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5 Key pieces of Information to extract from a Benefit Illustration [Insurance Hack]

Posted 23 February, 2017 by Clearly
in Technical Smechnical

You’ve made the decision to buy an insurance plan – or at least to consider it.

You tell the agent to give you “something you can digest”.

He hands you a Benefit Illustration – a thick, boring looking set of tables and small font. Next to the colourful product brochure, it looks positively encyclopaedic. And drab.

Yet the Benefit Illustration is one of the most important pieces of documentation to understand before making a purchase decision.

This is where we step in and grasp your hand ever so gently to reassure you everything will be all right. Here are the 5 key pieces of information that you can extract from every Benefit Illustration.

And you should.

For this article, I will be using a sample Whole Life Policy from an undisclosed insurer. The annual premium is $1325.10. Whole Life Plans are par (participating) plans – meaning the policy owner participates in the ups (and downs) of the par fund the insurer has set up for this plan.

Some part of your premium goes into paying for insurance and other costs, while the remainder is placed into the par fund to generate returns.

 

1. Death Benefit Table

 

This is usually the first table that you will see in the Benefit Illustration. It highlights the guaranteed and non-guaranteed amounts of money that the insurer will pay out in the case of death. (Usually this benefit is also tagged to Total and Permanent Disability [TPD] as well as Terminal Illness [TI])

For simplicity and consistency, we will examine just one line in the table, which is line 7, indicating 7 years after the policy has been active.

 

 

A: Total Premium Paid To-date = $9275.70
This is 7 years worth of annual premium (7 X $1325.10 = $9275.70)

B: Guaranteed Death Benefit = $36,615
This is the amount that the insurer will pay out upon death. Note that this is the bare minimum payout of the policy

C: Non – Guaranteed Death Benefit = $953
This is the estimated amount that the insurer will also pay out upon death for this policy at this particular point in time, given that the fund has been performing at 3.25% annual returns right from the start date.

Note that the amount of death benefit is listed as $1,543 assuming the fund performs at an average of 4.75% yearly. The better the fund performance, the higher the payout. We will examine the origins of the 3.75% and 4.75% later.

D: Total Death Benefit = $37,538
Adding up the Guaranteed and Non-guaranteed components will yield this payout.

 

2. Surrender Value and Maturity Value

 

On to the next most prominent table in the Benefit Illustration. This is the table that is usually the most scrutinised for Whole Life and Endowment plans because it shows the indicative returns of the policy. Ironically it can also be the most wildly inaccurate. Let us take a closer look.

 

 

Again, zooming into line 7 as an example –

A: Total Premium Paid To-date = $9275.70
This is 7 years worth of annual premium (7 X $1325.10 = $9275.70)

B: Guaranteed Surrender Value = $4,943
After 7 years into the policy, this is the amount that you are guaranteed to receive back, should you surrender the policy. Note that it is less than the amount you have paid so far, and this figure only exceeds the total premium you have paid in year 30 ($20,467)

C: Non-guaranteed Surrender Value = $275
After 7 years into the policy, assuming the par fund is performing at 3.75% returns annually, this is the amount you get for surrendering.

Similar to the Death Benefit table, the better the performance of the par fund, the higher this amount will be.

Maturity Benefit
Usually shown as the last line in the Surrender Value table, when the policy has matured (or expired). Since this is a Whole Life Plan, there is no maturity benefit as the plan does not expire.

But the information provided is exactly the same as the Surrender values.

 

3. Projected Investment Rate of Return

 

Now we examine the mystery of the 2 investment return numbers – 3.25% and 4.75%. Many advisers use these numbers inappropriately and you may have heard explanations like:

  • Our company is confident of hitting these returns and more, that is why we publish it on our illustration
  • Just look at the 4.75% (The upper bound of investment return), which is the true figure.
  • These numbers are way too conservative. Our company has achieved more than 6% returns (or some other impressive sounding number)

The truth is a little more prosaic.

 

 

These numbers are merely best guess estimates of returns given this particular time horizon and risk profile of the par fund of the insurer, and it is standardised across all the insurance companies. For funds with lower investment horizons and less risk in the portfolio, the projected returns will be lower and vice versa.

Point a loaded gun at any investment head –  he will be the first to blurt out that investment returns can fluctuate wildly from year to year. And brace yourself: he actually has absolutely no idea how the par fund will perform this year.

So why use the 2 figures?

We just have to start from somewhere, and those 2 figures are set by the Life Insurance Association in Singapore for use in all the Benefit Illustrations.

So regardless of any wild claims and credible sounding theories that some agents may employ, those numbers are merely best guesses – the accepted long-term estimate if you will.

Best to consume them with a pinch of salt.

 

4. Table of Deductions

 

If ever there was a horror story told within any Benefit Illustration, here is where you might find it. It shows you how much of your the money will be “deducted” should you decided to surrender the policy prematurely.

 

 

Again, line 7 is our focus.

A: Total Value of Premiums Paid To-date = $9,275.70
This is 7 years worth of annual premium (7 X $1325.10 = $9275.70)

B: Value of Premiums Paid To-date, Projected at 3.25% annual returns = $10,563
This figure shows what your premiums would be worth, after 7 years of compound interest @ 3.25% per annum.

It is worth noting that you do not pay the insurer to purely invest for you, there is usually some degree of protection element (Insurance cost) embedded in the plan. But this shows what your money might have been worth had it been used purely for investment and compounded at 3.25% annually.

C: Effect of Deductions To-date, Projected at 3.25% = $5345
This is the total amount of premium that would be taken away (deducted) from you should you decide to surrender the policy at that given moment in time.

It is a mish-mash of Insurance cost, administrative fees, and also the distribution cost associated with the policy.

Subtract C from B and you get the Total Surrender Value (D), which is the exact same figure shown under the Surrender Value table for line 7 as well.

 

5. Distribution Cost

 

Last but not least, the last table found in a Benefit Illustration is usually glossed over, but actually needs to be highlighted by the agent to every customer.

It shows you the amount of money that is paid out in commission and services to the distribution channel. Much of that money ends up with your agent, and some of it goes to his manager and his manager.

 

 

A: Total Distribution Cost To-date = $742
This means a total amount of $742 has gone into the distribution of this policy, which is 56% of your first year premium (742/1325.10 = 0.56)

In this table, the number does not change after the 3rd year, indicating that the distribution cost has ceased to be applied after year 3.

Is this table important to you?

Yes and No.

Yes because it shows you much much the insurance agent and his agency is receiving – always good to know. Your agent is obligated to inform you!

No, because it will not change anything about the policy. No amount of gasping and complaining and angry noises will change those figures – that is left to the insurer to make the decision.

Many practitioners will say that this cost is merely for your information, and it is not an additional cost to you. It would be more accurate to think of it as a mandatory service charge (much like when dining in a restaurant) rather than a tip which you can control.

 

These are the 5 key pieces of information that your Benefit Illustration provides you. While the information presented may appear technical, it is useful to understand them at least from a conceptual point of view – lest anyone tries to pull a fast one.

Would you like to know more about any part of the Benefit Illustration? Share your thoughts and comments with us below!

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

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