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If you have an Participating Life Insurance policy, you would receive an annual bonus statement that provides an update on bonus declared for this year and the total accrued bonus so far.
In this article I highlight what are the important segments to zoom into and the key info to be gleaned from a bonus statement, using my own Tokio Marine policy.
But firstly, lets understand what is a participating policy and what it entails.
Participating Life Policy
A participating life policy has an investment element that offers policy owners potential of higher returns through investment, besides standard protection.
This is done by 'participating' in the growth (hence 'participating policy') of an investment fund (par fund) pooled together from other life policy owners, that invests into various assets such as funds, ETF, stocks and bonds.
The returns are then distributed to the policy holders annually in the form of bonus, called reversionary bonus. These bonuses are irreversible (ie insurance company can't suka suka take back your bonus). They form the non-guaranteed benefit payout in event of claim, which the amount depends on investment returns.
So what should we take note of in the Bonus Statement?
1 - Bonus Rate
Bonus Rate is based on Sum Assured (SA). In this case, for every $1,000 SA, bonus rate is $10. So for my $80k SA, it's $800.
There is another portion of bonus on the previous bonus that has been declared and accrued into the policy - 1% of accrued bonus. With my accrued bonus of $4,080.80 before the latest round, i get $40.81 for this portion.
2-Total Accrued Bonus
The latest accrued bonus after this round is $4,921.
Take out your thick policy contract statement and refer to the Benefit Illustration. Compare the total bonus to the non-guaranteed portion of sum assured, for basic benefit (usually Death) of the corresponding year, gives you an idea of the insurer's ability to generate returns close to its initial projected rate.
Note that there are two columns for the non-guaranteed portion - a higher and a lower returns projection. See which one is closest to the total bonus.
The bonus for the past 3 years have been the same. This is common, as insurers sometimes withhold bonuses during years with good investment returns, to top up to years with sub-par returns, in a bid to smoothen the bonus declaration.
4-Size of the Par Fund
The par fund for my plan is almost $5.9b. This is quite a big size, as it needs to cater to claims payout from entire pool of policy owners.
Can have a sense of the size of par fund compared to some common Unit Trust in the market.
Here shows performance of par fund in the past 3 years. This should largely follow general market trend.
Understand how aggressive the par fund is by the percentage of equities and fixed income.
At end of 2017, the fund had 27% in equities, a higher portion than 2016's 25%. Its top 5 holdings are the S&P 500 ETF and local 3 banks. Given the good run of these stocks last year, this explain the 10.55% investment returns.
Insurance plan bonus statement contains valuable info about the investment return of par funds, and gives a clue on how has the plan's performance match up to the initially projected rates.
Your insurer's bonus statement may have different format or different terminologies, but they should not sound too different from mine.