[SINGAPORE] A projected annual investment returns figure that has been used to market life insurance products for more than 11 years might be coming down.
The Business Times understands from various sources that from July this year, the figure could drop from its current 5.25 per cent by possibly half a percentage point.
BT also understands that an annual review might take place on this figure in line with the push to improve standards in the financial advisory industry.
The change will not affect the actual values of existing or future insurance policies. But it will give a more realistic picture of how life insurance policy cash values grow over time.
It also means that life insurance companies are expecting lower returns from their life insurance funds in the current low interest rate environment.
Projected returns are set by the Life Insurance Association (LIA) and appear on the benefit illustrations used to sell whole life insurance policies.
In response to BT queries, the LIA said yesterday that the 5.25 per cent rate, which had been in place since March 2002, is under review. Said LIA president Annette King in a statement: “While we can confirm that the illustration rates for non-ILP (investment-linked) products are currently under review, the current illustration rates prevail.”
She also said that the life insurance industry regularly reviews the benefit illustration rates across its range of products. “During this review process, a number of factors are considered, including the global economic climate, which impacts the returns on assets held by insurers, such as, for example, equities, bonds, property.”
Life insurance policies give a payout in the event of death or permanent disability. This change concerns whole life policies. Under these policies, coverage is for life, and the customer typically gets back some money if the policy is terminated halfway.
Under participating whole life policies, customers’ premiums are invested in the insurer’s participating fund. These funds invest mainly in fixed income securities, where yields have been depressed in recent years amid a surge in demand.
Key interest benchmarks have also been near zero as central banks in developed economies flood markets with liquidity to encourage economic growth. As the cost of borrowing is reduced, creditors do not earn as much interest.
The 5.25 per cent rate is the “maximum best estimate long-term investment rate of return”, according to an LIA circular.
The circular states that another rate that is at least 1.5 percentage points lower also has to be shown – currently 3.75 per cent.
Ms King emphasised that these two rates are not guaranteed but “serve to provide a broad indication of policy benefits at these assumed rates”. “Actual rates will vary depending on the economic conditions, asset class returns and allocation within any given fund,” she said.
Insurance companies typically do not report the actual investment returns made by their funds. However, LIA’s projected returns figure closely tracks the average returns made by the industry over a period of time.
NTUC Income’s 2011 financial statements stated that its total investment return for its Life Insurance Participating Fund in 2011 was -0.82 per cent, resulting in a three-year average of 5.7 per cent. Last year, insurance companies should have done well amid a general market rally.
Calculations by BT show that a drop of half a percentage point might not make a big difference in a year, but will result in an 8 to 9 per cent drop in total future returns compounded for 30 years. For example, investing $200 a month for 30 years, compounded monthly, adds up to $174,000 under a 5.25 per cent interest rate, and $159,000 under a 4.75 per cent interest rate.
Insurance companies declined to comment for this article. Financial Alliance’s associate director of wealth management Brian Tan said that projected returns do not represent the real returns received by the client.
“So our message to clients is: only look at the guaranteed values, and plan based on that. We expect this low interest rate environment to continue for an extended period of time. Some insurance people are still projecting 5 per cent and 9 per cent.”
An insurance agent who was told about the possible change on Monday said it should not affect business. “My clients seldom look at the returns. The most important thing is whether they like the concept of insurance,” he said.
“With low interest rates everybody’s trying to find investments. If people are risk averse, a 4 per cent return is still not bad. It will be 3 or 4 per cent unless something major happens.”