Par For The Course

Sunday Times, August 30, 2009
By Lorna Tan

If you own a traditional whole life or endowment insurance policy, you would no doubt have come across the term ‘participating fund’ – often shortened to ‘par fund’.

Mystified by just what this par fund is and how it operates? You are not alone since insurance policies are among the most difficult financial products to understand.

Many of you would have received letters from your insurers informing you the extent of bonus cuts on your plans and how these would potentially lead to a lower cash value on your policies from those previously projected. The cuts mainly stem from the poor investment performance of the par fund last year owing to the global financial crisis.

Highlights:

Q: What is a par fund?

The premiums that policyholders pay for their par plans, such as for whole life and endowment policies, go into a common pool called the par fund. This fund is invested to provide stable returns over the long term.

Q: How are bonuses determined?

Each year-end, the insurer’s appointed actuary conducts a detailed analysis of the par fund’s performance, taking into account various components including expenses. He then makes recommendations on the amount of the bonuses to be allocated and the amount to be set aside for bonus smoothing.

Q: What is bonus smoothing?

This means to retain bonuses during the good performance years so as to have a same level of bonuses during bad performing years. Literally to smooth out the effects of big swings in the fund’s performance.

Q: What are customers’ concerns over the par fund?

1. Under current regulations, the fund can be used for marketing expenses such as advertising and the recruitment of life agents. Insurers appear to have full control of the way the fund is administered. It seems that many insurers are still aggressively advertising and recruiting while at the same time cutting the bonuses.

2. Is the payout that a policyholder receives when he terminates or surrenders his policy a fair representation of his policy’s share in the par fund. Insurers appear to have the discretion in determining the payout beyond the guaranteed amount. So should such policies still be seen as a form of savings, since withdrawing seems very detrimental to the policyholder.