Hong Kong people believe in saving money, and this spills over into their preference when taking out insurance policies. Many may opt for insurance products with a savings element, such as whole life or critical illness products that will distribute dividends or bonuses. These products are known as “participating policies”, where the insurance company pays policyholders non-guaranteed benefits (dividends/bonuses) as a way of sharing its profits.
In addition to insurance protection, a participating policy can also offer potential returns. After an extended period of accumulation, the policy’s accumulated dividends/bonuses may exceed the paid premium and provide returns to the policy. As participating policies come with both protection and return features, their premiums are also higher. For the same insured amount, the premium of a participating policy is normally higher than a purely protective one, such as a whole life or critical illness product without a savings element. Besides a higher premium, there are other areas for consideration.
1. Dividends / bonuses are not guaranteed
The returns provided by a participating policy are generally divided into two parts, namely guaranteed benefits and non-guaranteed benefits. As the name suggests, dividends and bonuses are not a given. The insurance company decides on the dividend/bonus amount based on its investment strategy and performance, claim history, operational expenses and other factors. The final pay-out received by the insured may be higher or lower than the projected amount indicated in the Benefit Illustration. Under extreme circumstances, the amount of dividends/bonuses may even be zero.
The distribution of guaranteed and non-guaranteed benefits differs from one participating policy to another. Generally, a higher proportion of the non-guaranteed benefits may lead to a higher potential return, but the return may also involve higher volatility. As such, when reading the Benefit Illustration, do not focus solely on the total cumulative value; instead, pay attention to the portions of the guaranteed and non-guaranteed benefits. The Benefit Illustration lists out the surrender value and death benefits based on different scenarios of projected return. These include the basic scenario, the optimistic scenario and the pessimistic scenario, which are provided to help policyholders understand the differences in returns. In addition, you can learn more about an insurance company’s past performance in paying out non-guaranteed benefits through the fulfilment ratio. Please note that this is a reference figure of past performance only, and is not an indication of future dividends/bonuses.
2. Early surrender may lead to significant losses
Participating policies are generally long-term insurance products and the policy term of some products may even last a life time. If you surrender in the early policy years or even in the medium term, you may not be able to recover all of the premiums paid. Early surrenders will not only mean failing to fulfil the purpose of your policy, you are also likely to suffer financial losses. Hence, before purchasing a participating policy, it is important to understand the terms and conditions of the policy, your personal financial circumstances and make sure that you can afford to pay the premiums throughout the whole policy term.
While saving money is important, the primary purpose of insurance is to provide protection. Take life insurance as an example. If your goal is to protect your family but you have bought a life insurance policy with a large savings element and a low insured amount, the death benefits may not adequately provide financial protection for your family due to a misfortune. Therefore, before buying a policy, it is importance to consider various factors, such as the main reason for purchasing the insurance, your protection needs and affordability, product features, etc. Choose an insurance product that suits your needs. If you want both protection and accumulation of savings, participating policies maybe an option for you. If you are after a larger insured amount with relatively lower premiums, and not potential returns from the insurance, you may consider purely protective products.
