Participating policies are the best-selling type of policies in Singapore, but do you really know how these policies works?
You may have heard of terms like “smoothing of bonuses” and the “90-10 gate”, but what do these mean?
Check out our definitive guide to Participating products in Singapore here.
What on earth is a Participating Fund?!?
When you buy a Participating policy, the monies are put into a segregated fund and the expenses, investment return and other cashflows are all tracked separately from other non-participating policies in the company.
It is a “Participating Fund” because Participating policies get a share of the fund’s profits.
How much profits do the Participating policies get? Will the insurer keep the profits for themselves?
This is where the “90-10 gate” comes in. Generally, if the insurer earns $100, it will have to declare $90 as bonuses and can only recognize up to $10 as its own profit. If the insurer does not declare any bonuses, it cannot recognize any profits from the Participating policies in its books. So, no, the insurer does not have an incentive to “keep the profits” as these will never be recognized as profits in its books. However, the insurer may smooth the bonus declarations to give its policyholders a more consistent return.
Bonuses are smoothed?
Unlike stock and shares whose values can increase or reduce rapidly, the returns on Participating policies are smoothed. This means that in years where the profits of the fund are in excess of what was expected, the insurer may keep some of the surplus. This surplus is then distributed to policyholders in years where the fund performance may be poor.
Reversionary bonuses vs terminal bonuses
aka…regular bonuses vs performance bonuses
The surplus from participating policies are typically shared through additional death/surrender/maturity benefits added to the policy or through cash benefits that are paid out on a regular basis.
Once reversionary bonuses are added to a policy, this forms part of the guaranteed benefits of the policy and cannot be removed. Terminal bonuses on the other hand are paid to the policyholder when the policy is terminated via death, surrender or maturity.
Is a Participating policy for you?
This really depends on what you are trying to achieve. Many Participating policies are “savings” plans as the majority of the premium is invested to give you returns over the medium to long-term.
However, in the recent years, whole of life plans that use the Participating structure to fund whole of life critical illness covers, provide good protection at older ages.
This is for general information only and does not constitute financial advice. This advertisement has not been reviewed by the Monetary Authority of Singapore.