What does it mean for consumers when insurers revise their caps for their illustrative investment returns (IIR)?
When the Life Insurance Association Singapore (LIA) announced that all Singapore-dollar denominated participating (PAR) policies will lower the caps for their IIR with effect from 1st July 2021, some of us might have thought that our policies’ returns will be affected. Is that really the case? Let’s examine it up close.
PAR policies accumulate cash value through a combination of guaranteed benefits and non-guaranteed benefits. The IIR consist of an upper investment scenario and a lower investment scenario, to help consumers better estimate the amount that they can expect to receive from the non-guaranteed benefits of bonuses and/or cash dividends, if the PAR fund achieves a return within the range of the 2 scenarios. And to ensure that such illustrations will be kept consistent across the industry, LIA introduced a cap for the range of projected returns as an industry standard in May 1994.
Due to the current market outlook where we are experiencing a prolonged low-interest rate environment, the IIR are revised downwards to ensure their relevance and appropriateness in providing consumers with a more realistic range of projected investment returns.
IIR and actual returns
The returns of a PAR policy depend on the actual performance of the PAR fund that will develop over the policy’s term. This means that the IIR have no impact on the actual returns on these policies. Therefore, it is important for consumers to remember that the actual returns received from the policy can be higher or lower than those reflected in the policy illustration.
Another point to note is that the IIR does not represent the maximum and minimum performance of the PAR fund. The actual performance will still vary depending on various factors such as economic conditions, asset class returns and allocation within the fund.
When are revisions made?
While the LIA reviews the caps on the IIR on an annual basis, LIA has only revised the IIR 4 times since its introduction in 1994. The basis for each of these revisions is the same – to ensure that the IIR remain relevant and appropriate in the prevailing economic climate.
And the same goes for banks’ savings accounts’ interest rates. But because banks’ savings accounts are short-term instruments (customers can withdraw their money anytime), their interest rates tend to be more sensitive to changes in the economic climate. Hence their interest rates are revised more frequently, to be exact, 20 times in the same duration (1994 to 2020).
On the other hand, PAR funds are considered long-term investments given the longer investment horizon (>10 years’ policy term). Hence the IIR is not as volatile as banks’ savings accounts’ interest rates.
What should I do?
Be it the price, of an HDB flat or a bowl of fishball noodles, it is common for consumers to compare between the past and the present. But time travel is not an option available to us yet. Hence, we need to work out our financial planning based on the present, and not in comparison to the past.
The projected return of savings instruments is just one of the several factors to assess, when deciding on the weightage of our financial portfolio between capital guaranteed savings instruments and non-capital guaranteed investments. To shift away from the former and into the latter, would be an oversimplified way of thinking.
Taking a moment to compare rates between the available savings instruments (PAR policies, bank savings accounts, government bonds, etc) will still be a more sensible first step.
If you wish to have a detailed comparison of savings instruments rates, or if you wish to do a rebalance of your overall financial portfolio, Chloe and her team are happy to be of service.
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