Several policyholders have complained about the reduction in the actual payouts on maturity, which were much lower than the amounts that were projected at the time that the policy was sold.
1. Who is responsible for the projection?
It is the responsibility of the insurer and the actuary to ensure that the projection is realistic. It has to take into account the likely investment yield in the future, and the expenses, mortality and other charges that are incurred by the insurer.
2. What do you consider to be unrealistic?
An insurance fund is invested in a mix of equities, bonds and other investments. The actuary has to study the past return on these investments over a period of several years, and make a realistic projection of the yield in the future.
Some insurers use a higher invetment yield for their projection. This can be unrealistically high.
3. Did NTUC Income make a realistic projection?
We consider it our duty to make a realistic projection. In the early 1990s, we were using a gross investment yield of 6.5%, which was realistic based on the conditions at that time.
In subsequent years, we faced the Asian financial crisis and the low interest environment. We found that the projected yield of 6.5% was unsustainable. We reduced the projections on two subsequent occasions. With the lower projection, we reduced the bonus rates for existing policies and used the lower bonus rates for projecting the yield on new policies.
We have since increased our bonus rates for three subsequent years. This was possible because of the improved investment climate.
Currently, our projected gross yield is 5.25%. The net yield, after deducting expenses, mortality and other charges, is between 4% to 4.5%.
4. How can policyholders ensure that they are not misled by unrealistic projections?
All insurers in Singapore now use the same gross investment yield of 5.25%. The risk of unrealistic projection has been largely removed.
5. What about high projections on terminal bonus?
Some insurers project a high rate of terminal bonus on certain products. They are not funded and not supported by the actual investment return.
They jack up the cash value and bonuses at certain long durations, usually at 20 years and later. The policyholder may be misled by these unrealistic projected values.
Some of these projected terminal bonuses are shown at several hundred percent of the accumulated bonus. This is excessive. It will take the policyholders 20 years to find out if the projected bonuses will be paid.
6. Can I rely on the projection of terminal bonus?
NTUC Income has been paying out a special bonus (or terminal bonus) of 25% for the past many years. Many policyholders have received this rate of special bonus on their matured policies. We have maintained this rate of special bonus through good and bad years.
We have been using this modest rate of special bonus in our projection (in contrast to several hundred percent used by some other insurers).
We have a track record of paying out these terminal bonus. You can trust us.
Some other insurers vary their terminal bonus according to the investment condition in each year. In some years, they removed the terminal bonus entirely. You cannot rely on their projections of terminal bonuses, as they are unreliable.
7. How can consumers check that the projections are realistic?
The consumer should be wary about new products which project high rates of annual and terminal bonuses, when there are no past track record. This is especially the case for terminal bonuses that are payable only after 20 years or longer.
8. What is the problem with the "Prime Life" product?
Many years ago, several insurers have introduced a "Prime Life" product that projects terminal bonus of several hundred percent on reaching 20 years or later. Prior to 20 years, the terminal bonus is nil.
NTUC Income refuses to introduced this type of product. We consider it to be not sound. It is also not equitable for the insurer should hold back the surplus for 20 years (if the surplus had indeed been earned) and give it out in a large terminal bonus after 20 years. This goes against the principle of a participating life insurance contract.
Many consumers bought this product from other insurers. They trusted that the insurers will pay out the projected terminal bonuses. They have been disappointed.
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