With effect from 1 July 2013, all the life insurance companies will adopt a set of lower investment returns of 4.75% p.a. and 3.25% p.a. for use in the benefit illustrations for Singapore-dollar denominated Participating (“Par”) policies. Participating policies are those that have a share of the allocations of the Participating (“Par”) Fund.
This is a reduction from the 5.25% p.a. and 3.75% p.a. used before 1 July 2013. The new set of lower rates used in the benefit illustrations reflects the current low interest rate environment.
The benefit illustration is a useful tool that can be used to illustrate the level of policy benefits assuming the Par Fund earns a certain level of investment returns. You will usually use a guaranteed column and two other columns showing projected returns based on two set of values.
However, we should always remember that the rates used in the benefit illustration are purely for illustrative purposes and do not represent upper and lower limits of the investment performance of the Par Fund. Most of the time, the actual returns of a policy will deviate from those shown in the benefit illustrations.
Even if a Par fund achieves a certain level of return, an insurer will sometimes use the principle of “smoothing” to declare bonuses that are higher or lower than the amount that should be given.
Therefore, do not rely too much on the projected values when buying an insurance policy. This applies even more in the case of investment-linked policies, as the market return of the fund is guaranteed to be (vastly) different from that shown in the benefit illustrations.