If you are an owner of a participating policy, you would be receiving a set of letters from your insurer just about now.
Participating policies are those that participate (duh!) in the ups and downs of an insurer’s investment fund set up for this purpose.
You can generally expect 2 sets of letters:
One that updates you on how the Participating (par) fund has performed for the year, and a second letter which shows the actual Bonuses accrued under your policies.
So what’s the big deal?
Its been said that the biggest secrets are those that are right in front of us, hiding in plain sight. If you think that these humble letters contain no surprises – then you might just be in for one yourself.
Grab the nearest magnifying glass and we will begin our investigative journey.
Participating Fund Update: Primer to a deeper mystery
The (ostensible) purpose of the Participating Fund Update (PFU) is to update the policy holder about how the fund has performed, what expenses have been incurred, and comment about how the various assets classes are faring. It also shows the bonus rate that is declared for the year.
That’s all and well. Except for one glaring omission that begs to be spotted. I’ll upload my own PFU gotten this year so you can play spot-the-omission with me:
See it yet? Well, you might say that its only specific to this particular insurer. Actually, I’ve got news for you:
By this time it’s normal to feel the hairs on your nape go quite stiff. What conspiracy is this?
What in the world is this rubbish about “maintaining the bonus rates” but not telling me what it is?
Logic would suggest that if the fund did well, then bonus rates should go up and vice versa. Sure, insurance companies practice smoothing, i.e. ensuring bonus rates are declared at a sustainable rate so there will always be some left during the lean years.
But the actual rate is nowhere to be seen. Is it 4.64%? 4.75? 1.5%? Goodness only knows.
No matter. Perhaps the PFU is only a generic document, and the actual Bonus Statement will display the rate after all. In case you were wondering, I saved my PFU from the previous year and this is how it looks:
The conversation goes like this in my head.
Hey! What’s the bonus rate for this year?
“Same as last year.”
Ok, what was the bonus rate last year?
“Same as the year before lah! You retarded?”
It is in this combined state of confusion and curiosity that we gingerly peel open the Bonus Statement.
The Bonus Statement: The plot thickens
The Bonus Statement (henceforth abbreviated as BS) contains more specific information relevant to each policy holder. It shows the bonus amounts declared under each particular policy.
Again, I use my own BS (stop snickering!) for illustration.
And here’s the BS from the year before
At this point your inner Robert Langdon is surely roused. How are the Reversionary Bonuses calculated? Where are the calculations? And where is the damn bonus rate?
I am sorely tempted to say that I took a chartered flight to Rome, fought with the mafia there, and had a divine intervention from the pope before solving the mystery.
Unfortunately the truth is a little more prosaic.
All I did was take a chartered walk to the kitchen, fought my own laziness, and had divine intervention from a coffee I was nursing.
Then suddenly it made sense.
Cracking The (Da Vinci) Code: Product Summary to the rescue
As always, it is the details that matter. Dragging out the original Product Summary received when I first bought the policy:
Then the calculations tallied marvelously.
My Basic Sum Assured: $36,615.
Bonus rate for Year 1: 5.50/1000 * $36,615 = $201.38
Bonus rate for Year 2: 5.50/1000 * $36,615 + 30/1000 * $201.38 (compounded from Year 1) = $207.42
Total Accrued Bonus = $201.38 + $207.42 = $408.80
Holy shit. What are the implications?
- Your bonus rates have already been predetermined right from the start, and the insurers try not to change it.
- For my case, the bonus rates are linked to the par fund performing consistently at 4.75% growth annually. (The higher illustrated growth rate in my Benefit Illustration)
- The Illustrated 4.75% growth rate does not mean bonuses accrue at that rate. (Indeed, less so)
Based on a long term 4.75% annual performance of the par fund, the calculated rates of return (on my total premiums paid) shown on my Benefit Illustration are:
4.36% per annum compounded (Death Benefit)
3.08% per annum compounded (Surrender Benefit)
Why the discrepancy?
Because the par fund is also used to pay out claims, maturity and survival benefits and surrenders. These eat into the fund performance – and serve to remind you that insurance is really about for protection, instead of investment.
What’s the next mystery to unravel?
So here we have it. Mystery solved. The bonus rate has always been made known to us, except that we do not pay heed to it.
My next question would then be: Why are insurers not making this more transparent? Why go through all the smoke and mirrors about alluding to a bonus rate that was set in the past, yet not explicitly made known?
Like any good mystery-detective novel, we will address this in the next part of this series.
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