Insurers to Reduce Participating Policy Illustrations – What This Means For Existing and Would-be Policyholders

Come July, life insurance companies have to cap the projected returns for their participating policies. Instead of the current 4.75% and 3.25% p.a. projections, the upper illustration rate will be lowered to 4.25% p.a, and the lower rate will be 3% p.a.

What are the illustrated returns for anyway?

The two projected returns aren’t the upper or lower limits of the returns one should expect from the policy. Instead, as their name suggests, they are illustrated values of what one might expect to get if the insurer’s participating fund reaches certain numbers.

Take this table you’d typically find in a participating policy for instance. If the insurer’s participating fund does 4.75% p.a. throughout the entire tenure of this 10-year savings plan, you would expect to get the $54,653 maturity benefit as illustrated when you first buy the policy. Note that this does not mean your rate of return was 4.75% p.a; a $54,653 maturity benefit after 10 annual payments of $4,788 is a little less than 2.5% p.a. return.

If the returns of the insurer’s participating fund are at 3.25% p.a, the returns under that column would be given instead, and in this example would be little less than 1.3% p.a. return.

What does this mean for existing policyholders?

Existing policyholders aren’t directly affected as the changes are not retroactive and do not change existing policies. However, the revision of illustrated values happen because of the low interest rate environment, and existing policies are still affected by the prevailing economic conditions. If insurers’ participating funds experience prolonged periods of bad returns, existing policyholders would invariably be affected as insurers may and can cut bonuses.

In short, the reduction of illustrated rates do not affect policyholders, but the poor returns of an insurer’s participating fund certainly would. The downward revision of the illustrated rates is an indication that it’s tougher for insurers’ participating funds to perform at higher returns.

In fact, insurers have cut bonuses for existing policies, so it might be a sign of things to come.

What does this mean if I want to buy a policy?

From 1st July 2021, insurers will not be allowed to project more than 4.25% p.a. for the more optimistic illustration and 3% p.a. for the lower projection. Theoretically, their projections do not affect their actual investment returns, and should not affect their bonus pay out. On the other hand, there’s an argument to be made that insurers would likely avoid making customers feel unhappy by cutting bonus, and as such there is a reason to buy before the change happens.

Think about it this way: if you’re taking a pinky promise of sort, even one without any legal obligation, would you want the person to paint you a picture with better returns, or slightly lower ones?

Of course, every single insurer in Singapore has cut bonuses before, and I cannot speak to how much they want to stand by their illustrated values. Pinky promises are only as good as the person crossing fingers with you.

Just don’t buy participating policies

I think this revision is a good reminder why participating policies are such a bad deal. It’s quite the heads I win, tails you lose situation: if the insurer does well, they take their cut and give you a significantly lower rate of return. If they don’t perform, they still get a sizeable cut before handing you scraps.

There really are much better ways to get returns now, and they’re not difficult to execute. Don’t get locked into a long-term obligation which leaves you at the mercy of an insurer with little room to change your investment strategy as conditions change.

You can check out Syfe’s portfolios to invest with someone’s help but much lower fees, or do it yourself with a trading app like moomoo after reading up on your own. They do give me referral incentives, but wait till you learn how much commission most participating polices pay to the agent. Yikes.

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