Monday, July 28, 2008

What is a Life Participating Fund?

I received a letter from one of the big insurance company, which I have a Life policy, with regards to their 2008 bonus declaration. I am disappointed to see that bonuses had not increase despite the equities bull run since 2004. I am not too optismistic in the next few years if the global economy do not do perform and when the effect of the industry-wide recent change in tax treatment of participating policies is felt.

Well. I'm not going to discuss on the Participating Funds returns today, I just like to share with you guys what exactly is a "Life Participating Fund".

1) What is a Life Participating Fund?
It is the premium collected from all Participating Policies from an Insurance company. These collected premium are pooled together and invested into a varieties of assets ranging from Equities, Bonds, Properties, Cash, etc

2) What is main aim and objective of such Fund?
It aims to get a stablised long term returns for those with Participating Policies(Whole Life, Endowments, etc) after netting off expenses and other benefits to such policyholders.

3) What returns can we expect from such Fund?
The fund are generally conservative in the portfolio of assets they invest. I estimate that 60% are invested into Bonds and Cash. With such asset combination, the returns should falls between 4%-5% p.a. After netting off, distribution cost, your policy returns should be around 1% to 2% lower.

4) What bonuses are declared from such Fund?
The insurance company will declare bonuses yearly which will be added into your policies as a result of profits earned from the fund. 2 type of bonuses are declared.
a) Reversionary Bonuses (Annual Bonuses)
* These are bonuses which are added annually to your policy. The reversionary bonus is, in effect, an addition to the sum assured under your policy.
b) Terminal Bonuses
* These are bonues that are added only when you surrender your policy, when your policy matures or when you make a claim

5) Will bonuses be reduced when global economy is bad?
* Insurers avoid large fluctuations in the bonus declared from year to year by smoothing bonuses over time. This means that profits may be held back in years when the performance of the fund has been good so that they pay them when conditions are less favourable.
* However, if the economy remain bad for prolonged period, the insurance company may very likely reduce the bonuses payout.

6) How are bonuses declared?
* At each year-end, the appointed actuary will conduct a detailed analysis on the performance of the fund and make recommendations on:
a) the amount of bonuses to be allocated, and
b) the amount to be set aside for the future bonuses.
* The bonuses that are declared will be approved by the board of directors of the insurer.

7) Must Insurers give good bonuses when economy is booming?
* There are noises in the industry, led by some well known industry players, insisting that Insurance companies are not fair in bonus distribution.
* I think I'm not in the position to comment on that but I do believe in smoothing of returns and that market is competitive and fairly efficient.
* The directors may decide not to give good bonuses, but when people get to know about it, the insurers may lose their competitiveness over time.

8) Are Participating Fund Returns important?
* In my opinion. YES. This is another area an FA is able to value-add and compared Life Participating Funds returns of different insurance companies.
* If that company project their policy returns based on 5.25% Life Participating Fund returns but they did not achieve it even over the good years, we have every reason to doubt their capabilities to give bonus as projected in their benefit illustration?


RUHAN said...

impotant topic...

Anonymous said...

avoid participating products if you are looking for enough protection at affordable cost .These are the worse products to use.
for accumulation of your wealth use funds. Warren Buffet didn't come to where he is by putting his money in participating insurance or bonds, right? so are GIC, Temasek etc...learn from rich dads and not from poor and kiasu and kaisi dads.

Anonymous said...


IFA will be able to do what the typical insurance agent can't. IFA is able to tap on better investment products and offer the best to clients.

Anonymous said...

In today's world of financial sharks one will do better by investing himself. For better or worse, there is no one to blame and no one to take advantage of you.

Anonymous said...

Please don't learn from GIC, Temasek Holdings; they are big losers and their investment acumen is wishy-washy. Read the current news and you will be shock!

Anonymous said...

How about something worse than insurance companies? MLM. There're many Lobin Hoods claiming that MLM firms are harmful. Then why are MLM companies still alive and kicking? BECAUSE NO ONE IS WRITING TO THE RELEVANT AUTHORITIES TO COMPLAIN.

Why are there so many Lobin Hoods complaining about insurance agents, yet those so-called unethical agents are still alive and kicking? BECAUSE NO ONE IS WRITING TO THE RELEVANT AUTHORITIES TO COMPLAIN.

For MLM, please write to CAD or AG's Office.
For insurance agents, please write to MAS.
The authorities are not proactive, they're REACTIVE. They won't do anything unless enough people shoot letters. Authorities will only gather resources for a large scale investigation when they've enough written complaints. Any anti-MLM website will tell you that. Apply the same logic to insurance agents.

Go FIDREC or Small Claims Court if you must to get back your money.