Many insurance companies introduce life insurance policies with low annual bonus and high terminal bonus.
If the policyholder surrender the policies before the terminal bonus is payable, usually during the first 20 years, they will get a low cash value. The insurance company makes a big profit.
The policyholder is likely to get a cash value (on surrender) that is lower than the total premiums that was paid. The policyholder usually gets a poor deal and has to bear a high cost for the insurance protection, compared to the alternative of buying a low cost term insurance.
Even if the policyholder is able to wait a long time (say, 20 years or longer) for the terminal bonus to become payable, the policyholder still faces the risk that the terminal bonus (which is not guaranteed) may be reduced in the future. Policyholders of insurance companies have suffered a big loss in payout due to a severe reduction in terminal bonus on a few occasions in past years.
NTUC Income used to declare a high rate of annual bonus from its annual surplus, consistent with the long term yield of the fund. This allows the policy to accumulate a high cash value and reach a breakeven point (i.e. the cash value equals the premiums paid) as early as possible.
As the long term yield changes, the rate of annual bonus is adjusted (usually upwards, but sometimes downwards).
NTUC Income has now decided to change the bonus structure to declare a lower rate of annual bonus and to increase the rate of special bonus. This affects 310,000 policies and is stated to be in line with "industry practice". The bad aspect of this industry practice is that the insurance company can to pay out a lower cash value and make a bigger profit on a surrendered policy - although NTUC Income has stated that this is not their intent.
NTUC Income has said that they will increase the terminal bonus for surrenders and claims, so that the payout to the policyholder will be not less than the old bonus structure.
It is important for each policyholder to know the answers to the following questions:
1. What is the rate of terminal bonus payable on each of their policy for each year from now until the maturity date or for the whole of life. Under this new system, a different rate of terminal bonus will apply for each type of policy, each year of entry, each year of termination and the type of termination (i.e. surrender or claim).
2. Will the rates of terminal bonus be published for all policies, so that each policyholder is able to see not only the rates that will apply to each of his policy but to all other policies as well?
3. How will the rates of terminal bonus be changed in the future, to reflect the change in the long term yield of the fund and to ensure that all the policyholders are treated fairly?
It is important for each policyholder to get sufficient assurance that their interest will be protected by the change in bonus structure. This requires full disclosure of the new rates of terminal bonus and the principles guiding the changes in these rates in the future.
It is best for each policyholder to be given an individual choice of staying with the old bonus structure or move to the new structure.
If the policyholder surrender the policies before the terminal bonus is payable, usually during the first 20 years, they will get a low cash value. The insurance company makes a big profit.
The policyholder is likely to get a cash value (on surrender) that is lower than the total premiums that was paid. The policyholder usually gets a poor deal and has to bear a high cost for the insurance protection, compared to the alternative of buying a low cost term insurance.
Even if the policyholder is able to wait a long time (say, 20 years or longer) for the terminal bonus to become payable, the policyholder still faces the risk that the terminal bonus (which is not guaranteed) may be reduced in the future. Policyholders of insurance companies have suffered a big loss in payout due to a severe reduction in terminal bonus on a few occasions in past years.
NTUC Income used to declare a high rate of annual bonus from its annual surplus, consistent with the long term yield of the fund. This allows the policy to accumulate a high cash value and reach a breakeven point (i.e. the cash value equals the premiums paid) as early as possible.
As the long term yield changes, the rate of annual bonus is adjusted (usually upwards, but sometimes downwards).
NTUC Income has now decided to change the bonus structure to declare a lower rate of annual bonus and to increase the rate of special bonus. This affects 310,000 policies and is stated to be in line with "industry practice". The bad aspect of this industry practice is that the insurance company can to pay out a lower cash value and make a bigger profit on a surrendered policy - although NTUC Income has stated that this is not their intent.
NTUC Income has said that they will increase the terminal bonus for surrenders and claims, so that the payout to the policyholder will be not less than the old bonus structure.
It is important for each policyholder to know the answers to the following questions:
1. What is the rate of terminal bonus payable on each of their policy for each year from now until the maturity date or for the whole of life. Under this new system, a different rate of terminal bonus will apply for each type of policy, each year of entry, each year of termination and the type of termination (i.e. surrender or claim).
2. Will the rates of terminal bonus be published for all policies, so that each policyholder is able to see not only the rates that will apply to each of his policy but to all other policies as well?
3. How will the rates of terminal bonus be changed in the future, to reflect the change in the long term yield of the fund and to ensure that all the policyholders are treated fairly?
It is important for each policyholder to get sufficient assurance that their interest will be protected by the change in bonus structure. This requires full disclosure of the new rates of terminal bonus and the principles guiding the changes in these rates in the future.
It is best for each policyholder to be given an individual choice of staying with the old bonus structure or move to the new structure.
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