【Are Savings Insurance Plans a Scam?】 Eye-catching insurance ads on social media. Uncovering the pitfalls of savings insurance.

Readers who regularly follow social media may come across advertisements for savings insurance. Certain savings insurance ads use eye-catching return figures to attract attention, claiming annual returns exceeding 10%, while also being "guaranteed" and "low risk". These offers appear far more appealing than fixed deposits, especially in the current sluggish environment of Hong Kong's stock and property markets, where savings insurance seems to outperform the broader market. However, on discussion forums, many netizens have debated that savings insurance is deceptive, complaining that the returns do not meet expectations. Why is savings insurance so controversial? This article breaks down two major pitfalls of savings insurance, hoping to help everyone understand the truth behind it.

We often come across advertisements for savings insurance on social media, showcasing remarkably high returns that entice readers to enquire and purchase. However, are these insurance advertisements exaggerated or overstated? Do high returns come with high risks? These are questions worth considering.

Case 1

In Case 1, the savings insurance in the advertisement offers premium financing with an annual return of up to 19%. When readers analyse the advertisement, the first thing to consider is whether the return is guaranteed or projected. From the phrase "up to," it is clear that this return is projected. Next, we must question the authenticity of the 19% return. The entire advertisement does not explain the calculation method for the return, and we are unable to verify it. However, the profit from policy financing comes from the interest rate differential. Only when the interest earned from the savings insurance exceeds the interest paid for premium financing does the policyholder stand to gain. With interest rates still high at present, the profit from premium financing is undoubtedly eroded, making it very difficult to achieve a 19% return. At the same time, one must not overlook that projected returns are often proportional to potential risks, and premium financing carries considerable risks. 

Further reading: 【Premium Financing】High Interest Environment May Lead to Losses in Premium Financing

Case 2

In Case 2, the advertisement promotes a tax-deductible annuity as zero-risk with a guaranteed annual return of 26%, which appears very attractive. However, in reality, this is not a return but rather a result of tax deductions (up to 17% of the premium) and premium discounts (12% of the premium), which reduce the amount of premium paid. These two figures cannot simply be added together to be considered as a guaranteed return rate. 

According to observations by 10Life, as of the deadline, an annual expected return of 7% for savings insurance in the market is already quite impressive. If someone claims that a savings insurance product offers a higher return, readers should exercise extra caution, verify the authenticity of the return figures, assess whether the underlying assumptions are reasonable, and be mindful of potential risks.

Apart from some exaggerated online promotions and sales tactics, the inherent characteristics of savings insurance also contribute to the perception that savings insurance is deceptive. To enhance readers' understanding of savings insurance and help them become savvy consumers, 10Life today highlights two common pitfalls of savings insurance:

Early Surrender May Result in Losses

Savings insurance is often long-term in nature, with more significant returns typically realised after ten years or more. The longer the policy term, the higher the returns. If a policyholder needs to surrender the policy early due to unexpected circumstances, the cash value received may be less than the premiums paid. Therefore, policyholders are advised to keep emergency funds aside and avoid investing all their savings into savings insurance.

Expected Returns May Not Meet Expectations

The returns from savings insurance are divided into guaranteed and expected returns. Guaranteed returns are what the insurance company is contractually obligated to provide to the policyholder, while expected returns (or total returns) include non-guaranteed dividends. These are influenced by factors such as the insurance company’s investment performance, dividend policy, and economic conditions, meaning the final amount may not fully materialise. Due to some savings insurance products failing to meet expected returns, with disappointing dividend fulfilment rates, many perceive savings insurance as deceptive. As a result, the Insurance Authority issued Guideline 16, requiring insurance companies to disclose dividend fulfilment rates to enhance transparency regarding dividend distribution.  

Further Reading: 【Dividend Fulfilment Rate 2024】Comparing Dividend Fulfilment Ratings of Major Insurance Companies

Although savings insurance has its controversies, it still offers numerous benefits, particularly when the stock market is underperforming, and investors are stuck with losses, unsure when they will recover. This highlights the advantages of savings insurance. As long as the policyholder is willing to let the funds accumulate over time, savings insurance is one of the few financial tools that guarantees no loss of capital. For clients seeking stable returns without investment expertise, savings insurance undoubtedly serves as a convenient financial tool for the less proactive. Below are the advantages of savings insurance:

Provides Guaranteed Returns

Unlike financial products commonly encountered by the public (such as stocks or funds), savings insurance offers guaranteed returns and can preserve capital. As long as the policyholder does not surrender the policy early and allows sufficient time for the funds to grow, positive returns can be achieved. Many people use savings insurance for long-term investment, preparing for retirement or their children’s education.

Encourages Saving Habits

Surveys indicate that one in four individuals born in the 1990s is a “moonlighter” (Note 1), living paycheck to paycheck. This suggests that young people often lack savings awareness. If affordable, moonlighting individuals might consider allocating a portion of their income to savings insurance, making regular contributions to implement financial planning, reduce overspending, and cultivate sound financial discipline. Over the long term, this could yield unexpected benefits.

A Convenient Financial Tool for the Less Proactive

Investing in stocks, bonds, and managing portfolios requires specialised knowledge, which not everyone possesses. However, with savings insurance, the savings are managed by professional investment teams. Policyholders do not need to monitor daily market conditions, as their funds continue to grow with interest. Thus, savings insurance is also a convenient financial tool for the less proactive.

Opinions on “savings insurance” vary widely—some praise it highly, while others avoid it altogether. Claims that “savings insurance is a scam” have some basis, but it would be unfair to deem it entirely worthless. Therefore, before purchasing savings insurance, it is advisable to understand the product features and risks, compare different products, or consult with 10Life advisors to choose the most suitable insurance product.

Further Reading: 〈Compare Savings Insurance Now〉  

Note:   
1. 〈1 in 4 Post-90s is a “Moonlighter”〉, HKET website.  
2. This article was last updated on: 7 December 2023.

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.