What is a participating policy?
Participating policies are insurance policies which provide both guaranteed and non-guaranteed benefits. The sum assured is a guaranteed benefit and is paid when the policy matures or upon the death of the insured. Participating policyholders are allowed to participate or share in the profits of the insurance company’s participating fund. This is paid in the form of bonuses or cash dividends. Bonuses and cash dividends are non-guaranteed benefits.
Premiums of participating policies are pooled together in a designated participating fund. The fund invests in assets such as government and corporate bonds, equities, property and cash. The proportions of the assets may change over time, depending on the investment strategy for the fund.
Participating policies usually take time to build up cash values. If a policy is surrendered early, a surrender value will usually be paid only if the policy has been in force for at least three years. The amount paid will be adjusted to deduct certain charges.
Non-participating policies pay just the sum assured when the policy matures or upon the death of the insured. The policyholder does not participate or share in the profits of the insurance company’s participating fund and is not entitled to any non-guaranteed benefits.
Non-guaranteed benefits - Bonuses and cash dividends
Bonuses are non-guaranteed benefits which may be added to your policy. Two common types of non-guaranteed bonuses are:
These are added regularly (e.g. annually) to the sum assured.
These are added on top of reversionary bonuses when the policy is terminated, like when you surrender the policy, make a claim, or when the policy matures.
Some participating policies provide cash dividends as non-guaranteed benefits, but these do not add to the sum assured. Bonuses may vary depending on the policy you buy. Read the Product Summary for the policy you are considering to find out more.
How are bonuses determined?
How much you get in bonuses depends on factors like:
- The participating fund’s investment performance;
- The expenses incurred by the participating fund (including amounts paid to meet claims); and
- Actuarial assumptions (e.g. on future bonuses and anticipated investment returns)
The bonus must be approved by the insurer’s board of directors, taking into account the appointed actuary’s recommendation. The insurer must:
- Ensure that policyholders from all groups of participating policies are treated fairly and that no group is favoured over others.
- Ensure that bonuses which are allocated (and future bonuses) can be supported by the fund.
Once the bonuses are declared and added to your policy, they are vested and guaranteed. The insurer cannot reduce or remove them later on.
But if your policy matures in a year that the fund performs poorly, you could receive a low or zero terminal bonus.
Although future bonuses are not guaranteed, insurers prefer to avoid large fluctuations in the bonus declared from year to year. To smoothen out bonuses, insurers may hold back bonuses in years when the fund has performed well so that they can be maintained when the fund has performed less well. This means bonuses may not necessarily track the rise and fall of investment markets. If the outlook for the fund’s performance is unfavourable, insurers may reduce estimates of future bonuses accordingly.
What safeguards are there to protect policyholders?
The profit that can be paid to shareholders of the insurance company is limited to a maximum of 1/9th of the value of bonuses allocated to participating policyholders. This means for every $9 distributed to policyholders, a maximum of $1 is distributable to shareholders.
If there is any shortfall in the assets needed to meet the guaranteed benefits of policyholders, the shortfall must be met by shareholders. The insurer must pay the guaranteed benefits even if the participating sub-fund performs badly.
Insurers selling participating policies must have an internal policy on the management of the participating fund business which is approved and reviewed regularly by the board of directors.
How do you track the performance of your participating policy?
After buying the policy, you will receive an Annual Bonus Update. This will include information about:
- The performance of the participating fund and its future outlook;
- The bonuses allocated (if any) to your policy for that year.
You will also receive an update of the projected total maturity value for an endowment policy or revised total surrender value for a whole life policy whenever there is a change in the bonuses declared. You can also request for an updated benefit illustration showing illustrations of future non-guaranteed benefits based on the insurer’s latest best estimate of the future performance of the participating fund.
What if you leave the policy early?
Buying a life insurance policy is a long-term commitment. Early termination of the policy usually involves high costs and the surrender value may be less than total premiums paid. There may be no cash value in the first three years as much of the premiums pay for the expenses of distributing the policy (including commissions paid to your financial adviser representative).
The above information is prepared in collaboration with the Life Insurance Association of Singapore.