Taking part Insurance coverage Tariff Change 2021: How It Impacts You, Cash Information

From July 1, 2021, the projected rate of return for participating policies will be reduced. So this forecast has a very real effect on the products that insurers offer.

On June 3, 2021, the life insurance association announced that the exemplary return of the participating policies will be reduced from July 1, 2021.

The upper limit will be reduced from 4.75 percent to 4.25 percent and the lower limit from 3.25 percent to three percent. The last time this happened was over eight years ago.

The association was quick to warn that these numbers are for illustrative purposes only and do not represent actual returns for each participating policy. In fact, insurers have seen their participating funds grow sharply from 2020 onwards.

For example, NTUC Income and Prudential reported positive returns of 9.14 percent and 5.22 percent, respectively, for their respective participating funds.

All is well and good for insurers, but the exemplary rate cut has some very real implications for consumers.

According to the LIA, some life insurers could take this opportunity to review and redesign their products. Essentially, this means adjusting insurance benefits and premiums.

So here’s everything you need to know before the July changes roll out.

Illustrative prices over the years

As you can see, the guide values ​​determined by the LIA have only been revised downwards since the turn of the millennium. Whether or not an upward adjustment will be made is a guess, but don’t hold your breath.

Remember, however, that these are only forecasts and will not determine the performance of an insurer’s participating funds.

Take AIA, for example. Despite two exemplary interest rate revisions since 2013, the participating fund only fell below the lower limit in 2015 and 2018. His best result in recent years?

A net return of 10.5 percent in 2017, that’s more than double the projected return. In 2019 and 2020 it was similar with a plus of 9.5 percent and 8.5 percent.

OCBC’s insurance division, Great Eastern, also sang the same tune. The participating fund posted returns of 11.02 percent and 8.41 percent, respectively, in 2019 and 2020. The same applies to his second participating fund with a plus of 12.66 percent and 8.85 percent in the same years.

It seems that then things will turn out well and good. A 28-year-old financial advisor who prefers to remain anonymous told SingSaver, “This is a great move by LIA as it gives a more realistic view of insurers’ ability to meet reported returns based on current market conditions.”

But is that really all?

How are the participation guidelines affected?

At this point in time, existing policies are not affected. The LIA has also reassured consumers, saying they shouldn’t feel pressured to buy a new parity policy before July 1.

The insurers have not announced any changes either, because there are still three weeks until the new tariffs come into effect. However, that does not mean that things are not turning for some companies.

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The same financial advisor SingSaver spoke to said, “This change will prompt a revision of all current par policies as they must be in line with the new illustrated returns.”

“We will also use this opportunity to adapt our guidelines to the requirements and needs of the current generation in order to remain competitive and relevant. The changes can include changed rewards, better benefits and more customization, ”he added.

Hence, it seems that insurers are pushing this tariff change forward at different speeds. In any case, full clarity is granted by July 1, 2021.

It will be particularly interesting what insurers understand by “better supplementary services”, “more individualization” and “demands and needs of today’s generation”.

Are there any alternative options?

If you are satisfied with the participating fund and expense ratio of your insurer, then it goes on as usual. It has been shown over the years and with various insurers that these illustrative interest rate changes have no effect on their sub-funds.

Alternatively, if you are planning to purchase a participating policy, consider the BTIR (Buy Term, Invest the Rest) technique. Insurers try to keep their expense ratio low in order to improve returns for their customers and themselves, but premiums may go up.

And with so many low-cost investment opportunities available, there’s no better time to try this strategy out.

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Take robo-advisors, for example. Almost every platform in Singapore has an overall annual administration fee of between 0.4 percent and one percent.

Some even offer insurance policies to stand out from the crowd, like MoneyOwl and StashAway. Others, like Endowus, allow you to invest your CPF and SRS funds and expedite your retirement plans.

Additionally, investing in stocks is no longer the costly activity it used to be as online brokers cut commission fees left, right, and center. The minimum commission per trade still depends on the platform, but you can say goodbye to double-digit numbers.

In addition, online brokers provide easy access to ETFs so that you don’t have to laboriously select individual stocks.

Finally

Given the current economic climate and the declining performance of the bond market in recent years, this exemplary interest rate change is not a shock.

The announcement isn’t unprecedented either, as a previous tariff change was enacted in 2013. However, don’t worry as it will not affect the participating policies that you are adhering to.

The financial advisors SingSaver spoke to agreed, saying that individuals should continue to carefully plan their finances instead of falling victim to the FOMO.

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“Discuss with your trusted advisor what plans you need and whether they suit your needs,” said the 28-year-old financial advisor of the need for individuals to continue carefully planning their finances. “Don’t rush to get plans just because the illustrated prices change, but because you actually need them.”

Another thing you could do? Instead of taking projected values ​​at face value, take a look at the performance of each insurer’s participating funds.

“Many people think that these projections are either true or guaranteed which is false. And many potential customers are usually difficult to sell even with these (participation) plans. Be sure to read the terms and conditions, embargo periods and product features! ”Advised a 26-year-old financial advisor.

The participating funds are not subject to change, but the participating guidelines themselves will either be realigned or completely revised.

While insurers are taciturn, you can be sure that they are working hard behind the scenes. So do your behind-the-scenes work before you rush to buy a policy.

This article was first published on SingSaver.com.sg.