Your Insurance Policy’s Participating Fund Returns Compared
Through the article, the biggest determinant of the policy performance is in the investment return of the participating fund.
So how is the reality versus projection.
We take a look at some historical data today
The Return Performance of your Cash Value Policies
For the uninitiated, we can group insurance protection into 2 groups:
- those with cash values
- those without cash values.
Your whole life insurance, limited whole life insurance, insurance savings endowments and universal life policies are policies with cash values.
When you buy such policies with cash values, you are TRANSFERRING the job of building wealth to the insurance company.
Your insurance premiums paid contribute to participating funds, which are either the main funds or sub funds formed by the investment managers in the insurance companies to meet the objectives of the various cash value insurance policies.
How well your insurance policies do eventually in terms of returns will depend on the performance of the participating funds.
The participating funds invest in a combination of:
- government and corporate bonds
The following is taken from the Benefits Illustration (BI) , which explains your policy in detail.
The surrender value illustrates to you the projected surrender value you could get, if you liquidate your policy at that specific year, or age.
Notice that there are 2 sets of figures, one for projected at 3.25% investment return and one 4.75% investment return.
This is to give you an illustration of the potential of your policy.
The sales conversation often is lead in such a way that the insurance adviser and the client were discussing as if the 4.75% return is given.
But is it the case?
Let us take a look some data.
Performance of Investment Returns of Insurers over Different Periods
Business Times recently published an article name Upbeat forecast lends hope of better returns for insurers.
In the article it provides some data points on the investment returns of different Singapore Insurers and their average returns:
This data is much more comprehensive than the 7 year historical performance data we have previously.
Each row shows the average return over that X number of year span.
For example, the first row shows the 11 year average return which spans from 2006 to 2016. AIA is 4.36%/yr. The last row shows the average of the insurers over that time frame.
Some interesting things I notice:
- The large insurers such as AIA, Prudential and GE tops the number of times their returns across different time frames with top qua-tile returns
- The 11 year period is a period where the market started off lower, went on a dip and eventually recovered. In this period the return was 4.14% on average. Only Tokio Marine and Prudential came close of hitting the 4.75% investment return that insurance company use for illustration
- The 9 year period seems to be a period where there was a massive plunge follow by a 8 year recovering market. The average return is 3.13%
- The 8 year period is the best period, where they start at the bottom of the market in 2009 going all the way to the market highs in 2016. The average return of 4.97% beat the target of 4.75%. Firms like AIA, Tokio Marine and Prudential did very well.
- The 2 year period highlights the bear market in 2015 and the recovery in 2016. The average return is 2.47%. This is good in that in a challenging climate, the fund’s allocation actually create absolute returns
The difference when you put your money in an insurance policy is that you have transfer the investment scope of work to the insurance company and in this case across different time frame, the average return has been positive.
Comparing returns versus stocks, REITs and bonds is not an apple to apple comparison.
If we compare risk adjusted returns, the picture might be different.
In some time frame, the insurers was able to hit 4.75%. Prudential and AIA in particular have shown good investment returns over various time frame.
Yet the Participating Funds of insurance companies struggle to hit the 4.75% target.
Insurance Policy Owner’s Returns Will Be Smoothed, after Costs
If you read your benefits illustration, they will tell you that your projected returns depend on the investment performance of the fund.
There are cost deductions from the returns of this fund.
What this means is that the returns are LOWER than this.
They certainly do not look that far off from the surrender or maturity value of the past insurance policies my readers have told me about (read Does your insurance savings plan give you 3% to 5% returns?)
This updated table, while not providing the compounded growth, or XIRR does show evidence that some insurers like AIA and Prudential were able to generate investment return that is close to what was illustrated.
Taken as a cohort the average returns are lower. The returns will depend on your luck during this 10-25 year time period when you are holding on to these participating policies.
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