You should carefully examine your objectives and protection needs before taking out a participating policy. If you would like to insure only against mortality risk, with no potential returns, you may not need to consider a participating policy. Conduct a Financial Needs Analysis (FNA) through your insurer or insurance intermediary to understand your needs and evaluate your risk appetite, protection needs and financial condition to choose a product that suits your needs.
For example, if you wish to make use of insurance to cover part of your child’s educational expenses and you are not willing to bear high investment risk, you may consider one that is savings-focused to get a stable return, such as a participating policy with a relatively low proportion of non-guaranteed benefits. You will then be able to make a relatively accurate estimate on the future value of the policy. However, if you have other protection and savings, your risk-tolerance level is relatively high, and you are expecting to accumulate wealth, you may consider a participating policy with a higher proportion of non-guaranteed benefits to obtain relatively higher potential returns.
Reminder
According to the guideline issued by the Insurance Authority (IA), the insurer and insurance intermediary must assess your needs, financial situation, ability and willingness to pay the premiums, etc. before making any recommendation in respect of a suitable life insurance policy (including a participating policy), and they must ensure that the recommendation is based on that assessment. If you refuse to disclose information during the FNA process, the intermediary cannot recommend any insurance product to you.
The proportion of non-guaranteed benefits varies amongst different participating products. Refer to this proportion to consider if a policy suits your objectives. Generally, a product with a higher proportion of guaranteed benefits means a higher level of protection, and vice versa.
| Proportion of Guaranteed Benefits | Proportion of Non-guaranteed Benefits | Objectives |
|---|---|---|
| High | Low | Protection focus |
| Medium to high | Low to medium | Savings focus |
| Low | Medium to high | Investment focus |
In a general situation, a higher proportion of non-guaranteed benefits may lead to a higher potential return, together with higher volatility, which means a higher investment risk. Choose a product with a proportion of non-guaranteed benefits that suits your objectives, financial condition and risk appetite.
Take, for example, a participating policy projecting a total cash value of $100,000, $90,000 of which is non-guaranteed, at the end of the 10th year of the policy. When this policy is surrendered or matured at the end of the 10th year, the amount paid to the policyholder will vary from $10,000 (i.e. the guaranteed part) to $100,000 or more. Read the benefit illustrations carefully and consider whether the volatility of the potential returns is acceptable and whether your protection needs can be fulfilled if you receive only $10,000 under extreme circumstances.
Reminder
A participating policy is a life insurance product rather than a pure investment solution. Focus not only on the projected cash value, but also the protection element of the product by assessing whether the amount of death benefits (guaranteed and non-guaranteed) will meet your expectations.
The fulfillment ratio applies to most participating products to help you understand the past performance of the distribution of the non-guaranteed benefits of a product. A ratio close to 100% means the insurer has come close to achieving its projected non-guaranteed benefits. If the fulfillment ratio is higher than 100%, it means the actual payout was higher than the illustrated amount at the point of sale, and vice versa. Refer to the Fulfillment Ratio page on this website to learn more about the calculation of the ratio and reminders for interpreting the figures.
According to the IA’s guidelines, the fulfillment ratio must be disclosed for products with new policies issued since 2010 and has policies inforce in the reporting year. Refer to the List of Insurers’ Websites on the Fulfillment Ratio on this website to find out the fulfillment ratio declared by the insurers. Some insurers may have a number of fulfillment ratios for different types of participating products. While the fulfillment ratio is not directly comparable across all products, you can refer to the fulfillment ratio of a product series with the features that are similar to what you are interested in, such as the type of non-guaranteed benefits and product type.
Reminder
The fulfillment ratio may serve as a reference of past performance for policyholders, but it is by no means the sole indicator of the future declaration of the insurance product. The fulfillment ratio should not be used as the sole determining factor in deciding whether to purchase a policy. Consider other important factors, such as the suitability, affordability, key features and risks of the products, before making your decision.
According to the IA’s guidelines, the insurer should provide you with a benefit illustration showing the projected surrender value (i.e. the cash value of the policy upon surrender) and death benefits of the participating policy at the point of sale. Apart from the standard illustration, the insurer is required to provide additional illustrations under optimistic and pessimistic scenarios to show the variability of high and low returns. In general, a wider range between the two scenarios is expected for an investment strategy with higher volatility. Refer to these figures to evaluate the risk level of the product and consider whether you can tolerate this risk. Visit the "How to interpret benefit illustrations" on this website for detailed examples.
Reminder
The insurer or insurance intermediary will ask you to sign the declaration of the benefit illustrations at the point of sale. Ensure that you understand the illustrations, including the projected amounts of both guaranteed and non-guaranteed benefits, the variability of returns under optimistic and pessimistic scenarios, and the potential loss for early surrender of the policy, before signing the declaration. Do not take out a policy or sign a declaration in a rush or merely rely on the verbal commitment of the intermediary or any promotional leaflets about the total payout.