Should You Be Concerned About Dropping Illustrated Rates

Should You Be Concerned About Dropping Illustrated Rates

The Life Insurance Association (LIA) on 2nd June 2021 has adjusted the illustrated rates of participating policies (per annum) downwards from higher range 4.75% to 4.25% and lower range 3.25% to 3%. This is to provide consumers a more realistic range of projected investment returns. Should you be concerned about the dropping illustrated rates?

Wait.. But first..

Please do not run to your financial advisors to buy your participating plans now. The changes are made on the ILLUSTRATED/PROJECTED returns and NOT the actual returns of your potential policy. Even if you buy a participating plan before 1st July, it does not mean that you “locked in the old rates”.

The insurance company will only give the actual returns in the years ahead. The illustrated/projected returns serves as a GUIDE on what a realistic return may look like in the future.

So Why Are The Illustrated Rates Dropping?

This is to provide a more realistic range of your policy returns. The insurer participating funds are a combination of bonds, equity and also other assets. I have put a screenshot of Prudential’s, Great Eastern’s and AIA’s Par Funds composition here. You would see that the biggest composition is fixed income and bonds.

AIA (2019) – 69.2%

GE (2019) – 66%

Prudential (2020) – 64.4%

AIA Par Fund 2019 Asset Allocation

AIA Par Fund 2019 Asset Allocation

GE Par Fund 2019 Asset Allocation

GE Par Fund 2019 Asset Allocation

Prudential Par Fund 2020 Asset Allocation

Prudential Par Fund 2020 Asset Allocation

Against the backdrop of the persistent low interest environment, we will expect that bond and fixed income asset classes to be affected negatively which is why the LIA has revise the illustrated rates downwards.

Bond Rates Dropping

Bond Rates Dropping

So What Are Insurers Doing?

It is my guess that the insurers have started to have a higher equity exposure in this persistent low interest environment. My suspicion has been confirmed after digging into the various companies Par Funds Asset Allocation.

Singapore Insurance Companies Par Funds Allocation Trends

Singapore Insurance Companies Par Funds Allocation Trends

For those that are interested, these are the source of information. (NTUC 2018, NTUC 2019, NTUC 2020)|(AIA 2017, AIA 2018, AIA 2019)|(GE 2017, GE2018, GE2019)|(PRU 2017, PRU 2018, PRU 2019, PRU 2020)|. You can see that for some companies, they started to have a higher equity position in their participating fund.

As reported on Today, AIA Singapore will “refresh and streamline” its product suite. Great Eastern is unable to share more details, but likely to have an impact on premiums for new policies. Prudential Singapore declined to comment.

Final Thoughts By Wealthdojo

This is not new. The last change in the illustrated rate was in 2013 due to low interest environment. These changes should not influence you to get a participating policy or not because the changes are only in the illustration.

You should be instead focus on your financial needs and whether these plans (participating or not) can serve you in your financial planning.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

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