New rules keep you in the know
Fiona Chan
Sun, May 25, 2008
The Straits Times
If you own a whole life or endowment insurance policy, you can expect more information on your plan to come your way.

This is in line with recent measures taken to close the information gap surrounding what are known as participating life or 'par' policies.

To recap, premiums paid by policyholders for their 'par' plans go into a common pool called the 'par' fund and is invested in a variety of assets, with bonuses paid out from surpluses.

Such traditional policies are popular in Singapore, with 3.5 million 'par' policies with total assets of more than $50 billion.

Yet, despite their popularity, many policyholders had been dissatisfied with the way funds were administered and bonuses were declared.

Most insurers did not disclose the returns or losses of their funds, the target returns and payout levels, or the funds' investment strategy and allocation mix.

With the new measures implemented since March, all this is set to change.

They include a revised benefit illustration with two projected rates of returns, which is meant to help policyholders understand that cash bonuses are not guaranteed and will vary depending on several factors. Also, it is now compulsory for insurers to disclose how they invest the premiums collected as well as their past performance.

The changes reflect the industry's effort to improve consumers' understanding of 'par' policies so that they can make informed decisions.

What information should you receive now?

You will receive three sales documents from your adviser before you purchase a participating policy. They are:

  • Your Guide to Life Insurance;

  • A Product Summary; and

  • A Benefit Illustration.

    The guide contains general information on life insurance, while the product summary describes the features of the particular policy you intend to buy.

    In the latter, look out for the investment strategy of the insurer and the key factors that would affect future non-guaranteed bonuses.

    For instance, a recent product summary for NTUC Income's Vivolife product states that its 'par' fund currently has this investment mix: 31 per cent goes into equity, 52 per cent into fixed income, 5 per cent into loans, 6 per cent into properties and 6 per cent into cash.

    The summary also provides the annual investment yield and expense ratio - a reflection of how much of the assets are soaked up by costs - of the fund from 2005.

    While the product summary is a compulsory requirement, the guide to participating policies is provided at the customer's request.

    When you bought your policy, your insurance agent may have shown you a schedule, also known as the benefit illustration, of how much the cash value of your policy is projected to grow over time.

    He may have told you that your policy 'breaks even' after a certain number of years, meaning the cash value starts to exceed the premiums you pay.

    You would be told that you will receive a certain amount in cash when you surrender the policy.

    Bonus rates not guaranteed

    Your 'par' policy provides a combination of guaranteed cash benefits and non-guaranteed benefits in the form of bonuses.

    Do note that the bonus rates used in this illustration are not guaranteed and may vary according to the performance of the 'par' fund.

    In line with the changes, the revised benefit illustrations will now show two projected investment rates of return - 3.75 per cent and 5.25 per cent.

    Insurers may vary in their assumed rates, but they should not exceed the higher rate of 5.25 per cent, which is set by the Life Insurance Association (LIA).

    Before March, only one rate - with the corresponding values through the duration of the policy - was illustrated in the table. This led many policyholders to believe mistakenly that the illustrated values were guaranteed, when in reality, they were not.

    Bonuses paid from 'par' fund surpluses

    The cash value and exactly when your policy breaks even depend on the amount of annual or reversionary bonuses declared each year and the terminal bonus.

    The latter is paid only at the time of death or when the policy is cashed out.

    Annual bonuses are surpluses that insurers set aside from the 'par' fund. Once declared, they are considered vested or guaranteed in the plan and this increases your policy value.

    Factors that determine the level of bonuses include:

  • Investment performance or how skilfully your life insurer has invested the premiums. This is usually the most significant factor determining the amount of bonuses declared.

  • Level of expense allocated to the 'par' fund.

  • Claims of death or sickness paid out from the 'par' fund.

    Still, policyholders cannot assume that a record investment yield for a particular year will translate into immediate and bountiful bonuses.

    This is because a key feature of all 'par' plans is that the bonuses are 'smoothed' over the duration of the plan as the insurer manages the bonuses allocated each year.

    This means that during good years, the insurer will set aside some of the surplus in the fund in order to ride out the bad years.

    This 'smoothing' allows insurers to manage through good and bad times, and it also means that any bonus change will be gradual.

    The issue of bonus payouts has been a source of discontent among many policyholders.

    To make matters worse, there have been cases of insurers that used high projections to sell their policies, but reduced the terminal bonuses before they were due to be paid.

    Of late, Income has cut the annual bonus payouts of existing and new policies. Instead, it plans to assign more as terminal bonuses, which are paid only at the time of death or when the policy is cashed out.

    Although this reshaping of the bonus structure has met with much resistance from former chief executive Tan Kin Lian and several customers who claim that it is a bad deal, Income is expected to go ahead with it.

    Prior to the new measures, customers were left in the dark about how bonus payouts affected the value of their policies.

    Annual bonus update

    Going forward, you will receive an annual bonus update. This will include information about:

  • The performance of the participating fund and its outlook.

  • The bonuses allocated, if any, to your policy for that year.

    You will also receive an update of the projected total maturity value for endowment policies, or the revised total surrender value for whole life policies, whenever there is a change in the bonuses declared.

    In order to rein in your expectations, it is prudent to request, on a regular basis, a benefit illustration showing future non-guaranteed benefits based on the insurer's latest best estimate of the future performance of the 'par' fund.

    Comparing investment yields of insurers

    Now that the investment yields and expense ratios of each insurer have made it to the public domain, it seems the next logical step is to compare and rank them.

    After all, consumers would want to go with an insurer that can boast of high investment yields and low expense ratios.

    However, LIA president Mark O'Dell cautioned against doing this. This is because at present, the current information provided may not be sufficient for consumers to accurately judge the performance of insurers.

    'The investment yields disclosed in the current product summary may not apply to all 'par' policies sold by that company, as the par fund could be segregated by sub-groups,' he said.

    Moving forward, the LIA will work on enhancing the transparency of such policies by providing information on how the 'par' fund is operated, as well as the principles that are used to determine bonus payouts, he added.

    The industry will also work on improving consistency in reporting their 'par' fund figures.

    So what should policyholders look out for when shopping for a plan?

    'In evaluating policies, individuals should consider the level of guarantees, the company's investment allocation strategy and its associated risk profile and whether the current bonus scale is supportable with the current returns,' suggests Mr O'Dell.



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