Deconstructing and Understanding Your Whole Life Insurance Policy

Insurance terms are confusing to many, even to those who have already purchased a few insurance policies. Knowing how to read your insurance policy and the benefit illustration is crucial to knowing how the policy is beneficial to you and what you might still be lacking in protection. What are the guaranteed or non-guaranteed expected returns? What is the free-look period, and what is the difference between the premium and policy terms?

To highlight some of the most important parts of your policy, Planner Bee has deconstructed the different portions of a whole life insurance policy in this article. Here, we will explain insurance jargon and bring your attention to parts where you need to take a closer look.

Free Look Period

After your insurance is approved, you will be given a booklet with your insurance contract and the policy details. Upon receiving this booklet either in the mail or from your insurance advisor, your 14-day free look period commences.

Essentially, the free-look period allows you to cancel this policy within this 2-week timeframe and get a full refund. However, for those who had taken up an Investment-Linked Policy (ILP), you will have to bear the loss incurred if your current valuation is lower than at the point of investment.

This is also why it is important to understand your policy before signing the contract and to be able to independently go through the benefit illustration.

Product Summary

Containing descriptions of the policy’s features and general exclusions applicable to the plan, the product summary also lays out detailed information on benefits and claims, along with the investment strategy and risks in your whole life policy.

It is important to read and understand the product summary to know of any exclusions and the eligible situations for claims to avoid being blindsided when circumstances occur.

Benefit Illustration

Possibly the most important part of your insurance policy, the Benefit Illustration (BI) is also the most confusing document in a whole life insurance plan.

The BI will contain all benefits, costs, and charges of the whole life policy you have purchased. For most BIs, you will know the Product Type, Premium Term, Policy Term, Name of the Insurer, Policy Currency, Key Risks, Surrender Policy, Possible Costs, and Expected Returns (Guaranteed or Non-Guaranteed) in the first two to three pages.

Insurance TermsMeaning
Product Type
What kind of insurance is this?
Is the whole life plan an ILP or Endowment?
Premium Term
How many years do you have to pay for this policy?
Policy Term
When will this policy expire (if the policy does not lapse due to lack of payment)?
Surrender Policy
What happens if you terminate your whole life plan before it matures?
Key Risks
Comprising investment, insurance, and expense risks for a participating policy
Rate of Return
The net gain or loss of the investment in your whole life policy. This includes both Guaranteed or Non-Guaranteed returns.
Total Distribution Cost
Included in premium costs, this is the amount that you will pay for advice and for other distribution-related expenses.

In the policy illustration, you will also see the Sum Assured, which is your coverage amount. This is the sum that will be paid out usually in the event that Death, Terminal Illness, Total Permanent Disability or Critical Illness happens. However, for Endowment policies, the Sum Assured might not be the coverage amount, and can instead refer to the savings goal. This is especially true with regard to Guaranteed Issuance Option (GIO) policies. Policies with GIO serve to provide higher financial returns for a lower protection coverage.

3% and 4.25% Investment Returns

Deserving a point on their own, the 3% and 4.25% investment returns stated in the BI can be misleading for those who believe them at face value. According to the Life Insurance Association Singapore, insurers are “expected to illustrate at least two scenarios; an upper investment return scenario and a lower investment return scenario to provide a reasonable potential range of the level of benefits.”

“The Upper Illustration Rate and the Lower Illustration Rate are used purely for illustrative purposes and do not represent upper and lower limits of the investment performance of an insurer’s Par (Participating) Fund.”

Not only are the rates purely examples, but the investment returns mentioned also meant the returns for the participating funds your policy invested in and not your policy’s own investment returns. So even if you see that Fund A is reaping an 8% return this year, your investment is not getting 8% returns but at a lower rate determined by the insurer after deducting other factors such as cost of management.

It is also important to note that the lower illustration rate of 3% does not mean that 3% is the lowest return the par fund can get. It can be underperforming at 2%, 1% or even in the negative for the worst-case scenarios. These are your non-guaranteed returns, so the returns will fluctuate with how the funds perform for each year.

Understanding Your Whole Life Insurance Policy

Before you lock your insurance policy documents into a cupboard, never to be seen until a claim is needed, take time out to read and understand your whole life insurance policy. Take note of the sum assured, benefits, and guaranteed and non-guaranteed returns, and figure out if this policy fulfils your needs. Ask your financial adviser if there is anything that you are unsure about before the 14-day free-look period expires.

Check out Planner Bee’s Term Life vs Whole Life piece to understand more about insurance coverage. Use our Insurance Needs Calculator to figure out the total insurance coverage you need, and whether you are adequately insured. Alternatively, drop us an email at ask@plannerbee.co to know more!

Read more: How Much Life Insurance Do I Need in Singapore?

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