You will be able to read a benefit illustration and separate what is promised from what is projected.
The savings plan Aisyah was offered came with a benefit illustration: four pages of tables, with columns of figures running for 20 years and beyond. The adviser pointed to one number near the bottom of the last page, the total surrender value at year 20, and said that was what she'd get back. It was much more than her premiums. Aisyah wanted to know how sure that number was. The answer was in the column headings.
A benefit illustration is the most useful document you'll get for a policy with a savings or investment part, and the one most people skip. This lesson shows you how to read it, and how to separate what the insurer promises from what it only projects.
The benefit illustration sets out, year by year, what the policy is projected to be worth. It usually has a row for each policy year, or for each year early on and every five years later. Along each row you'll find the total premiums paid to date, and then columns showing what the policy would pay if you died in that year, and what you'd get back if you surrendered it.
It's issued for policies with a savings or investment part, such as endowment and whole life plans. A pure protection policy with no cash value, like most term plans, has much less to illustrate.
Read the notes at the top and bottom of each page as well as the tables. They explain what each column means and the assumptions behind it.
Every value column is split, either into separate columns or separate tables. The guaranteed part is what the insurer has promised to pay, whatever happens to its investments. The non-guaranteed part depends on future investment returns and on bonuses the insurer decides to declare. It can turn out higher or lower than illustrated, and the insurer isn't bound by the illustration.
The total, guaranteed plus non-guaranteed, is the number people quote. It's also the least certain number on the page.
Here's Aisyah's illustration, with figures made up to show the method. She pays S$3,000 a year for 20 years, S$60,000 in total. At year 20, the guaranteed surrender value is S$55,000. The total surrender value is S$79,500 at the higher illustrated rate, and S$66,200 at the lower one. So of the S$79,500 the adviser pointed to, S$24,500 isn't guaranteed. On the guaranteed figures alone, she'd get back less than she put in.
The non-guaranteed values are shown at two rates of investment return, so you see two versions of the future side by side. These illustrated rates aren't chosen by the insurer for each policy. They're set by industry rules, which the Life Insurance Association publishes, and they apply across insurers so that illustrations can be compared.
They are illustrations, not forecasts. The higher rate isn't a prediction, and the lower rate isn't a floor. The fund's actual returns could be above the higher rate, below the lower one, or anywhere in between, and they'll vary from year to year. The notes on the illustration say this, in plain words, and they mean it.
The useful way to read the two rates is as a range for the non-guaranteed part, and to plan as if only the guaranteed part is certain. If the policy would still suit you on its guaranteed values, the non-guaranteed part is a possible bonus. If it only makes sense at the higher rate, you're relying on returns nobody can promise.
LIA's website explains the current illustrated rates and how they're set. Look them up there.
Now find the surrender value columns. These show what you'd get back if you stopped the policy and cashed it in, in each year. They matter because plans change. People lose jobs, have children, move abroad or simply need the money.
In the early years, the surrender value is often much less than the premiums you've paid. Part of each early premium goes to costs, including the cost of selling the policy, which lesson 5.3 looks at.
Aisyah went through her illustration year by year. At the higher illustrated rate, the total surrender value first exceeded her premiums paid in year 9. At the lower rate, it took until year 11. On guaranteed values alone, it never caught up within the 20 years shown: at year 20, S$55,000 guaranteed against S$60,000 paid. In year 5, after paying S$15,000, she'd get back a guaranteed S$9,600, or about S$11,100 to S$11,900 including non-guaranteed values.
That told her what stopping early would cost, which mattered more to her than the year 20 figure. If there was any chance she'd need the money within ten years, this was the column to plan around.
When you read an illustration, you're looking for a few specific numbers. What are the guaranteed values at the points in time you care about? What range do the two illustrated rates give for the non-guaranteed part? In which year does the surrender value first exceed what you've paid, at each rate and on guaranteed values only? And what would you lose by stopping in the early years?
Ask the adviser to walk you through any column you can't follow. A good adviser will do that without steering you back to the total.
You'll practise on one policy with a savings part now. If you don't hold one, use the illustration for a policy you've been offered or are considering.
For one policy with a savings part, write the guaranteed and non-guaranteed values at year 10 and year 20 and the year surrender value first exceeds premiums paid.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).