Participating Policy Illustrations Will Be Lowered From 1 July: Here's All You Need To Know in 2 Minutes
If you’re a responsible working adult, there’s a high chance you might already have your insurance needs sorted out.
And you’re currently holding on to a Participating (Par) policy, or looking to get one, there are some upcoming changes to take note of.
The Life Insurance Association (LIA) has announced that the illustrative investment returns used in par policies will be reduced with effect from 1 July 2021.
If that sentence above is a chunk of words that look foreign to you, don’t worry as we will break it down for ya.
Okay, not this break it down. You get what I mean.
Here’s all you need to know about the upcoming changes!
TL;DR: Reduction in Participating Policy Illustrations: What Are the Changes and How Does It Affect Me?
|Reduction in Par Policy Illustrations||Details|
|What Is a Par Policy?||Life insurance policies that provide both guaranteed and non-guaranteed benefits
Common par policies include:
1) Whole life plans
2) Retirement plans
3) Savings plans
|Changes to Par Policies (From 1 July 2021)||Illustrative investment returns:
- Upper limit from 4.75% to 4.25%
- Lower limit from 3.25% to 3.00%
|Why the Revision?||Changes will help provide a more realistic range of projected investment returns in view of the sustained low interest rate environment|
|Changes for an Existing Par Policyholder||Changes in policy illustrations only applicable to new par policy applications from 1 July 2021
Rates are only for illustrative purposes, does not represent actual returns of par fund
|Effect on Premiums and Benefits of New Policies||Insurers are likely to take this opportunity to review their policy features and adapt accordingly, which would result in changes in premiums and benefits|
What Is a Participating (Par) Policy?
Participating (par) policies are life insurance policies that provide both guaranteed and non-guaranteed benefits.
Some common par policies would include whole life plans, retirement plans, and savings plans.
As its name suggests, policyholders of par policies would have a portion of their premiums pooled into ‘participating (par) funds’. These funds invest in a range of assets to generate an investment return.
These returns will make up both the guaranteed and non-guaranteed benefits as part of your policy.
The non-guaranteed benefits would depend on a couple of factors, such as the investment returns of the fund, the level of expenses incurred, and the number of claims made on the fund.
The common types of non-guaranteed benefits would include:
- Reversionary bonuses (declared annually and will form part of the guaranteed benefits (i.e. sum assured))
- Terminal bonuses
- Cash dividends
Changes to Par Policies From 1 July Onwards
To demonstrate the volatility of non-guaranteed benefits, the Policy Illustration would typically use two projected investment rates of return to illustrate the benefits and charges of a product.
This is how they usually look in our policies.
From 1 July 2021 onwards, the following changes will occur for the policy illustrations:
|Changes In||Before 1 July 2021||From 1 July 2021 onwards|
|Upper Illustration Rate||4.75% p.a.||4.25% p.a.|
|Lower Illustration Rate||3.25% p.a.||3.00% p.a.|
|*Note: Lower illustration rate must be at least 1.25% p.a. below the upper illustration rate|
As indicated in the table above, there will be a downward revision in the illustration of non-guaranteed benefits.
This is in view of the sustained low interest rate environment, and these changes would help to provide a more realistic range of projected investment returns.
The last adjustment in 2013 was also due to a low interest environment as well.
That being said, these projected investment rates of return are mainly used for illustrative purposes and do not represent the upper and lower limits of the performance of a par fund.
This means that the rates do not reflect the actual returns of both existing and future par policies.
How Are the Returns of Par Funds Across Companies?
|Company||AIA (S$)||Aviva||AXA||Etiqa||Great Eastern||HSBC Insurance||Manulife||NTUC Income||Prudential||Tokio Marine|
We can see that the par fund performance across different companies has mostly outperformed the illustrated investment returns.
That being said, companies typically do not pay according to the returns as seen due to a couple of reasons.
One of which is the act of ‘smoothing’ of bonuses, which means preventing large fluctuations in bonuses by cutting them during years of good returns to maintain payouts for years with less favourable returns.
This is also what makes par funds attractive to some despite high distribution costs – by offering a slightly lower level of volatility, providing stable medium- to long-term returns with some level of guarantee.
How Would the Changes Affect Me as an Existing Par Policyholder? Will My Bonus Be Reduced?
The changes in policy illustrations are applicable to all new par policy applications from 1 July 2021 onwards.
This means that if you are an existing par policyholder, the companies probably would not be sending you newly revised policy illustrations to adjust these projections.
According to LIA, since the rates used are only for illustrative purposes, the actual returns for bonuses of existing and future par policies will not be affected.
Life insurers will still be following their existing processes to review their Par Fund’s performance to determine the bonuses to declare for the year.
That being said, not much information is currently available online on whether there will be a shift in future bonus declarations with these new caps.
Since companies are generally still pretty tight-lipped regarding these changes, we would strongly encourage individuals to approach their trusted financial advisers to find out more and decide whether these policies are aligned with their personal needs.
Does This Mean That Future Investment Returns Will Be Lower?
The lowering of the caps of the illustrative investment returns is to provide consumers a more realistic range of projected investment returns, especially in the current low interest rate environment.
It does not affect the actual investment return, which is dependent on future economic conditions, allocation of the Par Fund, and asset class returns.
However, as quoted from the Association of Financial Advisers (Singapore), to ensure the sustainability of Par Fund, there needs to be a shift in product design, which will lead to lower guaranteed returns to reflect lower government bond yields.
As such, insurers have also begun to reprice their products, and more insurers are expected to follow suit.
If these returns are something you are concerned about, DIY investing is perhaps an option you would want to look into if you want your money to beat inflation.
It is lower in costs and it is really not as difficult to start as you think.
How Will These Changes Affect the Premiums and Benefits of New Policies?
The downward revision would mean a change in the caps on the illustrative investment returns in the Policy Illustration, which technically does not have any immediate impact on the premiums.
That being said, insurance companies are likely to take this opportunity to review their policy features and adapt accordingly in view of the changes.
With such changes, one could expect an eventual downstream impact on premiums and benefits.
We do not recommend anyone to chiong (read: rush) into getting a new plan before 1 July 2021.
If you do already have an interest in purchasing such plans, do consult your trusted financial advisor to find out how these changes would affect you before deciding whether to purchase a policy now.
Always find someone that you can trust and is licensed to address your concerns as the last thing we’d want is to own an ill-fitting policy due to fearmongering.
How Often Are Caps Reviewed by LIA?
These illustrative caps were introduced by LIA in 1994 to ensure consistency among insurers.
Caps are reviewed annually in order to ensure that they are kept relevant to prevailing market conditions.
By revising caps to a realistic range of projected investment returns, consumers can make better informed financial decisions.
Insurance can be a really tricky topic.
With the new upcoming changes and a wiiiiiide range of policies, it’s easy to get confused and overwhelmed.
So if you have any burning questions on this topic, time to get them answered right here!