Read the financial values on your insurance policy
There are some stories recently about insurance companies paying lesser than what is expected by their clients. Were the financial returns justified, or is it just a case of mis-selling by the financial advisers?
We are not here to judge who is right or wrong. Instead, let us proceed with how to read the financial values of your insurance policies.
You are now reading part 2 of Understanding your insurance policies. In case you missed it, part 1 explains the general terms of your insurance policies.
Total premiums paid to date
The total premium paid to date indicates the amount you have paid in total after each respective policy year. This amount shown does not include premiums paid for any riders. This is due to rider having no cash value and does not contribute to the financial returns of the main insurance policy.
Whole Life Policies and Investment Linked Policies tend to have attached riders to enhance its overall health and protection coverage. It is important to take into account the premiums paid for riders if you are trying to calculate the break-even point of your insurance policy.
The financial values shown under the guaranteed column refers to the amount that you will receive in the event of death or the surrendering of your policy. This value should be higher as the policy years goes by. Guaranteed value by the insurance company will not change despite market fluctuations.
Note: The Guaranteed value indicated for Death and Surrendering of policy will be different. This is due to the insurance company paying out a claim in the event of death, against paying out a claim due to your voluntarily surrendering of policy
There are two columns of values shown under Non-Guaranteed. Currently, the projection for financial returns is based on 3.25% and 4.75% investment return. The basis for the projected returns is set by the Life Insurance Association (LIA). This shows how much you should be expected to receive if the participating fund achieves 3.25% or 4.75% investment returns.
Note: The values shown are not based on your policies achieving 3.25% or 4.75% investment returns. It refers to how much the insurance company will contribute towards your policies if they made that amount of investment returns.
*This is vastly different from your policies accumulating financial returns at 3.25% or 4.75% p.a respectively. Refer to the bottom of the article for the additional write-up.
The Death Benefit refers to the financial value paid by the insurance company to your beneficiaries in the event of your death. The Death Benefit includes a Guaranteed and a Non-Guaranteed amount. The Death Benefit should be higher as the policy years goes by.
Note: For some policies with a multiplier effect on death coverage, the Death Benefit may be higher initially up to a specific age (usually up to age 70). The financial values will then be lower once the multiplier effect expires and is replaced by a base Guaranteed and a Non-Guaranteed amount.
The same can be said for the coverages on health and protection riders with multipliers.
The Surrender value refers to the financial value you will be getting after you voluntarily surrender your policy. This value consists of a Guaranteed and Non-Guaranteed amount. Once the yearly bonus is declared for your policy, the Non-Guaranteed value for the corresponding year will be Guaranteed. Hence, the Surrender Value should be higher as the policy years goes by.
Note: There is a possible exception of the above for Investment Linked Policy due to mortality charges.
Related: Investment Linked Policy
Table of deductions
The Table of deduction states the differences between taking up the insurance policy and investing the premium yourself. You would also not be expecting Guaranteed financial values or any insurance coverage if you have done your own investment instead. These differences consist of the cost of insurance, distribution cost, expenses, surrender charges and expected financial returns to the shareholders.
Note: A portion of the health and protection coverage can be fulfilled by a term policy if financial budget is a current pressing issue.
Read about: Term Insurance: How does it work?
This consist of mainly the cost of the financial advice provided to you, which includes the commission paid to the adviser and the agency/ independent firm. This is due to your financial adviser requiring an income and their firm requiring business costs and profits.
How to know the financial progress of your insurance policies?
If a couple of years have passed since you purchase your policies, do not be shy to ask the insurance company for an updated Benefit Illustration. This is different from the yearly declaration of bonus you receive for your policy by the insurance company.
Note: The yearly declaration of bonus only states the rate of bonus for your policy and not the actual financial value in dollars and cents.
Are your financial goals on track?
Keep track of your financial goals and objectives and ensure your Insurance Portfolio is updated according to your life stages.
Read about: Managing your Insurance Portfolio
*Additional explanation on Non-Guaranteed Investment Returns:
One of the many roles of an insurance company is to generate financial returns for the company, shareholder and policyholder (You). As a policyholder, your premiums are being used to generate financial returns via investments by the insurance company. In return, you receive insurance coverage and certain long-term financial gains.
The risk of investing is reduced as you have a Guaranteed cash value on your participating policies. The projected rates of returns also have to factor in the cost of insuring you, market volatility and investment risks accordingly. The insurance company also have to average or smooth out the Non-Guaranteed returns in anticipation for bad financial years.
Hence, it may be a little unrealistic to expect all the investment returns to be given back to the policyholders as there are costs and risks involved throughout the whole process. Do consider Investment products if you are looking to reap the full financial returns on your funds.
Need a policy review?
Talk to your financial adviser.
Alternatively, Contact us and licensed financial advisers are available to talk to you.