Most of us like the sound of the word “guaranteed”, especially when it comes to our money.
If someone told you an investment came with a capital guarantee, you would probably assume that your original investment is protected no matter what happens. Even if markets fall, you would expect to get back at least what you put in.
That is why recent concerns raised by the Monetary Authority of Singapore (MAS) and the Life Insurance Association (LIA) over the phrase “capital guaranteed upon death” deserve attention.
While the two phrases sound similar, they can mean very different things. More importantly, misunderstanding the difference could affect how Singaporeans make investment decisions, which can impact their retirement savings and long-term financial plans.
Why The Regulators Are Concerned
The issue centres around how certain investment-linked policies (ILPs) are being marketed.
According to MAS and the LIA, there are concerns that some consumers may interpret the phrase “capital guaranteed upon death” as meaning that their investment capital is fully protected.
However, that may not actually be the case. This is because the guarantee only applies under a specific circumstance: when the policyholder passes away.
This difference is important because consumers could end up believing they are taking less risk than they actually are. For example, since ILPs consist of investment exposure, returns are typically tied to market performance, and the value of the ILP can decline, with additional fees layered into the ILP that eat into overall returns.
What Does “Capital Guaranteed Upon Death” Actually Mean?
The easiest way to understand the concept is through a simple example.
Imagine investing $100,000 into an investment-linked policy.
The money is invested in underlying funds whose value can rise or fall depending on market conditions. If markets perform well, the value of your investment could increase. If markets perform poorly, the value could fall below your original investment amount. This is before fees are included.
Now, suppose the policy includes a “capital guaranteed upon death” feature. In that case, if you pass away while the policy is in force, your beneficiaries may receive at least the amount you originally invested, subject to the policy’s terms and conditions.
The key point here is that the guarantee only applies to the death benefit. It does not necessarily mean that you can surrender the policy in the future and receive your full $200,000 back. It also does not mean that the investment value cannot decline while you are alive.
Why Many People May Misunderstand The Difference
When most people hear the phrase “capital guaranteed”, they naturally assume several things.
First, they may assume their original investment cannot lose value, or that, even if it does, their principal is protected regardless of market conditions. They may also assume they can withdraw their money without suffering losses. These assumptions are reasonable because that is how many people may naturally interpret the word “guaranteed”.
However, these assumptions are wrong.
The investment component still faces market risk, and if markets decline and the policyholder decides to surrender the policy or withdraw funds during their lifetime, they could potentially receive less than they originally invested.
Logically, a trusted adviser should be able to easily clarify these misconceptions. However, this is precisely where problems can arise. Not all advisers explain these risks clearly enough for clients to fully understand what they are buying, which can lead to expectations that do not match reality, or, as some would put it, mis-selling.
Not All Guarantees Protect You In The Same Way
One useful question to ask whenever you see the word “guaranteed” being presented to you is: guaranteed under what circumstances?
Different financial products offer different types of guarantees.
For example, CPF retirement savings earn government-backed interest and CPF LIFE provides lifelong payouts, helping retirees manage the risk of running out of money.
Singapore Savings Bonds allow investors to redeem their principal while earning interest backed by the Singapore Government. Fixed deposits offer guaranteed interest rates over a specified period and are protected under the Singapore Deposit Insurance Scheme up to applicable limits.
Some endowment plans provide guaranteed maturity values if held until the end of the policy term, although surrendering early may still result in losses.
Investment-linked policies are different because returns are largely driven by the performance of the underlying investment funds. Even where certain guarantees exist, investors need to understand exactly what is guaranteed and when the protection applies.
Read Also: Why Guaranteed Returns On Your Investments Isn’t Always Guaranteed
The recent concerns raised by MAS and the LIA serve as a useful reminder that not all guarantees are created equal. A phrase like “capital guaranteed upon death” may sound reassuring, but it is not the same as having a capital-guaranteed investment.
Before committing your money, it is worth taking the time to understand exactly what is being guaranteed, when the guarantee applies, and under what circumstances you could still lose money. Ultimately, the word “guaranteed” should never be the end of the conversation. It should be the starting point for asking more questions.
Read Also: 6 Investments In Singapore That Provide Guaranteed Principal And Returns
Photo Credit: DollarsAndSense/Raymond Quek
