Understanding the Bonus & Benefits of Life Insurance

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Recently, a Facebook post of a daughter of a deceased 92-year-old woman went viral due to her difficulties in claiming the insurance benefits from AIA. In her post, she shared that her mother had bought 3 policies from AIA and with her passing, her policies were due for a payout. Her daughter claimed that one of the policies was a whole life participating policy that had a sum assured amount of $30,000, but the death benefit payout was 25% less than the projected returns.

Her inquiry into the huge discrepancy between the projected and final payout set us thinking about helping our clients understand the bonus and benefits of your life insurance so that you understand the policies you are buying into.

What are Participating Policies?

Participating policies are insurance policies which provide both guaranteed and non-guaranteed benefits. The sum assured is a guaranteed benefit and is paid out when the policy matures or upon the death of the insured.

Other than the sum assured, participating policyholders can participate or share in the profits of the insurance company’s participating fund. The insurance premium you pay will contribute to the participating funds which will be formed by the investment managers in the insurance companies. The performance of these funds will affect the amount of bonuses or cash dividends you get. Do remember though, these bonuses and cash dividends are non-guaranteed benefits.

This is different from an Investment-linked policy.

Some people confuse participating policies with investment-linked policies(ILP). The key difference is that under an ILP, you do not have guaranteed cash values. Rather, your returns are determined by the performance of the funds you choose. The latter is both a boon and a bane – since these funds are usually more volatile as compared to a participating fund, you can potentially earn higher returns, but you can also lose more money.

In a Whole-life insurance plan, your premiums are used to pay the costs of insurance. In contrast, the premiums you pay on an ILP are first used to buy fund investment units. These units are then sold to pay for the costs of insurance, as well as other fees. In a way, you can see an ILP more as an investment plan first before an insurance plan.

Types of Non-guaranteed bonuses

There are usually 2 types of non-guaranteed bonuses:

  1. Reversionary bonus–  is an annual bonus that increases the guaranteed benefits of the policy. Once added, a reversionary bonus cannot be reduced or removed unless you surrender the policy before it matures.
  1. Terminal bonus – is added on top of reversionary bonuses when the policy is terminated, like when you surrender the policy, make a claim, or when the policy matures.

Once a bonus is paid, the amount becomes part of the guaranteed value. Policyholders need to always keep in mind the non-guaranteed nature of the bonuses. In fact, policyholders are strongly encouraged to look into the investment returns on your insurer’s participating funds. The fund performance can be affected by a number of factors such as unexpectedly large claims including death claims, as well as the fund’s investment experience.

Projected investment rate of return

While all insurance policies will, of course come with a benefit illustration, the problem is that for most layman, they just look like rows and rows of numbers. We may even selectively choose the bigger amount to look at and assume that’s the amount of benefit we will get! This is where the discrepancy in payout comes about.

The Life Insurance Association (LIA) sets an upper limit to projections at 5.25 percent, and insurers have to present a second scenario 1.5 percentage points below the maximum projection.

Policyholders need to remember that the rates represent what insurers’ life funds are expected to achieve, bu do not mean that they WILL achieve. There is thus a need to understand that you may even achieve below the lower limit of investment returns since they are non-guaranteed.

You will also need to net out the policy expenses such as mortality costs, management expenses, and distribution costs which include commissions and other costs. After these deductions, you will then have an idea of the net returns.


Credits: MAS, LIA and MoneySENSE

Using this example of a benefit illustration provided by Moneysense, you can see that the difference of projected investment returns differ by about $20,000 when you compare the investment returns between the higher limit of 6.75% and lower limit of 3.75%.

Dispute Resolution

If you have a complaint about your insurance policy, you should first approach your insurer or the insurance representative who sold you the insurance policy. However, if you fail to reach an agreement, you can contact the Financial Industry Disputes Resolution Centre (FIDReC) for an independent alternative dispute resolution scheme. You must lodge your complaint with FIDReC within six months from the date when you failed to reach an agreement with your insurer.

Presently, FIDReC covers the following:

For claims between insured persons and insurance companies: up to S$100,000 per claim • For other claims (including disputes between banks and consumers, capital market disputes, third party claims and market conduct claims): up to S$50,000 per claim

Keen to know more about which type of insurance suits your needs best? Contact us here for a one-to-one consultation!

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