Decoding your endowment policy illustration
If reading an insurance policy document gives you a headache, we’re here to help. Not with a painkiller, but by equipping you with the tools you’ll need to understand what is going on.
An endowment policy is a type of insurance product that is designed to meet your financial goals, and comes with an element of protection.
Endowment policies usually mature (end) after a fixed period of time. As such, it is particularly useful if you’re trying to meet financial goals that have different timelines.
Say you intend to buy a BTO flat and/or get married in the next few years. You could use the payout from a short-term endowment policy to help with your downpayment, and defray your wedding costs.
It’s different if your focus is on your child(ren) going to university in 10-15 years’ time, or if you want to start saving for your retirement. In this case, a policy that lasts longer would be more handy.
What You Get from an Endowment
Endowments have two types of structures: participating, and non-participating policies. Par policies, and non-par policies for short.
With par policies, the insurer collects the premiums and invests them as a collective pool. If you buy a par policy, you will get to share in the profit.
With non-par policies, your premiums are not invested together with the par fund. This means that you do not share in the profits of the insurer’s par fund, and you are not entitled to any non-guaranteed benefits.
|With participating policies, you get:||With non-participating policies, you get:|
The Endowment Plan Starter Pack
When you buy an endowment plan, you normally receive these documents:
- A Guide to Life Insurance,
This booklet is produced by the Life Insurance Association of Singapore, and provides you with general information about life insurance.
- Product Summary, and
This is a simplified description of your policy’s key features.
- Policy Illustration (previously known as ‘Benefit Illustration’).
These calculations provides an estimate of what your endowment plan is worth.
Now, to decode the Policy Illustration with the example below. In this example, the buyer is a 35 year-old male who is looking at a policy that lasts for 10 years.
* By Year 10, the non-guaranteed portion of the death benefits - assuming 3.25% - would come to $34,943.
** By Year 9, the policyholder would have paid $200,378 in premiums. Assuming a 3.25% return, his total surrender value is projected to be $161,804. Should he choose to surrender at this stage, he will get back less than the total premiums paid. If there is a bonus cut, the projected surrender value may be lower.
*** At Year 10, the maturity value - which comprises guaranteed and non-guaranteed values - is projected at $223,943, assuming a 3.25% return.
1. Policy illustration
The policy illustration estimates how much your endowment policy is worth.
The calculations show how much you would pay each year, and what you can expect to receive under various scenarios:
|Scenario||What you should look at|
You hold the policy until it matures (ends)
The maturity value
You cancel the policy before it is supposed to expire
You pass away before the policy ends
These payouts are often referred to as “bonuses”, and be broadly categorised in this manner: guaranteed or non-guaranteed.
Guaranteed bonus is the amount that the insurer promises you’ll get. Confirm, guarantee, double chop.
Non-guaranteed bonuses are not fixed. They are determined and declared on an annual basis. The actual amount you get depends a lot on the participating fund: the actual value of the fund’s assets, investment performance and investment outlook, and level of expenses incurred.
There are two types of non-guaranteed bonuses:
- Reversionary bonus: These are declared annually. Once declared, it will be considered part of your guaranteed benefit.
- Terminal bonus: This is an additional bonus that is paid when you end the policy early, make a claim successfully, or when the policy matures. Holding the policy for a longer time can give you a higher terminal bonus.
2. Policy illustration rates
Amount of bonus you can expect to receive, if the participating fund achieves the illustrated investment returns. This is only applicable if you have opted for a participating policy.
Typically, two investment return rates are used in the illustration: 3.25% and 4.75%. These rates have applied since 1 July 2013, and were announced by the Life Insurance Association Singapore.
These rates are used only for illustrative purposes and do not represent the upper and lower limits of the participating fund’s investment performance.
3. End of policy year/age
A side-by-side comparison of the policy’s age to your own age.
It allows you to track the total amount or premiums you would have paid each year, and when your policy will mature.
4. Total premiums paid to date
The sum of all the premiums that you have paid since your policy started, to the end of the policy year.
5. Guaranteed death benefit
The amount that the insurer promises (guarantees) to pay if the insured person dies.
6. Non-guaranteed death benefit
This is the variable bit of the death benefit, which depends on the investment returns of the participating fund.
In the policy illustration, this is calculated using the typical assumptions that the industry applies: 3.25% annually, and 4.75% annually.
7. Guaranteed surrender value
The amount you’ll get if you cancel the policy before it reaches full term. Surrendering the policy early usually means you’ll get back an amount that’s less than the premiums you’ve paid.
8. Non-guaranteed surrender value
The “bonus” to be paid on top of the guaranteed portion if you cancel the policy early.
9. Maturity value
The amount you could get back if you hold the policy until it matures.
Four More Useful Phrases
We’ve short-listed a few more terms that you may see in your endowment policy. If it’s not here, never fear – chances are, it’s in the insurance glossary.
|Insurance terms||What it means|
Some endowment policies allow you to withdraw cash, sometimes even annually.
If you choose to make cash withdrawals from your endowment policy, it effectively reduces the amount of money you have in the participating fund.
So don’t be surprised to see a lower net rate of return when the policy matures.
Guaranteed Yield at Maturity
The effective rate of return that the guaranteed component can give you each year – so long as you do not make any more cash withdrawals, and hold your policy until it matures (ends).
Total Illustrated Yield at Maturity
The potential rate of return that your policy can achieve each year. This rate includes both the guaranteed and non-guaranteed components of your endowment policy.
Total distribution cost
The amount that the insurer will pay to the distribution channel that sold the policy to you. It includes payments for commissions.