection policy design is term insurance.
 Investment policies – where the main objective is to facilitate the
growth of capital by regular or single premiums. Common forms (in
the U.S.) are whole life, universal life policies.
 A life insurance policy is a contract with an insurance company. In
exchange for premium payments, the insurance company provides a
lump-sum payment, known as a death benefit, to beneficiaries upon the
insured's death.
 Life insurance contract is an agreement between two parties whereby
party insurance (insurance companies) are responsible for and shall pay
to the insured 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, is
required to pay a definite sum of money agreed on maturity of policy at the

death 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 essential
features of life insurance are as follows:
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2.1.2.1

Insurable interest

The insured or policyholder must have an insurable interest for a valid
life insurance contract. Insurable interest arises out of pecuniary relationship
which exists 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
his survival.
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 can
purchase life insurance policy for a third person unless he has financial interest
in his life.
According to Vietnamese laws, insurable interests mean the rights to
ownership, the rights to possession, the right to use, the property rights; the
rights and obligations to foster and provide financial support for insured
objects.10

Insurable Interest Requirement
As noted earlier, insurance is intended to compensate an individual or a
business 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 the lives of famous people, especially those who were reportedly
ill, hoping to make a profit if the insured person died.
The practice of purchasing insurance as a wager is now considered against public
policy. 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