You will split a sample benefit illustration into what pays for cover and what is invested.
A benefit illustration is a table of numbers, often several pages long, with columns for each policy year and two rates of return. Most people look at the biggest number on the last page and stop there. This exercise asks a narrower question: of the money you would pay in, how much goes to charges and cover, and how much is left invested? You can answer it with three figures from the illustration and one spreadsheet function.
Use the benefit illustration from a real ILP you have been offered, or a sample from an insurer's website. Wei Ling's example policy is the worked example, with all figures made up for the example.
Turn to the main table of the illustration and find three numbers at year ten.
Total premiums paid to date. Wei Ling's example pays S$3,600 a year, so by year ten that is S$36,000.
The projected account value, sometimes called the policy value or fund value, at the lower illustrated rate of return. In her example, S$36,500.
The same value at the higher illustrated rate. In her example, S$46,000.
Note what the two illustrated rates are. They are printed at the top of the table. These rates are assumptions the illustration is required to use so that policies can be compared on the same basis. They are not forecasts, and the insurer is not saying the sub-funds will earn them. The policy value could end up below the lower figure or above the higher one.
The tempting move is to compare premiums paid with the illustrated value. At the lower rate, S$36,500 against S$36,000 looks like the policy has cost almost nothing and even made S$500. At the higher rate, S$46,000 against S$36,000 looks like a S$10,000 gain.
That comparison misses something. The illustrated value already includes ten years of growth at the illustrated rate. To see the charges, you need to compare the illustrated value with what the same premiums would have grown to at the same rate with no charges at all. The gap between those two is the cost of the policy's charges and cover, including the growth those charges would have earned.
Premiums are usually paid at the start of each policy year, so use the FV function with its last argument set to 1, which tells the spreadsheet that each payment is made at the start of the period. You met FV in How money works, lesson 6.2, Future value: what a sum or monthly saving grows to.
At the lower rate in the example, 4% a year: =FV(4%, 10, -3600, 0, 1) gives S$44,950.87. At the higher rate, 8% a year: =FV(8%, 10, -3600, 0, 1) gives S$56,323.75.
Use the rates printed on your own illustration. The 4% and 8% here belong to the example.
Subtract the illustrated value from the no-charge value at each rate.
At 4%: S$44,950.87 minus S$36,500 is S$8,450.87. As a share of the S$36,000 in premiums, that is about 23.5%.
At 8%: S$56,323.75 minus S$46,000 is S$10,323.75, about 28.7% of premiums. Always pair the two values worked out at the same rate.
The estimate is higher at the higher rate because charges taken early would have grown faster had they stayed invested. Both are rough. The illustration's own timing of premiums and charges may differ from this simple model. Many illustrations also include a column showing the effect of deductions to date, or a total distribution cost. If yours does, check your figure against it. A large gap means you have read a number from the wrong row or rate.
Wei Ling's worksheet is half a page: total premiums to year ten, illustrated value at each rate, no-charge value at each rate, estimated charges in dollars and as a share of premiums, and the illustration's own deduction figure if it shows one. Underneath, she clipped the question list she wrote in lesson 5.3, Questions to ask before you sign an ILP.
For her, about a quarter of ten years of premiums went to charges and cover in the example. Part of that buys real life insurance, which has value if she needs it. To decide whether the price is fair, she would compare it with the cost of term cover, the question from lesson 5.3.
Your own illustration will give different numbers, and possibly a different story about the early years. The activity below takes you through it with your figures.
Complete the illustration worksheet and write one sentence on what share of your premiums the charges take by year ten.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).