Upcoming Major Changes on Participating Policies
Recently Life Insurance Association (LIA) Singapore announced that from 1 Jul 2021, the Illustrated Investment Rate of Return for Participating Policies will be revised downwards. The Upper Illustration Rate will be revised from the current 4.75% to 4.25%, and the Lower Illustration Rate will be revised from the current 3.25% to 3.00%. Many clients and friends asked me what the impact of this revision will be. I have my answer in this article.
Photo by Micheile Henderson on Unsplash
The Story from the Beginning
The revision of Illustrated Investment Rate of Return for Participating Policies is a result of two strong trends in the recent years.
Firstly, the Monetary Authority of Singapore (MAS) has stricter regulation on the capital investment for insurance companies. For a long time, MAS has been requiring insurance companies to invest their capital based on the risk profile of the product where the capital comes from. Participating Policies are low risk products, most of which have a guaranteed pay out that is higher than the principal, so the capital from Participating Policies can only be used to invest into a relatively low risk investment portfolio. In early 2020, MAS revised its requirements to require insurance companies to match the investment cashflow with the expected pay out cashflow to policy holders. This change further restricted the investment vehicles for Participating Policies, resulting in higher allocation to bonds and especially government bonds.
Secondly, the world has been in a low interest rate environment since the global financial crisis in 2008. Although the interest rates hiked up a bit from 2017, the unexpected COVID-19 pandemic in 2020 again forced the central banks to turn back to low interest rate policies. In such an environment, the yields from bonds especially government bonds are usually very low.
Because the capital from Participating Policies has a higher allocation to government bonds, and the yields from government bonds are low for long, LIA concluded that insurance companies should lower policy holders’ expectation on the investment return from Participating Policies. So they decided to revise the Illustrated Investment Rate of Return downwards.
Changes on Participating Policies
1. Existing Polices Are Not Affected
Many clients and friends are concerned whether their existing Participating Policies will be affected by the upcoming revision. The answer is no. Only those policies sold from 1 Jul 2021 onwards will apply the updated Illustrated Investment Rate of Return.
2. Some Participating Products Will Be Taken off the Shelf
Under the current difficult situation, new Participating Polices are struggling to provide a guaranteed pay out that is higher than the principal, and at the same time offer an attractive investment return to policy holders. As a result, some Participating Products will be taken off the shelf from 1 Jul 2021. We may have to wait until the interest rate hikes up to a certain level when we see these products again.
3. The Remaining Participating Products Will Have a Lower Bonus Rate
Even for the remaining participating products, from 1 Jul 2021, newly sold policies will have a lower bonus rate giving the same insurance premium. This is to apply the revised Illustrated Investment Rate of Return.
According to the above situation, if you prefer endowment plans which provide a guaranteed pay out that is higher than the principal, or whole life insurance (including critical illness insurance) plans, and you have an intention to apply one in the near term, it will be a wise choice to apply by 30 Jun 2021. Because these two types of insurance plans are both Participating Policies. You are welcome to contact me directly if you have any inquiries.