Read a benefit illustration and tell what the insurer promises apart from what is only projected.
When you read a benefit illustration, plan on the guaranteed values only. Treat the non-guaranteed values as a range that may or may not arrive, and use the surrender value columns to see what stopping early would cost you.
Aisyah was offered a savings plan by an adviser. She was given a benefit illustration of four pages of tables, with columns 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 would get back. It was much more than her premiums. She asked how sure that number was, and the answer was in the column headings.
A benefit illustration sets out, year by year, what a policy is projected to be worth. It usually has a row for each policy year, or a row for each year early on and then one every five years. Each row shows the total premiums paid to date, then what the policy would pay on death in that year, then what you would get back on surrender in that year.
Benefit illustrations are 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. For a policy with a savings or investment part, the illustration is the most useful document you'll get, and the one most people skip.
Start with the notes at the top and bottom of each page. They explain what each column means and the assumptions behind it, so read them as well as the tables.
Every value column is split into guaranteed and non-guaranteed parts, either as separate columns or as 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 is not bound by the illustration. The total, guaranteed plus non-guaranteed, is the number people usually quote, and it is the least certain number on the page.
Non-guaranteed values are shown at two rates of investment return, so you see two versions of the future side by side. Insurers do not all use the same illustrated rates. For each participating (par) product, the insurer works out the higher rate from its own asset mix and the expected return of each type of asset. The Life Insurance Association (LIA) sets a cap on that rate, and if the insurer's own estimate is above the cap, it can only illustrate at the cap. The rates are illustrations and are not forecasts. The higher rate is not a prediction and the lower rate is not a floor. Actual fund returns could be above the higher rate, below the lower rate or anywhere between, and will vary from year to year. The notes on the illustration say this in plain words, and they mean it. LIA's website explains the current caps and how they work, so look them up there.
Read the two rates as a range for the non-guaranteed part, and plan as if only the guaranteed part is certain. If the policy still suits you on guaranteed values alone, treat the non-guaranteed part as a possible bonus. If it only makes sense at the higher rate, you are relying on returns nobody can promise.
Aisyah's plan (figures made up to show the method) costs S$3,000 a year for 20 years, S$60,000 in total. At year 20 her guaranteed surrender value is S$55,000. The total surrender value is S$79,500 at the higher illustrated rate or S$66,200 at the lower one. S$24,500 of the S$79,500 the adviser pointed to is not guaranteed. On guaranteed figures alone she gets back less than she put in: S$55,000 against S$60,000 paid.
The surrender value columns show what you would 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 paid, because part of each early premium goes to costs, including the cost of selling the policy. Lesson 5.3 covers these costs.
Aisyah went through her illustration year by year. Her total surrender value first exceeds the premiums paid in year 9 at the higher rate and in year 11 at the lower rate. On guaranteed values it never catches up within the 20 years shown. In year 5, after paying S$15,000, she would get back a guaranteed S$9,600, or about S$11,100 to S$11,900 including non-guaranteed values.
She decided the cost of stopping early mattered more to her than the year 20 figure. If there was any chance she would need the money within ten years, the surrender value column was the one to plan around. The same holds for you if there is any chance you will need the money early.
Work through any illustration like this:
Read the notes at the top and bottom of each page for what each column means and the assumptions behind it. Find the guaranteed values at the points in time you care about. Find the range the two illustrated rates give for the non-guaranteed part. Find the year the surrender value first exceeds premiums paid at the higher rate, at the lower rate and on guaranteed values only. Check what you would lose by stopping in the early years, comparing the surrender value with premiums paid. Judge the policy on guaranteed values, treat the non-guaranteed part as a possible bonus, and be wary if the policy only works at the higher rate. Ask the adviser to explain any column you cannot follow.
A good adviser will walk you through any column without steering you back to the total.
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.
Take one policy with a savings part. Write down the guaranteed and non-guaranteed values at year 10 and year 20, and the first year the surrender value is higher than the premiums paid.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).