Participating Policy
> How to interpret the benefit illustrations
Understanding a Participating Policy
How to interpret the benefit illustrations
According to the Guideline on Benefit Illustration for Long Term Insurance Policies (GL 28) issued by the Insurance Authority, insurers should provide you with a benefit illustration of the participating policy showing the projected surrender value (i.e. the cash value of the policy upon surrender) and death benefit at the point of sale and when the policy is in force. In illustrating the values and amounts, the Appointed Actuary of an insurer should refer to Actuarial Guidance Note 9 on Best Estimate Assumptions (AGN9), issued by Actuarial Society of Hong Kong. Apart from the standard illustration, the benefit illustrations will also include additional illustrations under optimistic and pessimistic scenarios to show the variability of the ultimate returns.
Following is a fictional case to demonstrate the variability of the projected surrender value under different scenarios.
The best-estimate scenario (standard illustration)
Having regard to AGN9, the insurer’s best estimate of the investment return is 4.5% per annum.
End of Policy Year
Total Premiums Paid
Surrender Value
Guaranteed
Non-Guaranteed
Total
Accumulated Dividends and Interest
Terminal Dividend
1
5,000
1,000
0
0
1,000
2
10,000
3,000
4,500
675
8,175
3
15,000
5,000
9,000
1,350
15,350
4
20,000
7,000
13,500
2,025
22,525
5
25,000
10,000
18,000
2,700
30,700
In this scenario, if you surrender your policy at the end of the 1st policy year, you will receive only $1,000, even though you paid a total premium of $5,000. The amount you receive will be less than what you paid. In contrast, if you surrender your policy at the end of the 5th policy year and paid a total premium of $25,000, you may receive up to $30,700, only $10,000 of which is guaranteed (i.e. the amount that the insurer must pay you). The remaining $20,700, regardless the accumulated dividends and interest or terminal dividend, is non-guaranteed. The insurer may therefore pay you less than or more than $20,700.
Pessimistic scenario
While keeping the other assumptions, the benefit illustration in this scenario reflects the downside situation. The expected investment return is 3% per annum.
End of Policy Year
Total Premiums Paid
Surrender Value
Guaranteed
Non-Guaranteed
Total
Accumulated Dividends and Interest
Terminal Dividend
1
5,000
1,000
0
0
1,000
2
10,000
3,000
3,000
450
6,450
3
15,000
5,000
6,000
900
11,900
4
20,000
7,000
9,000
1,350
17,350
5
25,000
10,000
12,000
1,800
23,800
According to the above illustration, the expected investment return is lower than that of the standard illustration. If you surrender the policy at the end of the 5th policy year, with the same amount of the premiums paid (i.e. $25,000), you may receive only $23,800, $10,000 of which is guaranteed. The remaining $13,800, regardless the accumulated dividends and interest or terminal dividend, is non-guaranteed. In this scenario, the amount you receive upon policy surrender will be less than what you paid.
Optimistic scenario
While keeping the other assumptions, the benefit illustration under this scenario reflects an upside situation. The expected investment return is 6% per annum.
End of Policy Year
Total Premiums Paid
Surrender Value
Guaranteed
Non-Guaranteed
Total
Accumulated Dividends and Interest
Terminal Dividend
1
5,000
1,000
0
0
1,000
2
10,000
3,000
6,000
900
9,900
3
15,000
5,000
12,000
1,800
18,800
4
20,000
7,000
18,000
2,700
27,700
5
25,000
10,000
24,000
3,600
37,600
Based on the above illustrations, the expected investment return is higher than that of the standard illustration. If you surrender the policy at the end of the 5th policy year, with the same amount of the premiums paid (i.e. $25,000), you may be able to receive $37,600. However, like the situation under the standard and pessimistic scenarios, only $10,000 of the surrender value is guaranteed. The remaining $27,600, regardless the accumulated dividends and interest or terminal dividend, is non-guaranteed.
To summarize, if you surrender the policy at the end of the 5th policy year, the amount you receive may vary from $23,800 to $37,600 under the pessimistic and optimistic scenarios. Consider whether this range of variability is acceptable. Furthermore, you should also note that the illustrations under both scenarios by no means represent the minimum and maximum surrender value. The amount you receive may be lower than that under the pessimistic scenario, or higher than that under the optimistic scenario.