Participating versus non-participating policies

Par policies are insurance policies that participate or share in the profits of the insurance company's par fund. Apart from guaranteed benefits, they also provide non-guaranteed benefits.

The sum assured is guaranteed. It is paid when the policy matures, when you pass on or when you become totally and permanently disabled (if this benefit is provided) during the policy period.

The non-guaranteed benefits may include bonuses and cash dividends. They depend on how the par fund's investments are performing, how many claims are made on the fund and the expenses incurred by the par fund.

Non-par policies are not entitled to any profits that the insurance company makes.

The sum assured is guaranteed. Depending on the policy contract, it is paid when the policy matures or when you pass on. You are typically not entitled to any non-guaranteed benefits.

How do par policies work?

When buying a par policy, your premiums will be pooled together and invested with premiums from other policyholders in the fund.

The par fund invests in a range of assets to generate an investment return. The fund's assets can include government and corporate bonds, equities, properties and cash. The proportion invested in each asset class may change over time, as determined by the insurer.

Tip: You can find par fund's investment strategy, including its broad investment mix, in the product summary.

Risks of par policies

As a policyholder, you will share in the risks of the par fund including:

These risks can affect the performance of the par fund, which in turn affects the bonuses or cash dividends to be declared and paid to you.

Types of non-guaranteed bonuses

Here are the common types of non-guaranteed bonuses for par policies:

Reversionary bonuses

These are declared regularly, e.g., annually. Once declared, they will form part of the guaranteed benefits of your policy (that is, added to the sum assured).

They are typically payable in full when a claim is paid or when the policy matures. However, should you surrender the policy, only a proportion of the accumulated reversionary bonuses will be payable.

Cash dividends

Some par policies provide cash dividends as non-guaranteed benefits, but these do not add to the sum assured. Although these dividends are typically declared as immediate cash payments, some insurers may allow them to be:

• Converted to additional sum assured (also known as paid-up additions)

• Applied towards reduction of future premiums

• Re-invested with the insurer

Terminal bonuses

These may be payable when you surrender the policy or make a claim, or when the policy matures. They are separate from any reversionary bonuses.

When a bonus is declared

Non-guaranteed bonuses are usually determined annually. Most often, they take the form of an addition to the sum assured.

As a policyholder, you will be notified when the bonuses have been declared. If there is a change in your bonus rates, the insurer will also provide an updated projection of the revised total maturity benefit or total surrender value.

When the fund performance has been unfavourable and the outlook remains pessimistic, insurers may cut future non-guaranteed bonuses.

Note: The illustrated bonuses and cash dividends will vary across policies. To find out more, read and compare the product summaries of the policies that you are considering.

How bonuses are determined for par policies

How much you get in bonuses depends on factors such as:

• Performance: The par fund’s investment performance and future outlook

• Expenses: Amounts paid as claims and the expenses incurred by the par fund – expenses include investment, management, distribution, tax and other expenses

• Smoothing policy: Insurers generally try to avoid large fluctuations in the non-guaranteed bonuses from year to year by smoothing bonuses over time. For example, insurers may hold back some bonuses in the years when the fund has performed well. This is so that bonuses can be maintained when the fund performs poorly. As a result, the amount of non-guaranteed bonuses may not necessarily follow the short-term ups and downs in the investment markets.

When determining bonuses, the insurer must ensure that:

• All its par policyholders are treated equally and fairly

• The par fund has enough funds to support the bonuses that are declared (that is, become guaranteed) without compromising the solvency of the par fund or the company

The insurer's board of directors must approve all bonuses after taking into account the appointed actuary's recommendation. Once approved, the non-guaranteed reversionary bonuses for that year will be declared (that is, become guaranteed).

Tip: Once a reversionary bonus is declared, the insurer cannot subsequently reduce it or take it away upon a claim.

What about terminal bonuses?

Unlike reversionary bonuses, any terminal bonuses are only calculated upon maturity, claim and/or surrender. As such, if the par fund is performing poorly at that point in time, you could receive a low or zero terminal bonus.

Safeguards for par policyholders

To protect par policyholders, insurers are required to have a few safeguards in place.

Limits on profits distributed to shareholders – Profits paid to shareholders of the insurance company are limited to 1/9th of the value of bonuses given to par policyholders. This means that for every $9 distributed to par policyholders, only up to $1 can be distributed to shareholders.

Shortfalls in assets will be met – If there is any shortfall in the assets needed to achieve your guaranteed benefits, it must be met by the shareholders. This means that the insurer must pay the guaranteed benefits even if the par fund performs poorly.

Process must be overseen by the board – Insurers selling par policies must have an internal policy that sets out how it will manage the par fund (including how bonuses are determined and allocated). The board must approve and regularly review the policy and ensure the insurer adheres to this policy.

Tracking the performance of a par policy

After buying a par policy, you'll receive an Annual Bonus Update. This will include information on the:

• Performance of the par fund and its future outlook

• Bonuses declared (if any) to your policy for that year

Whenever there is a change in the bonuses declared, you'll also receive an update of the:

• Projected total maturity value for an endowment policy

• Revised total surrender value for a whole life policy or an endowment policy

You may also request an updated policy illustration of future non-guaranteed benefits, based on the insurer’s best estimate of the performance of the par fund.

When you surrender a policy

Buying a life insurance policy is a long-term commitment. Early termination usually involves high costs. The surrender value that is payable to you may be zero or less than the total premiums paid.

There may be no cash value in the first three years after policy inception as most of the premiums have been used to off-set the total distribution costs of such products (e.g. commissions and benefits paid to your financial adviser).

For par policies

Par policies usually build up cash values after a minimum period. The cash value (surrender value) is the amount you will be paid if you cash in (surrender) your policy. It includes a portion of the bonuses and cash dividends that have been declared.

Depending on the performance of the par fund when you surrender your policy, the cash value that you will receive may be less than what was previously illustrated to you.

Do note that the amount paid to you will be adjusted to deduct specific charges and any amounts owed to the insurer.

For non-par policies

Depending on your product's features, non-par policies may not have any cash value (surrender value) if you surrender your policy.

If it does, it is important to know how much you would receive if you decide to cash in your policy as this may be less than your total premiums paid to-date.

If it does not, you may only receive a refund for any unused premium should you surrender your policy.