Participating insurance policies (e.g. endowment and whole life) declare annual bonuses. Once declared, it is guaranteed. Many (but not all) par products have terminal bonus as well. Terminal bonuses are not guaranteed and is expressed as a percentage of already declared bonus. Terminal bonus will only be declared on maturity or upon claim or surrender.
In the past, one insurer reduced the terminal bonus to zero for a particularly bad year. The outcry from the policyholders were terrible. But there is little policyholders can do - afterall what is not guaranteed is not guaranteed. Recently a famous insurer cut its annual bonus for policies incepted after 1993 and increase its terminal bonus so that the "Total bonus" remains the same. Actually it is misleading for the insurer to say that the "Total Bonus" remains the same afterall the actual terminal bonus being non-guaranteed is an unknown future value. It is more approriate to say that the "projected total bonus" remains the same.
The cut in annual bonus for this insurer is particularly disturbing. This is because the Year 2007 is a good year. Granted that it should not distribute all its profits to its policyholders outright (because it need to keep some profit for bad years), but at least it should not cut bonus. What is the lesson here?
- Do not put all eggs into one basket. It is quite alarming to see people buying all their insurance policies from one insurer. Spread the "risk" (whatever what it is) across multiple insurers
- When buying par product for the purpose of savings (i.e. endowment), look for one that provides the highest guaranteed cash value. Currently the champion at this point of writing is TM Asia Life.
- When buying par product for coverage (i.e. whole life), spread the risk across a few insurers to reduce the risk.
- There is no need to put all money into par products for savings. Can also diversify some into unit trusts and RSP on it. The endowment can be used as the "bond fund" while the RSP into Unit Trusts be treated like the "equity" portion.
- To provide very high temporary coverage, a term product is recommended. However, again do not put the entire sum assured into one insurer. For example, if buying a S$1m coverage, avoid putting all S$1m into one insurer. Perhaps spread the risk by putting S$250k into 4 insurers.
- Look for an IFA to help implement the above. Note that not all FA are IFA. Some FA companies are ownned by insurance companies. Thus, they are not "I"ndependent.
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