Tamper with your expectations.
That is the only way you will feel happier.
At least that is when you look at the bonus you can get from your insurance policies when they mature.
In recent weeks, we have been seeing a lot of discussion with regards to more transparency and communication on how much non-guaranteed bonuses the insurance policies are providing to policy holders.
Policyholders are not very happy that they are not getting the kind of returns what they THINK they should be getting.
Cash Value Policies
For the uninitiated, we can group insurance protection into 2 groups, those with cash values and those without cash values.
Your whole life insurance, limited whole life insurance, insurance savings endowments and universal life policies are policies with cash values.
When you buy such policies, you are TRANSFERRING the job of building wealth to the insurance company.
Your insurance premiums paid contribute to participating funds, which are either the main funds or sub funds formed by the investment managers in the insurance companies to meet the objectives of the various cash value insurance policies.
How well your insurance policies do will depend on the performance of the participating funds.
The participating funds invest in a combination of:
- government and corporate bonds
The 7 year historical performance of insurance company’s participating funds
Lorna Tan wrote a good piece in the Straits Times explaining to the readers the need to read the documents provided together with your insurance policies.
To be honest, I wonder how many people would want to read a document with so much “chim” terms.
The gem in the article is a summary of the 7 year returns of the various insurance companies:
It should be noted that this may not be reflective of your returns. The note emphasis that these are the most representative sub-funds of each insurer, which means that it excludes sub-funds meant for different strategies.
The most puzzling thing was what Lorna mentioned in the article:
According to LIA’s compilation of life funds’ returns requested by The Sunday Times, insurers Manulife, Prudential, AIA and Tokio Marine have achieved average returns of above 4 per cent per annum over a seven-year period ending 2014.
I got curious and decided to find out what is the compounded average growth rate of the participating funds in the table above.
If you look at the CAGR, they don’t look like above 4%, or does the average returns they are talking about is not the returns of these participating funds.
This return is not what you will get
If you read your benefits illustration, they will tell you that your projected returns depend on the investment performance of the fund.
There are cost deductions from the returns of this fund.
What this means is that the returns are LOWER than this.
They certainly do not look that far off from the surrender or maturity value of the past insurance policies my readers have told me about (read Does your insurance savings plan give you 3% to 5% returns?)
Comparing versus a Passive Singapore Stock and Bond Portfolio
In my table above, I have added three columns.
The first column is the yearly return of the STI ETF, an exchange traded fund whose job is to mimic the performance of the Singapore Straits Times Index, Singapore’s blue chip stocks.
The second column is the yearly return of the Nikko ABF Bond Fund, an exchange traded fund whose job is to mimc the performance of an index following a basket of Singapore Government and Quasi-Government Bonds.
The third column is the yearly return of a portfolio of 60% STI ETF and 40% Nikko ABF Bond Fund.
To be honest, the return of the STI ETF and ABF Bond Fund is not exceptional. The Singapore market have gone no where during this period.
The STI ETF returned 2.37% after factoring dividends, and ABF Bond performed better with 3.22%.
However, in the third column we see the beauty of the portfolio in minimizing volatility of the portfolio, and was able to also provide a better return of 4.02%.
What I understand is that participating fund tends to be more heavy on bonds, hence I feel a 40% bond allocation for the passive portfolio is a good measure.
A Passive Low Cost ETF Portfolio, is something a wealth builder like you can construct based on buy and hold and seems to have outperformed the various insurance funds.
To be fair, the STI ETF have been much of a disappointment during this period.
Comparing against the Singapore Savings Bonds
When the Singapore Savings Bonds first came out, there was a big promotional drive by insurance companies providing better return shorter term endowments.
If you held on for 10 years, the average return based on the past issues is 2.5%. This is not far off from what you see by the participating funds.
Consumers now have choices over insurance endowments.
There is no exceptional investment manager amongst the insurance participating funds
When many buy into a policy they may be buying into the idea that a reputed insurance company gives better and more reliable returns.
A look at the table shows that there are no clear outperformers in the 7 year period.
In fact, the performance of the fund is a function of the performance of the country.
Don’t expect your participating fund to be better than the others.
Why you are angry
This is because during the whole planning discussion, the numbers that are related to you are based on 3.25% investment return and 4.75% investment return.
A good planner would have gotten the message across, but if you want to clinch the sale, showing a better projected figure connects better with the clients that the cash value would meet his or her wealth goals.
The client will always be ANCHORED to that 4.75% figure provided.
In fact, he or she would have thought the 4.75% figure is what they would get, only to shocking realize their returns is based on that figure and not that actual figure.
The lesson to be learn here is that while you TRANSFER the responsibility of wealth building to the insurance company, your returns is still governed by the same conditions as the alternative, which is a passive Singapore market portfolio.
I am likely to get insurance agents telling me, look past this 7 years. The returns are much more respectable.
Well here is the problem. Just like the recent discussion, there is such a lack of transparency over the par funds returns.
If the data is in one place that is readily available, more comparison can be done.
What should you do as a policy holder?
Be aware that non-guaranteed returns is for real.
Hope for the best that the next 5 to 10 years when your policy matures, the market goes on a good run.
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