Lower Caps On Participating Policy Illustrations: How It Affects You As A Policyholder
On 2nd June 2021, the Life Insurance Association of Singapore (LIA), in a press release, announced that the life insurance industry in Singapore will revise the caps of illustrated investment returns downwards of participating policies.
The last time it had done so was in 2013 where the upper illustration rate was revised from 5.25% to 4.75% and the lower illustration rate was revised from 3.75% to 3.25%. Effective from 1st July 2021, these rates will be reduced to 4.25% and 3% respectively. Let us answer the questions raised in view of the changes announced by LIA:
1) Why have the caps on illustrative investment returns been revised downwards?
LIA president Mr Khor Hock Seng said that this downward revision was made “primarily in consideration of the sustained low-interest rate environment.”
The objective in doing so is to “provide consumers a more realistic range of projected investment returns so that individuals can make better financial decisions.”
Due to Covid19 and the impact it has had on many economies, governments around the world have reduced their interest rates. This in turn translates to encouraging banks to lend out money more and as a result, cause interest rates to also fall over time. Like our Singapore government who has injected more liquidity into the economy with initiatives such as the Covid 19 Support Grant and the various job schemes, the governments across the world have also had to tap into their reserves to stimulate their economies. As such, the interest rate climate is quite low across the world.
2) What do these changes in the illustrative rates mean for policyholders?
For existing policyholders or those who purchase policies before 1st July, your illustrative investment returns remain as they are currently or when you purchased them (prior to 2013). Do illustrative returns equate to actual returns? In most cases no. Companies usually use these numbers as indicative returns. The actual returns depend on the fund performance, expenses incurred by the fund as well as claims experience the fund.
To avoid large fluctuations in the non-guaranteed bonuses, insurers practice what is called a smoothing of bonuses over time. This means that the non-guaranteed bonuses are not aligned with the short-term fluctuations in the investment markets. Instead, when the par fund has performed well some of the bonuses are kept to buffer the years when the par fund performs less favourably. In doing so, they can avoid the large swings in non-guaranteed bonuses declared.
3) Does every policy get affected?
Nope. These changes do not affect your term insurance policies (Hospitalization, Accident, Disability or some Critical Illness or Death/TPD plans) or your investment-linked plans. The plans which get affected are mainly whole life policies, endowment plans or annuity policies that have surrender values.
The insurance industry landscape is an ever-evolving one. There are changes that occur across the industry which are reflective of the times we live in. Over the years, we have seen changes in critical illness definitions, hospitalization plan payouts, and even the inclusion of Covid 19 related coverage. It is always beneficial to keep abreast of these changes and review your portfolios regularly.
So always remember, when you purchase an insurance policy, it should be aligned with your personal needs and risk profile. It is beneficial to sit with a financial advisor to see which plan suits your need, budget and risk appetite. If you would like to find out more about how to go about setting up an insurance portfolio that comprises a mix of plans that suit you as an individual, do send me a message below or email me at firstname.lastname@example.org and I will be happy to answer!