Read each table in a whole life benefit illustration and explain what every figure means.
Find the benefit illustration for a whole life policy you own or are thinking of buying, and count how many pages it has. Then count how many of those pages you have actually read. Most people have read two: the main benefit table and the signature page. They skip the pages in between, which explain what the numbers mean and what they cost. Taken in order, those middle pages show what the policy costs you and what happens if your plans change.
Jun Hao is weighing up a new whole life plan. Ryan hands him a 9-page illustration and takes him through page 4, the main benefit table, and page 9, where he signs. Jun Hao flicks past the rest. Lesson 5.2 of "Read the fine print: payslips, statements, policies and contracts", titled "Guaranteed and non-guaranteed: reading the benefit illustration", deals with the main benefit table. Later Jun Hao sits down with all nine pages: the policy details, the death benefit table, the surrender value table, the distribution cost, the effect of deductions and the options if he stops paying. His premiums come to S$4,000 a year in total (a made-up figure, as are all of Jun Hao's numbers below).
Start at the front. These pages list the life insured, the sum assured, the premium, the premium payment term, which is how long you keep paying, and the cover term, which is how long the protection lasts. Any riders appear here too, each with a premium of its own. Compare every item with what you asked for. A premium term that runs shorter or longer than you expected changes every figure that comes after it in the document.
Participating (par) policies carry an extra rule: the illustration must show non-guaranteed values at two assumed investment returns. These illustrated rates come from industry rules published by the Life Insurance Association (LIA). Every insurer follows the same rules, so you can set one insurer's illustration beside another's and compare them. Take the two rates from your own document; LIA's website describes how they are set. Both rates are assumptions made for illustration only. Neither is a return you will receive, and neither is a minimum or a maximum.
For each year of the policy, the death benefit table gives the amount paid if you die in that year. One column is guaranteed, and each illustrated rate has its own non-guaranteed column. The guaranteed amount is normally the sum assured, and the non-guaranteed amount is the projected bonuses. In Jun Hao's illustration the guaranteed death benefit stays at S$200,000 in every year. By year 30 the projected total is about S$330,000 at the lower rate and S$420,000 at the higher one. When life cover is your reason for buying, give this table the most weight.
The surrender value table covers how much comes back to you if you stop and cash the policy in. It also separates guaranteed from non-guaranteed amounts. Anyone who might need the money while still alive should read it closely, and that includes most people. Read it beside the premiums you would have paid by a few chosen years. Jun Hao looks at years 5, 10, 20 and 30:
By year 5 he has paid S$20,000. The guaranteed surrender value is S$6,000, which is 30% of premiums paid. The total is S$9,500 at the lower rate and S$10,500 at the higher. By year 10 he has paid S$40,000. S$22,000 is guaranteed (55%), and the total is S$33,000 at the lower rate and S$37,000 at the higher. By year 20 he has paid S$80,000. S$55,000 is guaranteed (about 69%), and the total is S$85,000 at the lower rate and S$100,000 at the higher. By year 30 he has paid S$120,000. S$95,000 is guaranteed (about 79%), and the total is S$150,000 at the lower rate and S$190,000 at the higher.
Reading across these rows, Jun Hao sees that the guaranteed value stays below premiums paid at every point up to year 30. At the lower rate, the total catches up with premiums paid somewhere after year 10, where it is S$33,000 against S$40,000, and before year 20, where it is S$85,000 against S$80,000. The yearly rows of the full table show the exact year. At year 30, S$95,000 of the S$190,000 shown at the higher rate is not guaranteed, so half of that headline number relies on future bonuses. On your own table, mark the year the guaranteed value overtakes premiums paid, the year the total does, and how much of each total is non-guaranteed.
Two items on the cost pages explain the low surrender values in the early years. The total distribution cost is a running figure for how much of what you have paid has gone to selling and advising on the policy, commission included. Follow it year by year. For Jun Hao it reaches S$6,500 by year 5 but only S$9,000 by year 30, so the bulk is charged in the first few years.
The effect of deductions table puts the value with no charges beside the value after charges and shows the difference. Charges and the cost of cover make up that difference. At year 30, at the higher rate, Jun Hao's value would be S$225,000 with no deductions and is S$190,000 after them, which is S$35,000 less over 30 years. Lesson 5.3 of the same course goes into both items in more detail.
The section most often skipped is the one about what happens when you cannot keep up the premiums. Read it now, while you can still pick a different policy; once you need it, that choice has gone. Most par whole life policies offer some of four options.
An automatic premium loan starts when a premium is missed: the insurer pays it for you by lending against the policy's cash value, at an interest rate the insurer decides. Your cover continues, but the loan and its interest keep growing and are deducted from whatever the policy eventually pays out. Under the reduced paid-up option, premiums end and you keep a smaller amount of cover for life without paying anything more. A policy loan lets you borrow against the cash value. A premium holiday, a pause in paying, is available on only a few policies.
Every option comes with conditions: the interest rate on any loan, the effect on future bonuses, and what happens if a loan becomes larger than the cash value. In that last case the policy usually ends. Note down which options your policy gives you and what each one costs.
Jun Hao builds a single table with a row for each of years 5, 10, 20 and 30, and columns for premiums paid, guaranteed surrender value and the total at each illustrated rate. Underneath he adds three notes: the total distribution cost at year 5, the effect of deductions at year 30, and the options if he stops paying. The nine-page document now fits on one page, and he can talk Mei through every figure on it.
Now do the same with an illustration of your own: mark it up page by page and finish with the same one-page summary. If you don't hold a whole life policy, ask an insurer or adviser for a sample illustration, or use one you've already been offered.
Take a whole life illustration and mark the guaranteed value, both projected values and the total premiums paid at years 5, 10, 20 and 30.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).