In the past 2 years, there have been some significant changes to the health insurance front (Your private Medishield plans).

In the last 5 years, we have also seen some of the fastest growth rates in the premiums on the health insurance and the additional private riders that you could purchase to reduce the out-of-pocket cost that you would pay if you get hospitalized.

I been trying to wrap my head around these changes but never got around it but I didn’t have the bandwidth to get around researching on it.

Last year, we had a brief on the changes to the health insurance plans and the impact.

The team that did the brief did such a great job framing the decision tree we should go through step by step to consider which is the appropriate health insurance.

I thought its better I get my head around thinking about this issue. I believe that health insurance should not be looked upon as the be all end all.

We all should have a rough overall strategy to address our medical needs. This includes the medical savings and the maintenance of our overall wellness.

I think the health insurance premium cost (your shield plans and their accompany riders) are not cheap. We all have to make a choice to choose the right insurer, a grade of medical coverage we are comfortable with that is affordable enough for us in the long run.

But how do we go about making the decision?

This article sought to explain:

1. A brief background of how we got here
2. The out-of-pocket expenses you have to pay if you just pay for the regular private shield plans and if you purchase riders that covers the deductibles and co-insurance
3. Comparing between existing NTUC Incomeshield riders and the replacement
4. The difference in expenses if you decide to go with the panel and non-panel doctors
5. Brief comparison of the out-of-pocket expense on a few health insurance providers
6. The recent premium escalation for existing NTUC Incomeshield riders
7. The health insurance decision making framework

Why Did Health Insurance Get So Expensive?

If you have been paying attention to the bills that passed you by, you would have noticed that the premiums of your private integrated shield plans (IP) have been going up.

This was the direct and indirect failure of our current Singapore healthcare and insurance system. It started with private insurers fighting with each other to convert as many of us to IP.

One of the upside is to provide riders that, if you pay for these riders, if you are hospitalized, you do not need to pay a single cent.

There are a few different grades of hospital and surgical plans provided by each private insurers. The plans are differentiated mainly by the grade of hospital treatment/experience you can get (private hospitals, Class A ward, Class B1 ward, Class B2 and below ward).

Since the premiums are not too unaffordable, and it was not so big of a problem, many of us would choose the highest coverage, which is coverage up to private hospitals.

At first, it was not a problem because every stakeholder did not do anything funny. Then, the profit-driven private hospitals decide to put it in their marketing campaign that you do not have to pay for a single cent for a much better treatment experience.

Since our restructured government hospital experience is not always the best, and the cost of treatment is fully paid by their insurance plans, a lot of people go to the private hospital to seek treatment. This worked so well for the private hospital so it reinforce what they should do.

A lot of us start going there for private hospital treatment, even for minor issues.

And so health insurance payout increases, premiums that remained low starts going up.

This became a big problem. You can read more about it in my old article here.

No More All-You-Can-Eat Buffet Health Insurance Riders

On March 2018, the Ministry of Health announced that from April 2019 onwards:

1. Co-payment: New IP riders must incorporate a co-payment of 5% or more
2. Co-payment Cap:
   1. Pre-approved or panel treatments: Co-payment cap at $3,000 a year or more
   2. Non-panel treatments: No co-payment cap

The reason given is to curb the “buffet syndrome” so that we are prudent in using and charging healthcare services. This is also to ensure healthcare costs and health insurance premiums remain affordable.

Lastly, this will promote treatments through panel of specialist so that medical costs can be monitored and controlled.

So now you would have to pay at least some out-of-pocket expenses for your hospitalization bill instead of not having to pay a single cent if you purchase the comprehensive riders after April 2019.

The change that is new that affects your decision tree in the grade of health insurance selection is that it will be cheaper if you select from a panel of medical professionals pre-approved by your medical insurer.

You would submit a pre-authorization request form before admission.

If you would like to have a wider selection of health professionals, going further than the list of pre-approved medical professionals of your insurer, your out-of-pocket expenses will be higher.

From Zero Out-of-Pocket Expenses Paid to Some Co-payment

The best way to illustrate these changes is through the diagram extracted from MoneyOwl’s slidedeck.

If you do not have any riders, you would need to pay a deductible plus a 10% co-insurance of the total hospital bills incurred.

With the old full rider system, the deductible plus the 10% co-insurance is fully paid by the rider. If you have a rider that only pays for the co-insurance, then you would still need to pay for the deductible.

Under the new system, your deductible is still handled in a similar manner. However, you will need to co-pay the co-insurance.

The amount of co-insurance you pay is subjected to:

1. Whether the 5% of hospital bills is below or above $3,000
2. Whether you choose pre-approved / panel treatments or you would like a wider choice of treatment options.

It may be easier if we go through an example. Since NTUC IncomeShield happens to be one of the more popular plans out there, let us use that as an illustration.

NTUC IncomeShield used to have 2 riders before the announcement:

1. Plus Rider. This covers the deductible and 10% co-insurance for all 3 different grades of their shield plans. You basically pay zero dollars for the grade of your shield plan chosen.
2. Assist Rider. This rider caps the 10% co-insurance to either $3,000, $2,500, $2,000 depend on the grade of your shield plan chosen.

Since Apr 2019, NTUC have introduced 2 riders:

1. Deluxe Care Rider. You would need to at least pay 5% in co-insurance, capped at $3,000 per policy year for panel or pre-approved doctors. There are no cap if you choose the non-panel doctors
2. Classic Care Rider. You would need to at least pay 10% in co-insurance, capped at $3,000 per policy year for panel or pre-approved doctors. There are no cap if you choose the non-panel doctors AND an additional $2,000 a year charge

If you are still on Plus Rider and Assist Rider before 7 March 2018, you are not affected by the changes.

So they say. We will get to this in a minute.

For those after, your options are the Deluxe Care Rider, Classic Care Rider, or don’t have a rider at all.

The table above compares the amount that you will pay if are on the Plus Rider versus the Deluxe Care Rider and also the Assist Rider versus the Classis Care Rider.

MoneyOwl‘s solutions team compared these two grade of riders with 2 different hospital bills, a small $10,000 bill and a larger $80,000 bill.

You would realize 2 things:

1. Now you would at least pay something.
2. How much you would pay depends on whether you choose pre-approved doctors/panel doctors or you do not declare and wishes to have more options.

The major impact that is new to us is how much do we value the freedom to seek the medical help we desired. With this new structure, this becomes a consideration.

Freedom to Choose Non-Panel Doctors is an Additional Medical Cost

MoneyOwl also did a comparison across some of the shield plans they carry:

The information might not be super up to date but honestly I do not think things have changed that much.

What you will notice is that for the same $80,000 hospitalization bill, the out-of-pocket expense for panel doctors are largely the same.

If you wish to have the option to pick and choose from non-panel doctors, then you will need to compare between plans.

Generally, I think that if you go to the top of the top, that is the Deluxe Care @ NTUC, MyHealthPlus C-II @ Aviva, Enhanced Care @ AXA and Key Rider @ RHI, there is not much difference.

The difference tends to be for those riders that do not cover fully the deductible plus co-insurance such as MyHealth Plus A-II and Classic Care.

Existing Health Insurance Rider Premiums Likely to Get More Expensive

If you are currently on the Plus Rider or Assist Rider, you have the option to stay on them. Staying on these riders allows you to pay zero out-of-pocket expenses for the Plus Rider and lesser for the Assist Rider.

Here is the catch.

The premium escalation can be a little crazy.

The table above shows the premium increase for NTUC Incomeshield Plus Rider. If you are on the preferred plan, your premiums went up from 15% to a whopping 65% in some age band.

For example, if you are at the age 65, last year your premium was $2832 a year. This year it became $4673!

I look upon this as either the existing premiums was not priced well, there is some inflation happening in the past year, or that it looks like an attempt to force you to port over to the Deluxe Care Rider.

We are not sure about next year, but it is likely that

1. As you go up in age band, your premiums will rise from where it is now
2. The whole category of rider will rise in premiums as well

So in some years there will be a massive rise.

For example, if you are 65 going to 66, not only will your premiums go up from $2832 to $3670, but it will be inflated upwards to $6056 due to the revision in premiums for the entire Plus rider.

Your premiums went up 100%.

The table above compares the premiums you would pay if you remained covered under Plus rider and if you port over to Deluxe Care rider.

You will achieve a lot of savings in the earlier age bands (before 80 years old).

If you remain on Plus rider, you pay more in premiums versus otherwise, but no out-of-pocket expenses. If you pay for Deluxe Care rider, you pay less in premiums but out of pocket expenses.

Which one increases faster? I have no idea.

The Health Insurance Decision Making Framework

Basically, we have some decision to make.

However, the decision you need to make is never straight-forward. I often tell you that the decision is easier to make if you know what you want.

In this case, it is not what you want, but what kind of medical situation you will be hit with from this point till you passed away, the frequency of occurrence. If you know that, you can choose your plans better.

Unfortunately, we do not have a clue how to determine certain areas that we do not have control over such as inflation rate, certain health ailments, further changes in policy.

So here is my way of thinking about this whole problem.

Note that there are certain areas in the decision tree that I choose not to discuss such as:

1. You have pre-existing medical condition. In this case your decision might be more straight forward. You might not be able to switch and if you do you need to ensure the new insurer covers you.

I think in the brief by MoneyOwl’s team, they also provide some very high level rule of thumb how to think about this (it is much concise than the more detail bullshit you will read about later):

What We Know from Today’s Discussion

Here is a little summary of what I have explained in the previoius section:

1. You will need to pay out-of-pocket expenses
2. Out of pocket cost is greater if you choose a non-panel doctor
3. If you need to have a private hospital option, the premium cost is greater

Constraints that You Need to Work Within

There are many variables to this decision making. Let me group them in a few major categories.

Your Wellness:

1. Not sure when you will passed away
2. Have no idea going forward, how is your constitution, what is the frequency of medical needs, as well as the magnitude of medical needs
3. How would you manage your wellness on a periodic basis

The Quality of Care You can Accept:

1. Panel Doctors or More Freedom of Medical Treatment Choices
2. Up to Private Hospitals, Class A Restructured Hospitals or below?

Growth:

1. Inflation Escalation of Different Insurers
2. Each insurer’s premiums at each age band is different
3. Medical inflation of different ailments

Your Cash Flow Management:

1. Can you accumulate a sinking fund for your medical needs?

Some of these constraints you have a certain degree of control over and can exert your influence. For others, you have no control, you are a slave to life or the system.

What You Have and Do Not Have Control Over

We re-group the constrains in the previous section into what you can control, cannot control, and have partial control over.

What you do not have control:

1. Inflation of medical cost
2. Inflation of premiums
3. Your duration alive
4. Standard of healthcare in hospitals
5. Panel Doctors versus Non-Panel Doctors

What you have some control:

1. Your Overall Wellness

What you have control:

1. Manage your wellness on a periodic basis
2. Accumulation of Sinking Funds
3. Funding of insurance premiums

Those who I have no control over, I think I would have to take a conservative estimation:

1. Inflation cost is going to be 7% a year at least
2. Inflation of premiums needs to moderate down lower
3. 90 to 100 years old
4. Accept Class A Restructured Hospitals
5. Panel Doctors

The way to think about those areas that you have no control is that you got to expect them to change for the better or the worse. That is just the way these things are.

You can argue until cow comes home about how unbalance or wrong the system is but if your family members need help you got to pay for it.

If you want everything to be the best (factoring high inflation, live a long life, private hospitals, freedom of choice of doctors), prepared for a very high premium or a huge medical sinking fund.

For those you have some control, try your best to do something about it. But do not have high expectations that if you do it well, you can completely mitigate the risk.

There are certain areas that you have to depend on fate.

For those areas that you have control, this is where you can strive to do better:

1. Do enough to keep yourself healthy and in good condition.
2. On an annual basis, set aside some of your surplus from work into a medical sinking fund
3. Fund your insurance premiums

What You can Do Today to Help You Make a Better Decision

At this point, there is definitely some things that I am clear about, but also areas that are not clear to me.

Some of this would involved questions such as

1. Are restructured hospital really that unacceptable in the experience?
2. How likely would there be an emergency and I would need to expedite this by going to a private hospital
3. The experience with panel doctors
4. Just how much signficant savings will switching plans give me on a long term basis

All this means that there are some things to think about or research upon:

1. You need to try your best to know the quality of healthcare you can accept
   1. Panel doctors or non-panel doctors
   2. Grade of treatment
2. You need to look into the past (yourself or your family history) to determine the magnitude and frequency of healthcare needs
3. You need to figure out whether you would like to pay higher premiums upfront so that you do not need to pay so much if you need to claim
4. Do what You have Control Over

#1 deals with things you have no control over and you need to figure out a certain level of what you can accept. #2 tries to give you an edge whether betting on a good coverage is more beneficial due to your own personal health situation.

#3 and #4 are areas you have control over.

If you have better clarity on what may work out best for you, then you can better frame what kind of health insurance coverage you need.

You will also know the downside of your medical strategy. This is important because, almost all the strategy will have some downsides.

What will work for me might not work for you.

For example, you might prefer to:

1. Cover for a Private hospital shield plan with a full coverage rider
2. Have a small medical sinking fund
3. Fund your insurance premiums because you have a good, stable job

Someone with less resources would prefer to:

1. Do more to keep themselves active, healthy and in a good condition
2. Have medical coverage up to Class A Restructured Government Hospital
3. Cover the co-payment when it is still relatively affordable, but co-pay 5% , up to $3,000 per policy year
4. Build up a medical sinking fund for the out-of-pocket expenses
5. Do not pay too high of an insurance premium

There is no correct answer.

I would prefer to do something like the latter.

If you want to transfer ALL the medical risks to the insurance company, accept that you need to pay for it.

Let me know based on what you cannot control, have certain control and have control, what you would prefer to do.

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I am going to cover some of these insurance retirement plans, since I have the resources to do so.

I am doing this in order to let readers see it from my perspective.

This is so that, if you met up with an adviser and this is put in front of you, you got another way of looking at it.

Since I written a whole section on retirement planning & financial independence, it does make sense for me to view these plans, putting those considerations in mind.

AXA Retire Happy Plus belongs to a class of limited payout retirement plans.

However, specific for AXA Retire Happy Plus, there is an option to accept payout over the lifetime (till age 99 years)

The general idea is:

1. they are an accumulating plan then during a predefined age, it starts paying out cash flow till the assured passed away or when the end of the tenure has reached
2. the cash flow payout contains a guaranteed component and a non guaranteed component
3. the non guaranteed component will depend on the investment performance of a participating fund
4. both the guaranteed and non guaranteed cash flow payout increases over time, at 3.5% per annum to combat inflation
5. there is minimal death benefit since this is not the overall goal of the plan. Should the assured passed away, the death benefit is 101% of the premiums paid
6. a total permanent disability multiple rider that pays out in lump sum additional 5 times of your first selected retirement income upon diagnosis of TPD. Like all TPD policies, it is in effect till 65 years old
7. premium waiver riders can be attached to the plan (read what are premium waivers)
8. you can choose to keep the cash flow payout with them, and you will earn a non guaranteed interest rate, benchmark against a basket of fixed deposits

The following illustration from the brochure explains things better:

Sam choose to contribute premiums over 25 years and chose to payout 5 years later at age 61.

Sam can choose different duration of premium payments from 5, 10, 15, 20, or 25 years or a Single Premium (one lump sum).

Sam can choose when the retirement payout starts provided it is 5 years away from the last premium payment.

In this illustration, Sam chose to pay out all his accumulated assets over 15 years as cash flow. Same has a choice of 15, 20 years or lifetime.

At this point I think AXA Retire Happy is a rather flexible plan. A lot of plans leave me wanting because you cannot contribute a lump sum or that you cannot space out the distribution over the lifetime.

Regular Contribution, with 20 year payout starting at 65 years old

For some future comparison, we generate for a 40 year old (close to what I am going through), paying 10 years of $50,000/yr premium, and starting our cash flow distribution at age 65, for 20 years:

You notice that both the payout starts low before increasing over time.

Some retirees will like this because they see the 3.5% escalation as protecting their purchasing power over time.

But how do we measure the performance?

Measuring the Internal Rate of Return of the Plan

The rate of return that you will get, depends on the performance of the participating fund.

When you purchase a cash value insurance policy like this one, you are transferring the investment management to the insurance company.

I usually use the above diagram to illustrate how you should look upon your wealth management. The same concept is applicable to your insurance policy that has a cash value.

You feed your policy by paying the premiums through your disposable income. The insurance company takes your premiums and deploys it into equity, bonds and cash. The income earn from equity and bonds is fed back within the fund itself.

The manager determines how much cash back it gives back to you.

The table shows the rate of return of the participating fund for AXA Retire Happy Plus. In some years it is positive, and in some years it can be negative.

I want you to note the average performance over the past 3, 5 and 10 years.

Your rate of return, is determined by the rate of return for the participating fund.

In the benefits illustration, you will see the rate of return.

The illustrated yield at maturity, is equivalent to the internal rate of return I usually compute.

What it means is that if your participating fund achieves a rate of return of 4.75%, your internal rate of return over this period (40 years old to 84 years old, 44 years) is 3.75%/yr.

This 3.45% includes the 3.5% inflation escalation.

If the participating fund yields 3.25%, then the rate of return is 1.92%.

Think of internal rate of return as the “interest rate” you earned for contributing your money over this 44 years, and what  you get per year.

With this you can compare it against your Singapore savings bonds or Singapore government securities.

The 10 year yield of the latest Jan 2019 Singapore Savings Bond is 2.45%.

What this means is that potentially the Singapore Savings Bond would yield more than this AXA Retire Happy Plus.

Based on the historical returns of the participating funds, it might not hit the illustrated 3.75%/yr. Of course, we won’t know about the returns of the future but we can reference from the past.

What if we only compute the internal rate of return of the guaranteed portion?

We computed the internal rate of return of the guaranteed portion and it is 1.29%.

This means that if you contribute and withdraw from this policy and it only earns the guaranteed amount, its like earning only a 1.29% interest per year.

I think your returns should sit somewhere between 1.92% to 3.75%.

The Expenses and Costs to the Policy Holder

Based on the illustration, the policy holder will pay a premium of about $499,973 in total over 10 years.

The total distribution cost, which is the cost from the premiums that are used to pay for advice, commissions to your adviser and the firm, is $53,617.

That is about 10.72% of the premiums.

The total expense ratio shows the expense incurred from managing the participating fund. At an average of 10% for the past 3 to 5 years, that looks rather high, compared to some of the other participating funds.

What about a Lump Sum Premium, Life time Distribution?

Due to its flexibility, I thought it is appealing for me to have the following permutation:

1. Lump Sum Single Premium Contribution
2. Distributing Cash Flow for Lifetime

So I got my friend to come up with a single premium quote for $200,000 in premium at 40 years old and start taking annual cash flow from age 50 to age 99.

In all honesty, after getting this, I thought it would be better to pay a single premium at age 45 years old and then take distribution 5 years later at 50.

In that case, it would make this really look like an annuity. But I shall not trouble my friend to do this.

From the income schedule, at 50 years old I could get an annual income of $3,361 to $6,771.

This will increase overtime to a range of $18k to $36k at age 99. I think I will struggle to think what I can do with $300/mth

The internal rate of return, depending on the investment rate of return, is higher at 2.02% to 4.05%.

It is higher compared to the previous regular premium quotation.

I think what made it lower was the escalating nature. Usually, if a policy have this feature, they will start the income distribution at a lower base. This is the same for the CPF Life with Escalating feature.

The yield on the single premium Retire Happy Plus looks far lower than contributing to the CPF Life annuity.

I believe the main reason is, unlike the Retire Happy Plus, CPF Life pools the people’s resources together and thus you will receive mortality credits, which boost the return.

The distribution cost on this single premiums is $11,647. Against a policy cost of around $200,000, the distribution cost is 5.8% of the premiums paid, much lower than the 11% for the previous regular premium policy.

Suffice to say, I feel compelled to contribute to CPF Enhanced Retirement Sum then this policy.

Summary

While on paper, I like the flexibility of contribution and distribution, the internal rate of return, when compared against similar retirement insurance plans, are not the highest.

You could be mistaken that the escalating payout feature is a major advantage.

The internal rate of return of the policy based on guaranteed, non guaranteed returns tell us that if we compared against a non inflated payout product, the non inflated payout product might give you more cash flow over time.

This policy could be modeled as a single premium annuity, but it does not give you that return.

The upside of a retirement plan is that, for an annuity, if the assured passes away, you might only get a smaller bequest.

For such a retirement policy, should the assured passes away, the remain death benefit or cash flow, would be passed to the next generation.

I will probably profile another similar retirement plan next week, then we see how that plan measures up to this one.

A plan like Retire Happy Plus is meant more for retirement distribution.

Whether it is suitable for you or not, it will depend a lot on your overall plan. From my experience, plans like this do not work on its own, but as part of a retirement strategy.

If you are unsure such a plan fits into your overall strategy or not, yet you would like someone that is competent, trustworthy enough to review your retirement strategy, let me know.

I can put you through to my friends who have integrity, and may be able to help.

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We went through some policies such as Aviva’s MyRetirement Choice and OCBC PremierLife Generation showing the projected returns the policyholder could potentially get.

Through the article, we realize that the biggest determinant of the policy performance is in the investment return of the participating fund.

This is because the participating fund is the investment fund that provides the return for the policy.

Typically, to be able to sell these endowment or retirement policies, the insurance salesperson would need to make some projection of the investment return that you are able to earn.

So how is the return in reality compare to the investment projections in the past?.

Today, we look at some historical returns.

What You Need to Know About Your Insurance Policies’ Participating Fund

For the uninitiated, we can group insurance protection into 2 groups:

1. Those policies with cash values
2. Those policies 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 purchase such policies with cash values, 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 eventually in terms of returns will depend on the performance of the participating funds.

The participating funds invest in a combination of:

• equities
• government and corporate bonds
• property
• cash

Every year, if your policy has some sort of cash value that links to a participating fund, they will provide an update on investment returns and their current allocation to these asset classes.

Here is an example of the allocation of the participating fund of my Tokio Marine Limited whole life plan.

The following is taken from the Benefits Illustration (BI) , which explains your policy in detail.

The surrender value illustrates to you the projected surrender value you could get, if you liquidate your policy at that specific year, or age.

Notice that there are 2 sets of figures, one for projected at 3.25% investment return and one 4.75% investment return.

This is to give you an illustration of the potential of your policy.

The sales conversation often is lead in such a way that the insurance adviser and the client were discussing as if the 4.75% return is given.

In their annual update, the insurance company will also provide you with the latest performance.

Here is how mine look. One thing you will realize is that… on a short term basis, the net investment return look not so different from your other unit trust portfolio.

These returns are abstracted away from you. They are published only once a year. Thus, unlike your unit trust or stocks, you are unable to see the volatility in the portfolio so much.

This is not the net return that will into your endowment or whole life plan. There are still commission and other costs to net off.

The insurance companies will also smooth out the returns that you will eventually see. This means that they reserve returns during the good years so that they can supplement those years where returns don’t do so well.

Net Investment Returns is Not the Returns You will Eventually 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 that you will see are LOWER than the net investment returns you see in the illustrations.

The best way to think of the net investment returns is:

If it hits 4.75%, you will likely see what was projected in the benefits illustration when the policy was first sold to you.

If it hits 3.25%, then most likely the returns will be at the lower end.

Let us take a look some data.

The Investment Return Performance of Participating Fund Year on Year

Various sources have provided the historical net investment returns of the participating funds.

Here is my own compilation.

The first observation is that while you do not experience any volatility, what underlies your policy is no different from equities and bonds.

Their returns fluctuate over time.

I tabulated the best and poorest performing fund for the year. What we observe is that they do not stay constant.

There do have some constant names. AXA appeared the most in the poorest years. Prudential appeared the most in the best years.

Comparing Average Investment Return Performance of Insurance Participating Funds Over Different Time Frame

I cannot remember where I found this so I cannot give the proper credit.

To the right, this guy/gal tabulated the average return over different time frames.

For example, AIA over a 8 year period averages 4.5% a year.

Note that this should not be confused with rolling returns.

This gives you a good idea of whether your insurance policy can hit the returns projected. To hit the returns, they will have to generate a return of 4.75%.

Some Insurers Were Able to Clear the 4.75% Hurdle over Long Term

If we observe the 12 to 14-year average, some insurer was able to hit 4.75%:

1. Manulife
2. Tokio Marine
3. Prudential

No surprises as Tokio Marine and Prudential appeared the most in the best returns in the previous table.

Lower Bond Rates Will Affect Future Insurance Participating Fund Returns

The market returns for the past 5 years have been respectable.

However, if we look at the shorter average, you cannot find one insurer that can consistently hit 4.75% a year return.

Based on MAS Guidelines, most participating funds will hold more bonds than equity.

Typically, the equity to bonds/cash/property allocation is 35% to 65%.

In such a low yield environment, it will be rather challenging for the funds to achieve that 4.75% returns unless they

1. Shift more to the more volatile equities
2. Take on bonds at a higher end of the risk spectrum (like high yield, emerging market bonds)

Comparing the Performance of Insurance Participating Fund Versus a Portfolio of Low-Cost Index Funds

There are a lot of propoonents that believe that you could do better than this if you invest on your own.

Not everyone can invest on their own. However, the closest thing to a passive investment is to add on to a portfolio of low-cost index funds or ETFs.

The biggest problem I feel is that they are not doing an apple to apple comparison.

They will compare the participating fund returns versus a 100% equity ETF.

This to me is unfair because the 100% equity ETF is more volatile, higher in the risk spectrum. Part of the investment objectives of the participating fund may be to ensure that the volatility is lower so that the returns are more predictable.

This is a constrain and you have to factor that in when you are comparing.

A more appropriate comparison would be either a

1. 40% MSCI World Index 60% Bloomberg Barclays Aggregate Bond Index
2. 35% MSCI World Index 65% Bloomberg Barclays Aggregate Bond Index

So that is what I did:

On the right, I have included the performance of MSCI World and BBGA (Bloomberg Barclays Global Aggregate Bond) in SGD as well as the two different allocation.

If you compare the average growth and CAGR, the passive option might not be better.

The returns are lower.

I got a feeling that by using MSCI World, it might not be fair. The funds in this region like to invest in Asia ex Japan.

Comparing against MSCI Asia Ex Japan might be a better proxy. That will be for the next update.

My conclusion is that those who say they can do better, yet be more passive, are doing an unfair comparison.

Summary

Here are some general takeaways that I hope you will have:

1. The cash value of your policies are determine by the performance of the insurers’ participating funds
2. Each insurer can have more than one participating fund. Some of their paritcipating fund may be more conservative in their investments
3. If you peel off the layers, what drives your returns are no different from your unit trust, stocks and bonds. The difference is that it is managed differently by someone
4. Peeling off the layers, the investment returns follow market forces.
5. Think of the projection as a hurdle rate rather than the returns you will see
6. Most partcipating funds have a high proportion of bonds. Current bond yields indicate future total returns that you can get from bonds. This likely points to lower future participating fund returns unless they take on more risk

If you would like to find out how is the performance of some matured insurance savings plans of my friends and family, you can read Does your insurance savings plan give you 3% to 5% returns?

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