M9 Life Insurance and Investment-linked policies - Chapter 6 Participating Life Insurance Policies
Insurers are required to have in place what 3 measures to enable proper exercise of discretion in determining bonuses? Explain each of them briefly.
(1) Risk sharing mechanism - to clearly set out risk sharing rules and methodology used to derive from assets backing each participating product group, which forms an important part of the basis for bonus allocation and reserving for future bonuses (2) Bonus allocation process - to determine the appropriate annual (e.g. reversionary) bonuses and terminal bonuses to be allocated to participating policies at each year end. (3) Reserving for future non-guaranteed bonuses - to set aside appropriate reserves for future annual (e.g. reversionary) bonuses and terminal bonuses for participating policies at each year end.
What is a common approach to determine terminal bonuses upon maturity?
A common approach to determine terminal bonuses upon maturity is to set the terminal bonuses at the level such that the total benefits, i.e. both guaranteed and non-guaranteed benefits, payable to these policy owners are approximately equal to the share of participating fund assets backing these policies over the long run.
What is a common methodology to calculate the assets backing each product? State the formula. What does it capture of the product?
A common methodology to calculate the assets backing each product is through a formula that captures all key relevant cash flow of the product. cash flow = premium income + investment income - claims paid (eg death, surrender, maturity) - Expenses (eg: commissions, management expenses, tax)
What is A common objective of participating policies?
A common objective of participating policies is to provide competitive and stable medium- to long-term returns to participating policy owners
What is a common approach to determine terminal bonuses upon death?
A similar approach is typically adopted for determining terminal bonuses upon death, based on the expected level of death payouts - set the terminal bonuses at the level such that the expected level of death payouts are approximately equal to the share of participating fund assets backing these policies over the long run.
Do all participating policies have to be written in the participating fund?
All participating policies must be written in the participating fund.
Although these bonuses are declared as immediate cash payments, most insurers usually allow them to be converted to what forms? 2 ways.
Although these bonuses are declared as immediate cash payments, most insurers usually allow them to be converted to additional sum assureds (also known as paid-up addition), or to be applied towards reduction of future premiums.
Are Annual bonuses are allocated annually to all in-force participating policies?
Annual bonuses are allocated annually to all in-force participating policies, except in some cases, such as policies in-force for less than two years
What does any estimation or approximation adopted in the calculation process be to each class and generation of participating policies?
Any estimation or approximation adopted in the calculation process must be fair and equitable to each class and generation of participating policies
As all participating policies acquire cash value, the policy owners are entitled to what 3 benefits?
As all participating policies acquire cash value, the policy owners are entitled to the following benefits: - non-forfeiture options automatic premium loan policy loan
Why is it important that representatives have a good understanding of the process by which bonuses are determined, so that they can provide correct and proper advice to customers when recommending participating policies?
As bonuses form a significant part of the total benefits to policy owners for most participating policies
What can you say about participating policies with higher terminal bonuses in terms of how early/late is their bonus allocation?
As terminal bonuses are allocated towards the later part of policy duration, participating policies with higher terminal bonuses tend to have greater deferment in bonus allocation
At each year end, insurers declare the amount of what bonuses (clue: 2) to be allocated to participating policies.
At each year end, insurers declare the amount of annual (e.g. reversionary) and terminal bonuses to be allocated to participating policies
At each year-end, the Appointed Actuary (as required under the Insurance Act 1966) will conduct what? What recommendations will they make? 2 recommendations.
At each year-end, the Appointed Actuary (as required under the Insurance Act 1966) will conduct a detailed analysis of the performance of the participating fund and make recommendations of: - the amount of bonuses to be allocated; and - the amount to be set aside for future bonuses.
Bonuses allocated are communicated to participating policy owners how often? In what form will they be communicated in?
Bonuses allocated are communicated to participating policy owners annually. This will be in the form of an Annual Bonus Update as specified in Appendix C of Notice No: MAS 320.
Do Vesting And Allocation Of Bonuses Mean The Same?
Bonuses allocated may not vest (i.e. attach to the policy legally) immediately. The practice of bonus vesting varies among insurers. - Typically, allocated bonuses are vested only upon the policy anniversary for which the bonus is due and after having paid the premiums due
Bonuses allocated may not vest (i.e. attach to the policy legally) immediately. Typically, allocated bonuses are vested only when 2 conditions are met? What are they?
Bonuses allocated may not vest (i.e. attach to the policy legally) immediately. The practice of bonus vesting varies among insurers. - Typically, allocated bonuses are vested only upon the policy anniversary for which the bonus is due and after the premiums due have been paid.
How often are bonuses determined (or "declared") ?
Bonuses are determined (or "declared") on an annual basis.
What are bonuses? What kind of benefits do they include?
Both guaranteed benefits and non-guaranteed benefits
What 2 kind of benefits are paid out of the assets of the participating fund?
Both guaranteed benefits and non-guaranteed benefits are paid out of the assets of the participating fund
Both the simple and compound reversionary bonuses can be surrendered for what while the policy continues to be in force?
Both the simple and compound reversionary bonuses can be surrendered for their cash equivalent (an actuarial present value), while the policy continues to be in force.
Why is buying a life insurance policy said to be a long-term commitment in terms of the 2 consequences of early termination of the policy?
Buying a life insurance policy is a long-term commitment. Early termination of the policy usually involves high costs and the surrender value may be less than the total premiums paid.
Determination of what for participating policies is an important aspect of participating fund management.
Determination of bonuses for participating policies is an important aspect of participating fund management
Methodology To Derive Assets Backing Participating Policy Group. What is it? What does it reflect? What is the purpose of this?
Essentially, this is a process of allocating participating fund assets to each participating product group / class that the participating policy belongs, to reflect its share of overall participating fund performance for the purpose of determining the bonuses of each participating product group.
It is also important to consider the mix between guaranteed benefits and bonuses. Give an example of how policies can have different investment mix. What should representatives advise their clients on then? For what?
For example, policies with a higher proportion of guaranteed benefits will have a more conservative investment mandate (e.g. more assets such as government bonds, where low risk is the key characteristic). By contrast, policies with a higher proportion of bonuses will likely be supported by more volatile asset classes, such as equities to give potentially higher returns. Representatives should advise their clients of these differences, so that the clients would be able to select a plan that would meet their own risk preferences and investment objectives.
For items that are product-specific, such as premium income, commissions and maturity benefits, what is the common practice of allocating participating funds assets to it?
For items that are product-specific, such as premium income, commissions and maturity benefits, the common practice is to allocate the actual amount to the particular participating product
For items that involve shared experience, such as investment income (investment risk), management expense (expense risk), claims (mortality / morbidity risk), etc, what kind of amount is allocated to each participating product group in a manner consistent with the risk sharing rules as described earlier? What does it take into account of too?
For items that involve shared experience, such as investment income (investment risk), management expense (expense risk), claims (mortality / morbidity risk), etc, an estimated amount is allocated to each participating product group in a manner consistent with the risk sharing rules as described earlier, taking into account the appropriate expected experience of each participating product group
What is guaranteed benefit or sum assured? There are 2 things that will be paid out. What are they?
Guaranteed benefit, or sum assured, is the amount guaranteed to be paid out to the beneficiaries if the life insured dies within the policy term. There will also be guaranteed cash values that will be paid on surrender
However, why is it not advisable for a policy owner to surrender the bonuses under his policy? This is especially so for a policy with what kind of bonus? Why for this kind of policy?
However, it is not advisable for a policy owner to surrender the bonuses under his policy, as this will affect future benefits payable under the policy, especially for a policy with compound reversionary bonus, as the value of compounding on the past bonuses will be lost.
In Singapore, when do the actual bonus declaration typically takes place?
In Singapore the actual bonus declaration typically takes place only in March/April following the end of the financial year for which audited financial statements of the participating fund have been completed, after the Board of Directors has approved the bonuses to be allocated.
When the future outlook of fund performance continues to be unfavourable, what may be necessary for insurers to reduce?
In addition, when the future outlook of fund performance continues to be unfavourable, it may be necessary for insurers to reduce the estimates of future bonuses accordingly
In assessing the benefits of participating policies, what is important to look at? Instead of what?
In assessing the benefits of participating policies, it is important to look at guaranteed benefits and non-guaranteed bonuses in totality, instead of just focusing on guaranteed benefits or bonuses in isolation
In making the recommendations for annual and terminal bonuses to be allocated, the Appointed Actuary has to carry out an in-depth analysis taking what three things into consideration?
In making the recommendations for annual and terminal bonuses to be allocated, the Appointed Actuary has to carry out an in-depth analysis taking the following into consideration: to maintain equity and fairness between different generations of participating policies; to maintain solvency of the participating fund; and to ensure consistency with the objective to provide competitive and stable medium to long-term returns to participating policy owners
In the extreme event that the participating fund has insufficient assets to meet guaranteed benefits, what is the insurer required to do? For what?
In the extreme event that the participating fund has insufficient assets to meet guaranteed benefits, the insurer is required to make good the shortfall by injecting additional capital into the participating fund
What do insurers have to ensure of the application of the risk sharing mechanism?
Insurers have to ensure that the risk sharing mechanism is applied consistently over time.
Insurers must have in place a clearly written policy on risk sharing mechanism which covers what 2 things?
Insurers must have in place a clearly written policy on risk sharing mechanism which covers: Risk sharing rules on how the experience of a participating fund (in terms of investment, expenses, claims, surrender, etc.) should be shared by each participating product group; and Methodology to determine the amount of asset backing each participating product group, which, in turn, will be used to determine the bonuses for the participating product group.
How are these interim bonuses typically determined? 3 ways.
Interim bonuses are typically determined based on the prevailing bonus rates, or bonus rates used in the reserves for future bonuses or results from an interim bonus investigation report.
Can non-participating policies and / or riders be written in the participating fund.?
It is common that some non-participating policies and / or riders are written in the participating fund.
unlike reversionary bonuses, the TB is not added to what, but it is only added to what in what circumstances?
It is important to note that unlike reversionary bonuses, the TB is not added to the sum assured of participating policies that remain in force; it is only added on termination in the circumstances described above [(a participating policy that has been kept in force until maturity, death (or TPD if included in the policy coverage) or surrender]
Which risk is often the largest risk? Since there are other risks, what do insurers have to do?
It is important to note that, while investment risk is often the largest risk, it is by no means the only risk that affects the performance of a participating fund. Othe risks, such as expense and mortality risks, can also affect the performance. Insurers have to set out how each of the key risks is shared.
Why is it referred to as the 90:10 rule?
It is referred to as the 90:10 rule, because it means that 90% of any surplus determined to be distributable, as bonus goes to policy owners in the participating fund, and 10% goes to the insurer.
Key risks affecting participating fund performance include what risks?
Key risks affecting participating fund performance include: Investment risk; Expense risk - acquisition and maintenance; Mortality risk; Dread disease and other morbidity risks; Lapse / surrender risks; and Business risks, e.g. non-participating policies and riders.
Do many participating policies allow riders to be attached? What are some common riders? Do these riders typically participate in the profits of the participating fund?
Many participating policies allow riders to be attached. Common riders include term rider, critical illness rider and accidental death rider. These riders typically do not participate in the profits of the participating fund.
Meanwhile, participating policies that terminate in the early part of the year before the finalisation of the bonus allocation may be given what bonuses?
Meanwhile, participating policies that terminate in the early part of the year before the finalisation of the bonus allocation may be given interim bonuses.
Most insurers adopt the policy of allocating stable annual bonuses, such that annual bonus rates will be adjusted only if...(clue: 2 situations).
Most insurers adopt the policy of allocating stable annual bonuses, such that annual bonus rates will be adjusted only if: - there is a prolonged period of good or poor performance; and / or - there is a change in medium to long-term expected investment returns.
Most participating policies sold in Singapore provide non-guaranteed benefits in the form of bonuses which are additions to the sum assured. What do they typically comprise of? 2 types of bonuses.
Most participating policies sold in Singapore provide non-guaranteed benefits in the form of bonuses which are additions to the sum assured. These typically comprise reversionary bonuses and terminal bonuses
Non-guaranteed benefits or bonuses are not guaranteed because of 3 factors that determine the value of assets backing the policies. What are the 3 factors? So when will there be more bonuses/non-guaranteed benefits?
Non-guaranteed benefits or bonuses are not guaranteed, because the level of non-guaranteed bonuses depends on the value of the assets backing the policies, which in turn depends, among other things, on the following key factors: investment performance (this is usually by far the most important factor); the level of expenses incurred by or allocated to the participating fund; and the amounts paid out to meet claims on policies in the participating fund. If the investments have been performing well, or claims and expenses are less than expected, there will be more funds available for bonus additions
Of the total bonuses, what mix of bonuses can vary for different participating products? The mix of bonuses can depend on what?
Of the total bonuses, the mix between reversionary bonus and terminal bonus can vary for different participating products. Some participating policies are designed with relatively higher terminal bonus and lower reversionary bonus, while others may have relatively lower terminal bonus and higher reversionary bonus. This will also depend somewhat on the insurer's bonus philosophy, as there are many different valid approaches that can be taken
Once the bonuses have been added to the policy, can the insurer reduce them or take them away?
Once the bonuses have been added to the policy, the insurer cannot later reduce them or take them away.
Common participating products include 4 kinds. What are they?
Participating Whole Life Insurance policy; Participating Endowment Insurance policy; and Participating Anticipated Endowment Insurance policy There are also Annuity products issued on a participating basis in the industry
Participating life insurance policies provide a combination of what and what benefits?
Participating life insurance policies provide a combination of guaranteed and nonguaranteed benefits.
What are participating policies? These products are also known as what? Why?
Participating policies refer to life insurance products that participate in the performance of the participating fund of the life insurer. Such products are also known as with-profits policies as they share in the profits or surplus of the participating fund.
Participating products are typically used for what purposes? Two points.
Participating products are typically used for the purpose of meeting savings / investment and protection needs.
Policy owners who would prefer to get a full share of assets could buy what instead?
Policy owners who would prefer to get a full share of assets could buy ILPs instead.
What happens to Premiums of a participating policy?
Premiums of a participating policy are pooled together with those of other participating policies in a specially designated participating fund. The fund is invested in a range of assets, such as government and corporate bonds, equities, property and cash.
What is by far the most common method used?
Reversionary Bonus, also known as Annual Bonus, is by far the most common method used.
What is Reversionary Bonus (RB)? What is it also known as? What is this method irrespective of? Explain the process from bonus being declared to it being payable when there is a claim on the policy.
Reversionary Bonus, also known as Annual Bonus, under this method, the bonus is in the form of an addition to the sum assured (However, the addition is in proportion to the sum assured, e.g. S$10 per S$1,000 sum assured), irrespective of the age of the insured, or the period that the policy has been in force. 1. The amount of bonus is declared annually and 2. Once declared, it becomes a guaranteed amount in addition to the sum assured, 3. credited to each policy on its anniversary date (sometimes this is referred to as the bonus "vesting") 4. and it is payable when there is a claim on the policy.
May Reversionary bonus and terminal bonus be allotted as an equivalent cash amount to policy owners?
Reversionary bonus and terminal bonus may also be allotted as an equivalent cash amount to policy owners.
What do Risk sharing rules cover?
Risk sharing rules cover the way in which key factors or risks that affect the performance of the participating fund are shared by (or pooled across) each participating policy.
There are two ways by which the reversionary bonuses are allocated under this method. What are they?
Simple Reversionary Bonus (SRB) Compound Reversionary Bonus (CRB)
What clause do some insurance policies have to make sure that those who surrender do not take an unfair share of the assets at the expense of the remaining policy owners?
Some insurance policies have clauses that allow the insurers to reduce surrender values when the market falls sharply.
Rather than additions to the sum assured, in what form do some participating policies provide for non-guaranteed benefits?
Some participating policies provide non-guaranteed benefits in the form of cash dividends rather than additions to the sum assured
Which process manages the stability of returns?
Stability of returns is managed through the bonus declaration process
What bonus is added on top of the regular reversionary bonuses when the policy is terminated?
TB is added on top of the regular reversionary bonuses when the policy is terminated.
Why are terminal bonuses likely to fluctuate more than reversionary bonuses?
Terminal Bonuses are designed to fine tune the fairness of smoothing of bonuses for policies that are terminating in a particular year. For this reason, they are likely to fluctuate more than reversionary bonuses
What is terminal bonus? When do insurers pay it out? What are some variations of this among the insurers? What kind of policy do insurers pay it to?
Terminal bonus is the bonus which insurers pay to a participating policy that has been kept in force until maturity, death (or TPD if included in the policy coverage) or surrender, usually provided the policy has been in force for a minimum period. - Some insurers will not pay this bonus if the premium has been discontinued, while some other insurers prescribe a minimum period, e.g. 25 years, for which the policy must be in force before it is entitled to receive this bonus. This minimum may be longer for surrenders
What are terminal bonuses? Clue: pay out for 3 situations. What policies are terminal bonuses not applicable to?
Terminal bonuses are bonuses allocated to terminating policies, particularly upon maturity and death, and sometimes also upon surrender. Terminal bonuses are typically not applicable to policies that terminate during the initial years.
What is referred to as the bonus "vesting"?
The amount of bonus is declared annually and credited to each policy on its anniversary date (sometimes this is referred to as the bonus "vesting").
The bonuses that are declared will have to be approved by who? What will they have to take into account of?
The bonuses that are declared will have to be approved by the Board of Directors of the insurer, taking into account the Appointed Actuary's recommendations
The bonuses to be allocated have to be approved by who? It takes into account the written recommendation of who?
The bonuses to be allocated have to be approved by the Board of Directors of the insurer, taking into account the written recommendation of the insurer's Appointed Actuary
When some non-participating policies and / or riders are written in the participating fund, what is the effect on the performance of the participating fund?
The experience of these non-participating policies / riders can affect participating fund performance, which in turn, can affect the level of bonuses allocated to participating policies
The insurer has the obligation to pay what kind of benefits regardless of the performance of the participating fund? What else is paid out from the participating fund? Give an example.
The insurer has the obligation to pay guaranteed benefits regardless of the performance of the participating fund. Expenses incurred in the administering of the participating policies are also paid out from the participating fund.
If most or all of the benefits were guaranteed, does it mean that the investment policy has to be conservative?
The investment policy also does not have to be as conservative as would be the case, if most or all of the benefits were guaranteed.
The level of bonuses also varies between different participating policies, depending on the benefit design of the product. Give some examples of how this varies?
The level of bonuses also varies between different participating policies, depending on the benefit design of the product. Some participating policies have higher guaranteed benefits and lower bonuses, while others may have lower guaranteed benefits and higher bonuses.
for a year when the performance is bad. The stable annual bonus declared may need to be supported by what?
The reverse is true for a year when the performance is bad. The stable annual bonus declared may need to be supported by assets built up from previous good years.
What is Compound Reversionary Bonus (CRB)? Assuming that Mr Foo's (see Example 6.1) insurer pays a compound reversionary bonus of S$10 per S$1,000 sum assured and a compounding rate of 1% p.a. to Mr Foo instead, the total bonus that he would have received at the end of the fifth year would be what and the sum assured is increased to what?
The yearly addition is allocated in proportion to the sum assured plus any existing bonuses attached to the policy. Assuming that Mr Foo's (see Example 6.1) insurer pays a compound reversionary bonus of S$10 per S$1,000 sum assured and a compounding rate of 1% p.a. to Mr Foo instead, the total bonus that he would have received at the end of the fifth year would be S$2,550.50, and the sum assured is increased to S$52,550.50 Y0: CRB - NA Total sum assured - 50,000 Y1: CRB - (50,000/1000)*10 = 500 Total sum assured - 50,000 + 500 = 50,500 Y2: CRB - 50,500 * 1% = 505 Total sum assured - 51,005 Y3: CRB - 51,500 * 1% = 510.05 Total sum assured - 51515.05 Y4: CRB - 51515.05*1% = 515.15 Total sum assured - 52,030.20 Y5: CRB - 52,030.20 * 15 = 520.30 Total sum assured - 52550.50
Simple Reversionary Bonus (SRB) System, what is the yearly addition based on? Mr Foo has a S$50,000 Whole Life Insurance policy. Assuming that the insurer pays a simple reversionary bonus of S$10 per S$1,000 sum assured, the total bonus that he would have received at the end of the fifth year would be what and what would be the sum assured?
The yearly addition is based on the sum assured only and not the sum assured plus bonuses per year. Mr Foo has a S$50,000 Whole Life Insurance policy. Assuming that the insurer pays a simple reversionary bonus of S$10 per S$1,000 sum assured, the total bonus that he would have received at the end of the fifth year would be S$2,500, and the sum assured is increased to S$52,500 which is derived at as follows: $50,000 + ((($50,000/1000)*$10)*5) = S$52,500
TB is added on top of the regular reversionary bonuses when the policy is terminated. Are they applicable for all policies? If not, what policies are they applicable to?
They are typically only applicable to participating policies that terminate after having been in force for a certain minimum number of years
How is the terminal bonus calculated? Two ways.
This bonus is usually declared as a percentage (e.g. 50%) of the reversionary bonuses already attached to the policy, or as a percentage of the basic sum assured.
Where does this investment freedom arise from? What does this mean for short-term fluctuations?
This investment freedom arises from the long-term investment horizon of the fund, meaning that short-term fluctuations pose less of a threat.
How is the common objective of participating policies which is to provide competitive and stable medium- to long-term returns to participating policy owners achieved?
This is achieved by investing a larger proportion in assets like equities which will give potentially higher returns in the longer term
However, in any particular year, terminal bonuses allocated to each maturing participating policy may not always be equal to the assets backing the maturing policies. Why?
This is because of the participating policy objective of providing stable returns, such that returns (including terminal bonuses) to maturing policy owners do not fluctuate excessively between different groups of maturing participating policies and from year to year. It is impossible to pay out the full share of assets backing each policy, while at the same time smoothing out the returns.
It is important to note that not allocating higher annual bonuses during a good year does not mean that participating policy owners are short-changed. Why?
This is because the assets built up from a given year that are not used in annual bonus allocation of that year (and after meeting reserves for future guaranteed benefits), will be set aside as reserves for: - future bonuses (this is particularly important for participating policies with high target terminal bonuses); and / or - future annual bonuses.
Since ultimately the determination of bonuses is at the discretion of the insurer, there is a further regulatory safeguard to ensure that the insurer does not deliberately under declare bonuses in order to retain more profit for itself. What rule is this? What does the rule state?
This is the 90:10 rule, set out in the Insurance Act, which states that the profits that the insurer can take out of the participating fund in any year are limited to 1/9 of the amount allocated to policy owners as bonus for that year.
Participating policies with higher terminal bonuses tend to have greater deferment in bonus allocation. What may this enable for the participating policies in terms of length of duration it has supported for and what kind of asset classes? What will this then generate in terms of returns?
This may enable the participating policies to be supported by longer duration and more volatile asset classes, which may generate higher returns.
The benefits payable under a participating policy will be increased by the bonus payment. What will then this result in for death benefit, surrender value and paid-up amount?
Thus, the death benefit, surrender value and paid-up amount will all be inclusive of the bonuses credited to the policy (the amount of bonus may be lower in the case of surrender and paid-up). death benefit = guaranteed death benefit + bonuses credited surrender value = guaranteed surrender value + surrender value of bonuses credited Paid up amount = guaranteed paid-up value + paid-up value of bonuses credited
The practice of bonus vesting varies among insurers. Typically, when are the allocated bonuses vested?
Typically, allocated bonuses are vested only upon the policy anniversary for which the bonus is due and after having paid the premiums due
Most insurers adopt the policy of allocating stable annual bonuses, such that annual bonus rates will be adjusted only in 2 situations. under this approach, the annual bonuses allocated in a particular year will be dependent on the performance of the participating fund in that year? Annual bonuses may be allocated for a "good" year and a "bad" year will be same/different?
Under this approach, the annual bonuses allocated in a particular year may not be directly dependent on the performance of the participating fund in that year. This means that the same annual bonuses may be allocated for a "good" year and a "bad" year
How are participation policies different from Investment-linked Life Insurance policy in terms of their assets?
Unlike an Investment-linked Life Insurance policy where assets for each policy owner are clearly identifiable in the form of units held, assets are not separately maintained for each participating policy owner.
While it is the insurer who exercises discretion / makes the final decision on the bonus determination, the insurer has to take into account what 3 considerations?
While it is the insurer who exercises discretion / makes the final decision on the bonus determination, the insurer has to take into account the following considerations: to maintain fairness and equity between different classes and generations of participating policy owners, i.e. by not treating any particular groups of participating policies favourably, and not having practices that are unfair to any participating policies; to maintain solvency of the participating fund, i.e. by not declaring excessive bonuses that may threaten the solvency of the participating fund and be detrimental to all participating policy owners; and to ensure consistency with the objective of providing stable medium to long-term returns to participating policy owners, i.e. by not allocating bonuses that fluctuate excessively from year to year and from one generation of policies to the next generation.
Do all participating policies acquire cash value?
all participating policies acquire cash value
What does it mean by bonus allocated vest/ do not vest?
attach to the policy legally
What do insurers try to avoid for bonuses declared from year to year? How do they avoid it? What is the net effect of bonuses with regards to the rises and falls in the investment markets?
even though bonus levels are not guaranteed, insurers generally try to avoid large fluctuations in the bonus declared from year to year, by smoothing bonuses overtime. --> This means that bonuses may be held back in years when the performance of the fund has been good, so that they can be maintained when conditions are less favourable. The net effect is that bonuses will not necessarily follow the rises and falls in the investment markets.
What kind of level of bonus is the CRB system designed to pay vs that of the SRB system level of bonus?
it can be seen that the CRB system is designed to pay an increasing level of bonus to the policy owner because of the compounding effect, while the SRB system is designed to pay level bonuses.
How are bonuses most commonly expressed?
most commonly expressed in the form of an addition to the sum assured
What is referred to investment mix?
proportion invested in each type of asse
What will the bonus payment do to the benefits payable under a participating policy? This is unless the policy owner has opted for what or what?
the benefits payable under a participating policy will be increased by the bonus payment, unless the policy owner has opted to use the bonus to offset the future premiums under his policy, or withdraw it in cash
will the investment mix change over time?
the investment mix may change over time, in line with the insurer's investment strategy.
assets built up from a given year that are not used in annual bonus allocation of that year (and after meeting reserves for future guaranteed benefits), will be set aside as reserves for future bonuses. This is particularly important for participating policies that have..?
this is particularly important for participating policies with high target terminal bonuses
What is the difference between participating policies vs non-participating policies in terms of benefits they provide?
unlike non-participating policies which provide only guaranteed benefits, participating policies provide a combination of guaranteed and non-guaranteed benefits.
