How to read a policy illustration: guaranteed vs non-guaranteed figures

When you are offered a whole life, endowment or other participating policy in Singapore, the advisor hands you a policy illustration. It is a long table of years, premiums and benefits, and it is the single most useful document for understanding what you are buying. It is also easy to misread, because it mixes numbers the insurer has promised with numbers it has merely projected. This guide shows you how to tell them apart.

What the illustration is for

The Life Insurance Association describes the policy illustration as a document that sets out the benefits of the policy, both guaranteed and non-guaranteed, together with its costs and charges. Those charges include the cost of the death benefit and the cost of distribution, which reflects the commission paid to the representative who sells you the plan.

Since 2 July 2018 a participating or non-participating bundled product must also come with two shorter documents: a cover page that highlights the key features and risks, and a bundled product disclosure document that walks you through whether a plan combining protection and investment is right for you at all. Read those first; then use the illustration to check the detail.

Guaranteed columns

The guaranteed figures are contractual. On a participating policy they usually include:

• The sum assured, the minimum paid on death or another covered event.
• Guaranteed cash or surrender value, the amount the insurer must pay if you cancel the policy in a given year. It is typically zero or small in the early years, because most of the early premiums go to expenses and the cost of cover.
• Guaranteed maturity value on an endowment, if the plan offers one.

MoneySense's comparison of term and bundled products makes the point simply: on a participating plan the cash value is made up of guaranteed benefits plus future bonuses that are not guaranteed, and the surrender value of the guaranteed part may be less than the total cash value shown. If everything else on the page turned out to be zero, the guaranteed column is what you would still receive.

Non-guaranteed columns

The non-guaranteed figures are projections of bonuses or dividends from the insurer's participating fund. The LIA glossary explains that these depend on the fund's investment performance, the claims it pays and the expenses it incurs. Two kinds of bonus appear:

• Reversionary bonuses are added to the policy periodically. Once added, they become guaranteed, so the guaranteed column can grow over time even though future additions are not promised.
• Terminal bonuses are paid only when the policy ends, whether by claim, maturity or surrender, and can change until that moment.

Because bonuses depend on investment returns, the illustration shows them under two scenarios, and this is where the familiar percentages come in.

The two scenarios: 4.25% and 3.00%

Insurers are required to show at least an upper and a lower investment return scenario. For Singapore dollar policies the LIA caps the upper illustration rate; following the revision effective 1 July 2021, that cap is 4.25% a year, and the lower rate must sit at least 1.25% below it, giving a 3.00% cap for the lower scenario. Each insurer sets its own rates within those caps based on its fund's asset mix and expected returns, and it cannot illustrate above its own best estimate.

Three cautions the LIA itself gives:

1. The rates are illustrative only. They are not the upper and lower limits of how the fund will perform.
2. They are not the actual returns of any existing policy.
3. Actual bonuses may end up higher or lower than either column.

A fourth caution is ours: the percentage is the assumed return on the participating fund's investments, not the return on your premiums. After expenses, the cost of insurance and distribution costs are deducted, the yield to you at maturity is lower than the headline rate, and the illustration shows that separately.

Other lines worth finding

• Total distribution cost shows what selling the policy costs across the years, which helps you compare an advised product with a Direct Purchase Insurance version priced without advice.
• Effect of deductions shows how much of the projected value is absorbed by charges over the policy's life.
• Premiums confirm the amount, frequency and, for limited-pay plans, when payments stop.
• Yield to maturity or the equivalent line converts the whole projection into a single rate you can compare with other savings options.

Questions to ask before signing

MoneySense's checklist for life insurance is a good script. Ask the representative to explain every calculation, to say what happens if bonuses are lower than illustrated, and to confirm in writing which figures are guaranteed. Ask what the surrender value would be at the point you might realistically need the money, not just at maturity. And if a switch from an existing policy is being recommended, ask what you would lose by surrendering the old one, since early surrender values are often well below premiums paid.

A policy illustration is not a forecast. It is a structured way of showing you the floor and two possible ceilings. Buy on the floor, and treat anything above it as a hope rather than a plan.

Talk to an advisor

Illustrations from different insurers use the same caps but different assumptions underneath, and the honest comparison is in the guaranteed columns and the deductions. A licensed advisor can walk you through any illustration line by line, and our comparison pages show how plans on this portal line up. Use the portal's matching to find an advisor, or ask our assistant to decode a figure you do not recognise.

Sources

• Life Insurance Association Singapore — Illustrated Investment Rate of Return for Par Policies
• Life Insurance Association Singapore — Insurance Terms
• MoneySense — Life insurance: Comparing term and bundled products
• MoneySense — What to ask before buying life insurance