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Almost all the insurance companies in Singapore has a participating fund. For the most part, policyholders with a participating policy will contribute part of their premium into a participating fund.

Example of Participating Policy: Traditional Whole Life Insurance Policy, Endowment Savings Policy

How does it work?

Firstly, all the policyholders with a participating policy will pool their premiums together. Thereupon, the insurance company will use this pool of money to invest into their participating fund. On the whole, this fund is responsible for benefit payments, deduction of expenses, and more importantly, return of investment over the long run.

What does it invest in?

The objective of the participating fund is to provide stable returns in the medium to long term. For this purpose, the insurance company strives to achieve this goal by diversifying the pool of money across different asset classes.

Example of invested assets: Bonds (forms the majority of the fund), Listed Equity, Private Equity, Real Estate

What are the expenses involved?

Any expenses incurred in the management of the participating fund is spread across the participating policyholders.

Example of an Expense: Death benefit paid to a participating policyholder, investment fee, marketing and distribution cost

How to calculate the return?

There are three steps to calculate the return for a participating fund:

1. Determine the value of assets in the participating fund

2. Subtract the value of the guaranteed policy benefits, e.g. previously declared bonuses

3. The net amount is available to declare as future bonuses and dividends

Additionally, it is worthy to note that there exists an incentive for the insurance company to provide a higher return to the policyholders. This is because of regulatory requirements. In detail, there is a 9:1 ratio on policyholders to shareholders distribution, i.e. for every $9 given to the policyholder, the shareholder will receive $1.

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What is the risk?

Managing a participating policy has its own risk factors. Consequently, this has an adverse effect on the policyholder’s return.

Factors affecting the performance: investment return, mortality, morbidity experience, lapse and surrender experience

Since the objective of the participating fund is to provide stable returns to the policyholders in the long run, the insurance companies will often use a technique known as ‘smoothing‘. In essence, the insurance company will keep some of the profits in the good years to make up for the shortfall in the poor performing years.


Most insurance companies will send an annual update to their policyholders to inform them on their participating fund performance. Additionally, information on the projected policy and fund performance can be found in the policy illustration itself. Such information is critical to assist the consumers to make the right financial decision for their hard-earned money.

At the end of the day, investment return alone is not the ultimate decision factor. Instead, it may be worthy to take time to understand on the company’s size (thereby affecting expense ratio), as well as on the asset allocation (is the consumer undertaking more risk than necessary to achieve the same return?).

Thoughts of the Day 💭

  1. Do you own a participating policy?
  2. How well do you understand a participating fund?
  3. Does the participating fund size matter to you?

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