If you own a whole life insurance or an endowment policy, read the contract carefully and you will notice that a huge majority of them are participating policies

I have attached to you on what is participating policy

If short, when you pay the premium to your insurance policy (whole life & endowment), so do the rest of the other policyholders, all the premium will be pooled into this fund called the participating funds. The insurer which write the policies will manage this fund on your behalf. When you surrender your policies, or there’s death or illnesses payout, the insurer will pay out from this fund.

That being said, you, the policyholders, own the funds collectively. The insurer manage it for you, and is being paid a management fee. On top of that, there’s also a “profit sharing” arrangement for managing the funds. This ensure that the interest of both parties are aligned.

Under the Notice 320 Management of Participating Life Insurance Business set by MAS, the Monetary Authority of Singapore (Our Central Bank), there are guidelines with regards to the management of the fund. This ensure that your fund, will not be mismanaged.

https://www.mas.gov.sg/regulation/notices/notice-320

Of course, when you pool these premiums together, the funds invest in assets for you; namely investment grade bonds, equities, and other assets. In general the insurers invest in productive assets which eventually produce coupons payment, dividends, rental, or even stock price appreciation for you. Hence, on a yearly basis, the participating funds shall make an income from the assets they own. From the income, the board of directors of the insurer will hence declare a bonus to the policies, which ultimately gets channeled into your policies. Bonuses, once declared, becomes guaranteed.

Remember I shared about the profit sharing? As you can see, the shareholders of the insurer own the insurer, and they want more dividend payout from the insurer. As the funds make money, the contract between the insurer and the policyholders stated it clearly that, for every $9 bonus issued to the policyholders, only maximum $1 can be paid out to the shareholders. Clearly, this contract ensure that the policyholders’ interest is being well served.

If you refer to my past article on firing off your bank, over here, you see a different approach from the insurer. Here, because of the binding power of the insurance contract, this policy will serve you well, and as the funds make more money, your policies will get the majority share of the profits. Whereas, in the typical bank, rest assured, as a depositor of the bank, you are guaranteed to get as low interest rate you can. Go think about it; if you are the shareholder (owner) of the bank, will you want to give your depositor a high interest rate, and charge your borrower a low interest rate?

If you have read until now, you might have your reservations about life insurance policies in general, such as the high initial cost etc. I’ll leave it in the next article, but in this post I just want to showcase to you 1 point; for majority of you who own a life insurance or endowment policies, you have “fully paid property” which is guaranteed to increase in value over time thanks to the binding contract which you have with the insurers. Your policy work for you, and not against you.

As for your bank? You better think twice about storing your money there if you want better long term yield.