LIFE INSURANCE ASSOCIATION OF MALAYSIA
By 1 July 2005, all new participating life insurance policies are required to use the asset share methodology in computing the surplus to policyholders.
What is asset share methodology? Following are the FAQs on asset share:
1) What are the new guidelines on asset share methodology all about?
The asset share methodology is a method currently used in UK, Australia and South Africa to calculate the distribution of surplus to policyholders for participating life insurance plans (par plans).
This methodology allows for a share of the accumulated premiums plus investment earnings to be returned to the policyholder after allowing for deductions for cost of providing insurance coverage, acquisitions costs and other expenses incurred by the insurer.
2) What type of life insurance products are affected by this new guideline?
The new guidelines are only applicable to par plans. A par plan is one in which the policyholder will receive extra surplus in the form of non-guaranteed bonus or dividend, in addition to the contractual sum assured, which is guaranteed to be paid on death or maturity.
The new guidelines are, therefore, not applicable for insurance policies which only provide protection coverage (e.g. non-participating life insurance, medical, general insurance products) endowment products with only guaranteed benefits and investment-linked products.
3) How do the new guidelines affect the payment of surrender values?
Under these new guidelines, policyholders may receive surrender benefit in the first year. In the past, policyholders who terminate their policies before three years may not receive any cash value. This is because, traditionally, life insurance products being primarily longer term protection and savings purposes, are structured in such a way as to reward more to policyholders who continue to pay their premiums and keep their policies in force.
4) Do I have to pay more premiums on participating life insurance policies under the new guidelines?
The use of the asset share methodology may require some life insurers to revise the premium rates of their existing par plans. This is because life insurers will now have to pay higher surrender values in the earlier years compared to the old products. This additional cost will result in lower surrender and claim values in the later durations compared to the past. If a life insurance company intends to maintain the surrender values and claim values at the longer duration, it may have to increase the level of premiums to pay for the higher early cash surrender values.
5) Are the policy benefits similar for life insurance plans that are designed under the new guidelines?
Life insurer may maintain the same level of projected bonus/dividend for policies designed under the asset share guidelines compared to the old products. This will usually result in an increase in premiums. Since life insurance companies are required to pay out surrender values in the earlier policy years under the new guidelines, they have to maintain a higher percentage of their assets in shorter term and more liquid assets e.g. fixed deposits. The investment returns on these shorter term assets, which are low risk assets, are usually lower than other longer term investment instruments. Therefore the bonuses/dividends projected over the longer term may be revised to provide a realistic projection to policyholders.
6) Will I receive less bonus/dividends under the new guidelines?
Bonus and dividends are not guaranteed in advance. They are distributed from surplus generated from investments and operating profits from the participating fund. The actual amount paid out will depend on the investment performance of the life insurance company, operating experience and overall economic environment. You may receive more or less than the projected bonuses/dividends illustrated to you when you purchase your insurance policy. The distribution of surplus between policyholders and shareholders are governed by the Insurance Act 1996, in the ratio up to 90:10. This means that policyholders receive 90% of the surplus distributed from the life fund.
7) Will the new guidelines discourage policy holders to maintain their policies over a long duration?
Although the new guidelines may bring about higher surrender values in the early years, policyholders should be fully informed of the disadvantages of terminating their life insurance policies early. This is because the surrender value that they receive will be much lower compared to the premiums which they have paid, even under the asset share basis.
Consumers should always note that the purchase of a life insurance policy is a long term commitment and policyholders who hold their policies till maturity will continue to enjoy better values than those who surrender early. Policyholders have to bear in mind that when their life insurance policies are surrendered, they will lose their life insurance protection immediately.
*Issued by LIAM - 4 July 2005
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