We left off the first article by wondering why are insurers not making the bonus rate more transparent, but rather make us hunt for a piece of information that is not even included in the bonus statement itself.
If you haven’t read it already, do yourself a favor and solve the mystery of the bonus statement with us right here:
So what’s the next step to making the Bonus Statement crystal clear? It all starts with transparency and openness, as well as giving policy holders the real information that is helpful – not a load of bs (its regular abbreviation, not bonus statement)
In an alternate universe, where people are candid and upfront with their intentions, here is how we think the Bonus Statements should look like:
The (Totally Clear) Participating Fund Update
Dear Policy Holder,
I am supremely pleased to update you on the performance of our Participating Fund. On one hand, you should really care about this letter because it affects the bonus that you will be getting. On the other hand, you need not care since there is absolutely nothing you can do to affect the rate. (Not even shouting at our board of directors during the AGM)
Anyway, on to the task at hand. As of December 2016, the value of our fund was $10 billion. Holy shit that is a big sum. But don’t get too excited, you don’t get to spend that money at all.
We also paid out $900 Million in benefits to policy holders last year. Though it doesn’t really mean anything, its still fun to throw out big, impressive numbers.
Throughout 2016, our Par Fund made an investment return of 4.324223321%, which is FANTASTIC given the lousy conditions of the markets out there. Fish prices are going through the roof, and eggs are getting more and more pricey by the day. Daaayum…. markets are bad right now. I need to stress that markets are volatile and choppy and unpredictable, so as to make our returns seem FANTASTIC. Else any idiot with a fund will do exceptionally well too, in good times.
(FYI, this return is great compared to the returns that “some” sovereign funds are providing, which is a real mystery since they are supposed to be staffed with the best people and make only the best decisions. Oh well. They should have consulted me long ago, serve them right. Heard one of their head honchos had to leave to take care of a construction issue along Boxley? Foxley? road.)
For this year’s bonus declaration, we will be maintaining our bonus rates as last year, which is another way of saying: We still are keeping our commitment to you, based on a document you signed years ago. For now, that is. Unfortunately since this letter is a generic one, you will have to hunt for your policy summary to dig out the actual bonus rate in there. Sorry.
Needless to say, we will continue to manage the Fund prudently to provide you with a stable return for the long term. I needed to throw in the phrase “long-term” to get off the hook for any short term mishaps, you know the drill.
That’s all from me this year. Stay frosty and remember to pay your premiums, y’all.
This letter should then be followed up by the actual Bonus Statement.
The (Absolutely Transparent) Bonus Statement
For the Year Ended 31 December 2016
This Statement shows you the bonuses added to your applicable Participating Policies as well as the Illustrated values of these Policies in the future. It isn’t guaranteed to make sense to you, but hey, it will show you. (If you choose to ignore this letter, we would be grateful: Less scrutiny for us)
*Illustrated Death Benefit is the amount of Death Benefit you will receive if we keep up this rate of return for your policy, many many years into the future. It lets you have a future value to cling on to, no matter how far in the future it may be. Also, we like big numbers.
**Illustrated Surrender Value is the surrender proceeds you will receive if we keep up this rate of return. As you may have noticed, it is far lower than your Death benefit, which is why we included this number: To subtly influence you not to surrender.
Right now you might be having this question: How are the rates calculated? And where are the bonus rates?
Being the transparent Insurer we are, here is the relevant portion of your Policy Summary (you signed it years ago) that we based the calculations on:
$3 per $1000 sum assured and it compounds at a rate of $3 per $1000 of bonuses already declared. We deliberately avoided using percentage terms because it looks really bad (rate of return is 0.3% p.a, and compounded at 0.3% p.a). Remember, we are all for using big numbers to look impressive.
End of Statement
The Big Picture
We’ve poked enough fun at the Bonus Statements, so lets end with a fair note.
The returns seem low (0.3%) only because they are applied to your Sum Assured, a far bigger figure than your premiums paid (the actual long term yield is 4.36% compounded for the long term, based on your premium paid).
Policies are generally long term products, and hence you can expect plenty of variations across the years. That is why insurers cannot include specific details in each of your Bonus Statements (it would be possible, but costly)
The aim of these 2 articles is meant to draw attention to the numbers included in policies, and to help you understand them better.
Do you have any questions or comments? Leave them in the comments section below, we would love to hear what you think!
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.