Are Savings Insurance Policies a Scam? 4 Major Traps and Risks of Taking Out Savings Insurance.

When searching online for savings insurance, it is not difficult to find many internet users complaining that the “returns were not as expected” or that “cancelling the policy early means losing money”. Some even go so far as to say that “savings insurance is a scam”. Savings insurance itself is not a scam, but if you only focus on the expected returns when taking out a policy, without distinguishing between guaranteed and non-guaranteed benefits, the breakeven period and the surrender value, the actual outcome may differ from your original expectations.
The following explains 4 common pitfalls of savings insurance, as well as what to look out for before purchasing a savings insurance policy.
 

Many people feel that buying a savings insurance plan means being “caught out”, but the problem often stems from a gap between expectations when taking out the policy and how the policy actually works.

For example, the “projected return” shown in the benefit illustration does not mean that all the amounts are guaranteed; completing the premium payments does not mean that you have already broken even. If you need funds during the policy term and surrender the policy early, the amount you actually receive may be lower than the premiums you have paid.

However, savings insurance does not necessarily require you to lock up your funds for 10 or 20 years. There are also many short-term savings insurance plans currently available on the market. Some only require premiums to be paid for 1 year, with policy terms of around 3 to 5 years, making them suitable for people who do not want to lock up their funds for too long. The guaranteed returns of some products may also be more attractive than those of fixed-term deposits over the same period, but you should still compare the IRR, break-even period and early surrender terms in practice.

Therefore, before buying savings insurance, rather than simply asking “how high is the return?”, it is more important to understand: how much of the return is guaranteed, when you will break even, and what the consequences will be if you need to use the money during the policy term.

“I clearly saw this projected return when I took out the policy, so why didn’t I end up receiving this amount?”

One common reason is mistaking a “projected return” for a “guaranteed return”.

The returns from savings insurance can generally be divided into guaranteed and non-guaranteed portions. The guaranteed cash value is set out in the policy, while bonuses and terminal bonuses are non-guaranteed. The final amount paid may differ from the amount projected when the policy was taken out.
So when looking at the projected return of a savings insurance policy, do not just consider “how much can I get back in the future?” More importantly, ask: “How much of it is genuinely guaranteed?”

When comparing savings insurance, compare the guaranteed IRR and projected IRR separately. This makes it easier to understand the differences in returns between various products.

“It says you only need to pay for 5 years, so why can’t I get back all my principal when I surrender the policy after 5 years?”

This is because the “premium payment period” and the “break-even period” are two different things. “Paying for 5 years” only means that the premiums need to be paid within 5 years; it does not mean that the policy’s surrender value in the fifth year will already be equal to the premiums paid. If the policy has not yet broken even, surrendering it early may still result in receiving less than the premiums paid, even after all premiums have been paid.

Therefore, when purchasing savings insurance, you should also pay attention to the “break-even period” and retain sufficient liquid funds. If you expect that you may need to use the money in the fifth or tenth year, long-term savings insurance may not necessarily be suitable.

“I only wanted to get back the money I had paid in early. Why is it less?”

This is because savings insurance is not a bank deposit, and the premiums paid do not equate to the amount you can withdraw in full at any time. In particular, long-term savings insurance generally requires the funds to remain invested for a longer period. If you suddenly surrender the policy early, the cash surrender value at that time may be lower than the total premiums paid.

If you do not want to lock up your funds for too long, you may consider short-term savings insurance. Some short-term products have shorter premium payment and policy terms, with returns concentrated more on the guaranteed portion, making them suitable for those who wish to retain greater financial flexibility. However, you should still compare the break-even period and early surrender terms before taking out a policy.

You can use 10Life to instantly compare +190 savings insurance products, including short-term and long-term savings insurance with different policy terms, and make your choice based on when you expect to need the funds. You are also welcome to contact a 10Life insurance adviser to find a savings insurance product that suits you.

「Pay $1 million and get $2 million back in future — does that mean a 100% return?」

It may appear that the amount has doubled numerically, but this figure alone cannot be used to determine whether the return is high or low. This is because turning $1 million into $2 million over 10 years can result in a very different annualised return from doing so over 30 years. The longer the term, the longer the funds also need to be tied up. Therefore, when comparing savings insurance plans, do not just look at “how much you can get back in the end”; also compare the Internal Rate of Return (IRR) over the same term.

If the expected return of a savings insurance plan includes a relatively high proportion of non-guaranteed bonuses, you can also refer to the insurance company’s dividend fulfilment ratio to understand the difference between the non-guaranteed bonuses actually paid in the past and those originally projected. However, past dividend performance does not represent future returns.

Having discussed the above pitfalls, this does not mean that savings insurance is inherently unsuitable. The key is whether the product aligns with your savings goals and when you will need the money.

Some of the returns from savings insurance are guaranteed benefits, which are set out in the policy contract. Investment management is handled by the insurance company, so policyholders do not need to buy or sell investments themselves or monitor the market constantly. Paying premiums in instalments can also help develop a more disciplined savings habit, while savings insurance generally also provides death benefits.

The savings term can vary considerably between products. If you do not want to lock up your funds for too long, you may consider savings insurance with a shorter term. If your goal is your children’s education, retirement or wealth inheritance, you may consider longer-term planning.
For example, when preparing an education fund for your children, rather than simply pursuing the highest possible return, it is more important to consider “when the money will be needed”. Overseas education expenses are usually concentrated over a specific number of years, so it is also worth checking whether the plan offers arrangements such as phased withdrawals or policy splitting to meet funding needs at different stages of life.

Before taking out a policy, make sure you ask these 3 questions:

1. How much of the return is guaranteed? Do not treat the expected bonuses as guaranteed returns.
2. When will I break even? Completing the premium payments does not mean that you have already broken even.
3. What happens if I need money midway? Check the surrender values in different years, rather than only looking at how much you can get back at maturity.

To compare products, you can use the 10Life savings insurance comparison tool to compare the guaranteed IRR, expected IRR and break-even period of short-term and long-term savings insurance, and then make your choice based on your savings goals and when you expect to need the money.

Will savings insurance erode the principal?

It is possible. If you surrender the policy in its early years, the surrender value may be lower than the total premiums paid, resulting in a possible loss of principal.

Does completing the premium payment period for savings insurance mean that you have broken even?

No. The premium payment period is simply the period during which premiums must be paid; whether you have broken even depends on whether the surrender value at that time has reached the total premiums paid.

If I do not want my funds to be locked up, might short-term savings insurance be more suitable?

It may be worth considering. Short-term savings insurance has a shorter policy term, and returns are also more concentrated in the guaranteed portion, making it suitable for those who do not want to lock up their funds for the long term. When comparing plans, you may wish to consider the guaranteed IRR, breakeven period and currency options. The main plans available in the market are denominated in Hong Kong dollars, US dollars and Renminbi.

Are the expected returns of savings insurance guaranteed?

Not necessarily. Expected returns may include non-guaranteed bonuses, and the actual amount may differ from the benefit illustration provided when the policy was taken out.

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.