By Gwendoline Tan
If you’ve only got a minute:
- When you purchase an endowment plan, you will receive the following policy documents: Your Guide to Life Insurance, a cover page, policy illustration, product summary, and bundled product disclosure.
- Understanding your policy documents helps you make informed financial decisions that meet your goals and needs.
- The policy illustration is important as it illustrates the projected value of your endowment plan upon death, early surrender or maturity.
When buying insurance, we often focus on potential returns or coverage, especially when dealing with bundled products. This includes endowment plans, which combine insurance coverage with an investment component to grow your assets.
Equally important, however, are the supporting policy documents. Uniform across the industry and required by the Life Insurance Association of Singapore (LIA), they are designed not just for regulatory purposes, but to empower you to make sound decisions.
5 key policy documents—Your Guide to Life Insurance, a cover page, the policy illustration, product summary, and bundled product disclosure — illustrate the projected benefits, charges, and policy terms. This helps policyholders to set clear expectations and protect their interests.
1.Your Guide to Life Insurance
This booklet is produced by the LIA with the aim to provide basic details about life insurance products and distribution channels in Singapore.
It also outlines the general sales advisory process of financial representatives in Singapore, as well as your commitment and responsibilities as a customer, ensuring a well-informed purchasing experience.
2.Cover page
The cover page highlights key features, risks, and any compulsory riders of the policy.
It also includes other important information, such as an explanation on a 14-day free look period that starts from the day you receive the policy documents. During this period, you can cancel your plan if you find that the policy is unsuitable, and the insurer will refund the premiums less medical and other costs you have incurred.
3.Policy illustration
This document, previously known as the “benefit illustration”, provides detailed information on your policy’s potential growth over time. From it, you can also gauge the respective payouts upon the death of the insured person, surrender, or maturity of the policy.
Here's an example of a policy illustration for a limited pay participating endowment policy like Manulife GrowSecure, tailored for a 25-year-old non-smoking male. Limited pay endowment policies involve premium payments over a fixed, shorter period, while coverage and benefits continue till maturity.
The sheer volume of numbers involved here is enough to make anyone go cross-eyed, but fret not! Decoding them all is not rocket science.
The top section outlines the policy specifics, where it is a limited payment endowment policy with a 16-year term and an annual premium of S$13,610 over 5 years. Premiums can be paid monthly, quarterly, semi-annually, or annually, with the annual option being the most cost efficient.
This can be seen as 12 monthly payments of S$1,168 amounts to S$14,016 for the year, which is S$406 more than the annual premium of S$13,610.
Now let’s look at the tables, terms used, and what they mean for you as a policy holder and life insured.
End of policy year/age and total basic premiums paid to-date
The 1st column of each policy illustration table, “End of Policy Year/Age”, shows you each year the policy is in force and your corresponding age at that year. In this example, you will be 30 and have paid the last premium for this policy by the end of 5th year (since it has a payment term of 5 years).
The 2ndcolumn, "Total Basic Premiums Paid To-Date," reflects the cumulative premiums paid each year. This amount increases by S$13,610 each year until the 5th year, after which it remains at S$68,050 as no more premiums need to be paid.
Guaranteed and illustrated rates of return
Payouts are categorised into guaranteed and non-guaranteed returns, with non-guaranteed returns being dependent on the performance of the participating fund.
Since the non-guaranteed returns face a certain volatility, the LIA has set guidelines for insurers to provide 2 different scenarios of investment performance for the underlying fund. They are currently 3% and 4.25% and are reviewed by the LIA annually to ensure their ongoing relevance and appropriateness. Before 1 July 2021, these illustrated rates were 3.25% and 4.75%, respectively.
These illustrated rates help you understand potential payouts under different market scenarios. They are not guarantees, nor do they represent the maximum or minimum possible returns of the participating fund. Your actual payout will depend on the participating fund's real-world performance and any applicable costs.
Death benefit
This section details the payout upon the insured person's death before the policy matures. Since an endowment plan is a bundled product, the insurance component of the policy usually ensures that the death benefit is always higher than the total premiums paid, as can be seen comparing the 2nd and 3rd columns.
For instance, should you pass away on the 6th year of the policy, your beneficiary will receive a guaranteed death benefit of S$71,453 plus a non-guaranteed component which will only be known with certainty on the 6th year of the policy.
As a rough gauge, if investment returns have been consistent at 3%, you can expect a payout of around S$72,614 (sum of guaranteed amount and S$1,161). If investment returns have been consistently at 4.25%, you can expect a higher amount of S$73,035 (sum of guaranteed amount and S$1,582).
Surrender and maturity value
The "surrender value" indicates the amount you'll receive if you terminate the policy early. The "maturity value" represents the payout you'll receive if you hold the policy until the end of its term.
Using the same 6th year reference as before, surrendering the policy early yields a guaranteed return of only S$16,084. Even with the non-guaranteed element at 4.25%, the total (S$17,165) represents a loss of nearly 75% of the premiums paid.
This is why surrendering your policy is not likely to be a good idea as it usually comes with a heavy penalty.
Using the surrender values, you can roughly estimate when your policy breakeven point will be. This is the time where you can get back the full amount of your premiums paid or more, in the event you do have to surrender your policy early.
Based on the guaranteed benefits, the only time this happens is upon maturity. However, factoring in non-guaranteed component delivering a consistent 3% return, you'd breakeven between the 14th and 15th policy years. If the returns have been 4.25%, you will breakeven slightly earlier between the 13th and 14th policy year.
Table of deductions
The table of deductions highlights effect of deductions on your policy value, and the cost of surrendering your policy early.
The “value of basic premiums paid to-date” reflects the growth of your premium amount at the illustrated rates of 3% and 4.25%. This assumes that the full amount of the premiums was invested without any deductions for costs of insurance or other expenses.
The “effect of deductions to-date” is the accumulated value of the deductions for cost of insurance, distribution costs, expenses, surrender charge, expected tax payments, and expected transfers to shareholders.
The “total surrender value” represents the difference between the two.
Total distribution cost
This is the sum of each year’s expected distribution-related costs, including the costs of financial advice provided to you. This has already been accounted for when calculating your premium.
4) Product summary
This showcases the key features of your policy.
It should include the nature and objective of the product, details of the product provider (e.g. name and registration number), product benefits, commitment required from the client, any exclusions, pricing, fees and charges borne by clients, terms of withdrawal, surrender or claim, as well as any warnings and disclaimers.
5) Bundled product disclosure
This document helps you to understand what a bundled product is and whether the product you are considering is suitable for you.
In conclusion
Policy documents might seem a little dry or overwhelming at first, but they are one of the most important parts of your insurance plan.
It is worth taking the time to go through each section, especially the policy illustration, to understand exactly what you are signing up for.
If anything feels unclear, don’t hesitate to reach out to a professional advisor for guidance. Understanding your policy documents not only ensures transparency, but also empowers you to make informed decisions that truly align with your financial goals and needs.
