【Savings Insurance】Unveiling the Art of Language in Savings Insurance: Learn to See the True Returns

Starting from 1 July this year, the Insurance Authority has introduced a cap on the illustration rates for participating policies, stipulating that the maximum illustration rate for HKD policies is 6%, and for non-HKD policies, it is 6.5%. After the implementation of this measure, many people have been asking what the 6%/6.5% figures represent.

In reality, when insurance agents sell savings insurance, they often mention various figures such as return rates and bonus rates, which can be quite eye-catching. When choosing a product, which rate should consumers refer to? The following text breaks it down step by step.

To prevent overly aggressive sales tactics in the market, the Insurance Authority has introduced a new regulation known as the "illustration rate cap". According to the regulation, when insurance companies sell participating policies, the annualised return rate (i.e., the total internal rate of return (IRR)) calculated from the expected total surrender value shown in the benefit illustration documents must not exceed the illustration rate cap set by the authority at 6.5% (for non-HKD policies) or 6.0% (for HKD policies). This measure aims to prevent insurance agents and intermediaries from providing overly optimistic return projections during sales and to manage policyholders' expectations, thereby avoiding significant discrepancies between expected and actual returns.

The structure of each savings insurance product, such as the payment period, investment method, and return amount, varies. To calculate the time value, we recommend comparing savings insurance using the Internal Rate of Return (IRR). However, some agents may present other data to highlight policy returns when selling savings insurance, such as bonus rates. While these figures often appear attractive, consumers must pay attention to what those percentages (%) represent and how they are calculated. For instance, some in the market may calculate returns by comparing bonuses to cash value or even treat bonus accumulation rates as return rates, which can easily result in high return figures.

However, when 10Life analyses expected returns, we focus on the product's expected Internal Rate of Return (IRR), which is the annualised return of the cash value (including bonuses) relative to the premiums paid, taking into account the time value of money. Regardless of the insurance product's contribution period, payment method, or bonus distribution method, IRR provides a standardised way to calculate returns, making it easier for consumers to compare. For more details, refer to the 10Life Long-Term Savings Insurance Product Decoder.

Next, readers might ask why the cash value at the beginning of the policy term is so low, far below the premiums paid. Before answering this question, it is important to understand what "cash value" means. "Cash value" refers to the amount a policyholder can expect to receive if they surrender the policy at a certain point during the policy term. This amount includes both guaranteed and non-guaranteed components (if any). If the dividend realisation rate falls short of expectations, the actual surrender amount the policyholder receives may be lower than anticipated.

For example, in the illustration below, the "cash value" is highlighted in a red box, while the "premiums paid" are indicated in a green box. In the earlier policy years, such as the first 1 to 5 years, the "cash value" is relatively low. So, where have the premiums paid by the policyholder gone? In simple terms, they are used to cover adviser commissions, insurance costs, and the administrative expenses of the insurance company, among other things.

Another concern for many is, when will they break even? If you compare the "surrender value" and the "premiums paid", as shown in the example below, by the 10th policy year, the "surrender value" exceeds the "premiums paid" (see the pink line). Therefore, the expected breakeven year for this proposal is the 10th year. However, the "surrender value" includes non-guaranteed bonuses, dividends, or interest, so there may be instances where the breakeven period is "delayed".

If you wish to know the guaranteed breakeven year, compare the "guaranteed amount" and the "premiums paid". For this proposal, the guaranteed breakeven year is the 25th year (see the blue line).

It is important to understand that long-term savings insurance is a relatively long-term "investment". You must ensure that you have sufficient liquidity to meet your daily needs and maintain good financial discipline to make payments on time throughout the entire policy contribution period in order to achieve long-term wealth growth. Additionally, you should avoid early policy surrender, as this may result in unnecessary losses.

If you are wondering how to choose the right savings insurance, feel free to contact 10Life's insurance advisors to find a savings insurance product that suits your needs.

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.