On 2 June 2021, the Life Insurance Association of Singapore (LIA) announced that the life insurance industry in Singapore will revise the caps of illustrative investment returns used in policy illustrations, also known as the benefit illustration, for Singapore-dollar denominated participating (Par) policies. This will be made effective from 1 July 2021.
Here are 5 things to know about this latest change in policy illustration.
#1 Policy Illustrations Will Be Reduced From 4.75% p.a, 3.25% p.a. to 4.25%, 3.00% p.a.
Life insurers are expected to illustrate at least two scenarios; an upper investment return scenario and a lower investment return scenario to provide a realistic potential range of returns that policyholders can get from their Par policies.
Previously, this illustration was 4.75% p.a. for the upper investment return scenario and 3.25% p.a. for the lower investment return scenario. Effective from 1 July 2021, this will be reduced to 4.25% p.a. and 3.00% p.a. respectively. As such, you should expect to see the illustration in your Par policies projected returns to be based on 4.25% p.a. and 3.00% p.a from 1 July 2021 onwards.
#2 Policy Illustrations Are Not Supposed To Affect Actual Returns
While a policy illustration is crucial in helping policyholders to understand the level of returns we can expect from a participating policy, it does not have a bearing on the actual returns that policyholders get eventually. The actual returns that we get are determined by the performance of the participating fund, not what the policy illustration shows.
Rather, the policy illustration serves as an indication of the returns that a policyholder can expect if the participating funds achieve a return of 4.75% or 3.25%. Moving forward, these policy illustrations will be based on a return of 4.25% and 3.00%. This doesn’t imply that the participating funds will perform better or worse. The rates used are for illustrative purposes and do not affect the actual returns, including bonuses, of existing and future Par policies.
At the same time, it’s understandable that consumers will be wary that insurers themselves are going to illustrate a lower return. This, to some extent, will serve to lower the expectations that people have when it comes to the returns they can (or should) expect from their Par policies. That said, it’s important to recognise that the reduction in illustration for returns does not automatically mean we will get lower returns. The Par fund is supposed to provide the return based on what it generates, and not what the illustration says.
#3 Policy Illustrations Are Capped At 4.25% and 3.00%, Insurers To Use Lower Rates If Required
In response to the adjustment, people would focus on the revised rates of 4.25% and 3.00% moving forth. However, do note that both these rates are a cap, and not the default rates to be used as an illustration. The life insurer’s illustration should not be higher than the insurer’s view of the investment returns achievable over the lifetime of the Par policies. The upper illustration rate of 4.25% p.a. set by LIA is simply a cap. In short, you can go below it if required, but not above.
#4 Why The Need For A Downward Revision?
As shared by Khor Hock Seng, President of LIA Singapore, the “decision to make a downward revision on caps for investment returns assumed for policy illustrations is primarily in consideration of the sustained low-interest rate environment.”
In other words, the prolonged low-interest rate environment that we are currently seeing makes the revised range of projected investment returns more realistic and LIA’s move to revise the rates enables individuals to make better informed decisions.
Another point worth noting is that these return projections tend to reflect longer-term trends, as opposed to short-term interest rate changes. Unlike savings accounts offered by banks, we generally should not expect revisions to be made as frequently since Par funds are usually longer-term investments that should be less sensitive to short-term interest rate changes.
#5 You Do Not Need To Rush To Buy Any Policies
Last but certainly not least, it’s vital for us to emphasise once more that the revision of policy illustration will have no impact on actual returns on any existing or future Par policies. Again, the simple reason is that the rates are only for illustrative purposes. Our actual returns will depend on various factors including the performance of the par fund.
Think of this as changing the numbers in a math problem sum question. The type of question and exam format still remains the same. The only change will be the numbers used. The revised illustration does not improve or diminish the Par policies that you intend to buy or have bought.
So you do not need to rush to buy any policies before 1 July 2021 because there is no impact on any product or adjustment in returns. The only difference is that the policy illustration, which has no bearing on actual returns, will use a lower assumed rate of return.