Come July 1, 2021, the projected rate of return for participating policies will be reduced. Here’s how this projection has a very real effect on the products that insurers offer.

On June 3, 2021, the Life Insurance Association announced that the illustrative rate of returns for participating policies will be reduced from July 1, 2021 onwards.

The upper bound will be slashed from 4.75 per cent to 4.25 per cent, and the lower bound from 3.25 per cent to three per cent. The last time this happened was more than eight years ago.

The Association was quick to caution that these figures are solely for illustrative purposes and not the actual rates of return for each participating policy. In fact, insurers have seen their participating funds emerge strongly from 2020.

For example, NTUC Income and Prudential reported a positive return of 9.14 per cent and 5.22 per cent for their respective participating funds.

All might be well and good in the insurers’ hood, but the illustrative rate cut has some very real implications for consumers.

According to the LIA, some life insurers might take this opportunity to ‘review and redesign’ their products. Essentially, this means an adjustment to policy benefits and premiums.

So, here’s everything you need to know before the changes are implemented come July.

Illustrative rates through the years

As you can see, the illustrative rates determined by the LIA have only been revised downwards ever since the turn of the millennium. Whether an upward adjustment will be performed is anyone’s guess, but don’t hold your breath.

However, recall that these are just projections and do not determine the performance of an insurer’s participating funds.

Take AIA for example. Despite two illustrative rate revisions since 2013, its participating fund has only dropped below the lower bound in 2015 and 2018. Its best showing in recent years?

A net return of 10.5 per cent in 2017, which is more than double the projected return. It was a similar story in 2019 and 2020, with a 9.5 per cent and 8.5 per cent gain respectively.

OCBC’s insurance arm, Great Eastern, has been singing the same tune as well. Its participating fund reported a return of 11.02 per cent and 8.41 per cent in 2019 and 2020 respectively. Ditto for its second participating fund, with a 12.66 per cent and 8.85 per cent gain in the same years.

It appears that things will be fine and dandy, then. One 28-year-old financial consultant, who prefers to remain anonymous, told SingSaver: “This is a great move by LIA, especially since it gives a more realistic view of insurers’ ability to fulfill illustrated returns based on current market conditions.”

But is it really all there is to this?

How are participating policies affected?

At this point in time, existing policies aren’t affected. The LIA has reassured consumers too, saying that they ‘should not feel pressured to buy a new par policy before July 1.

Insurers have not announced any changes either, given that there are still three more weeks before the new rates kick in. This doesn’t mean the gears aren’t turning for some companies, though.

The same financial consultant SingSaver spoke to said: “This change will prompt a revamp of all current par policies as they have to be in line with the new illustrated returns.”

“We will also take this chance to upgrade our policies to suit the demands and needs of the current generation, so as to remain competitive and relevant. Changes can include revised premiums, better supplementary benefits, and more customisation”, he added.

Therefore, it appears that insurers are proceeding with this rate change at different paces. In any event, full clarity will be granted come July 1, 2021.

It’ll be especially interesting to see what insurers mean by ‘better supplementary benefits’, ‘more customisation’, and being able to ‘suit the demands and needs of the current generation’.

Are there any alternative options, then?

If you’re comfortable with your insurer’s participating fund and expense ratio, then it’s business as usual. It’s been demonstrated across years and various insurers that these illustrative rate changes don’t affect their par funds.

Alternatively, if you’re planning to purchase a participating policy, you might want to consider the BTIR (Buy Term, Invest the Rest) technique. Insurers aim to keep their expense ratio down to improve returns for both their clients and themselves but premiums will potentially rise.

And with the abundance of low-cost investment options, there’s no better time to give this strategy a shot.

Take robo-advisors, for instance. Almost every platform in Singapore charges an all-in annual management fee between 0.4 per cent and one per cent.

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

Moreover, investing in equities isn’t the high-cost activity it used to be, with online brokerages slashing commission fees left, right, and center. The minimum commission per trade still depends on the platform, but you can bid farewell to double-digit figures.

Furthermore, online brokerages grant easy access to ETFs, so you don’t have to painstakingly select single stocks.

In conclusion

This illustrative rate change isn’t a shocker, given the current economic climate and seeing that the bond market’s performance has been dipping in recent years.

The announcement isn’t unprecedented either, with a previous rate change being enacted in 2013. That said, fret not because this doesn’t affect the participating policies that you’re holding onto.

Financial consultants SingSaver spoke to concurred, saying that individuals should still diligently plan their finances rather than falling prey to FOMO.

“Do run through with your trusted advisor on the plans that you require, and whether they suit your needs,” the 28-year-old financial consultant said, on the need for individuals to still plan their finances diligently. “Do not rush to get plans just because illustrated rates are changing, but rather because you actually need them.”

One other thing you could do? Take a look at the participating fund performance of each insurer rather than taking projected values at face value.

“Many people think that these projections are either true or guaranteed, which is false. And a lot of prospective customers are usually hard sold on these (participating) plans too. Be sure to read about the terms and conditions, lock-in periods, and product features!”, advised a 26-year-old financial consultant.

Participating funds aren’t undergoing any changes, but the participating policies themselves will be either rejigged or revamped entirely.

Although insurers are tight-lipped, you can be sure that they’re working hard behind the scenes. Therefore, do your behind-the-scenes work too before rushing out to purchase a policy.

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