Author
Bowtie Team
Updated on
2025-07-10
Disclaimer: This article is translated with the assistance of AI.
Savings insurance is a major revenue driver for insurers. Ever curious about how they invest your premiums and what investment lessons you can learn? Join Bowtie’s actuary, Mr. J, for insider tips and savvy insights!
Savings Insurance = Pure Protection + Participating Policy Concept
In the market, savings insurance generally includes Whole life insurance and Whole life critical illness insurance , which come with a savings component. For insurance intermediaries (Agents and Brokers), policies with a savings element offer higher commissions, and the coverage amounts have some flexibility, making them a great tool for hitting MDRT milestones. Of course, insurance companies are willing to pay out those higher commissions because they’ve crunched the numbers just right .
Whether it’s whole life insurance or whole life critical illness insurance, your premiums aren’t just used for your protection— the insurance company invests the rest and shares in your returns . That’s why these lifelong policies can be “paid up” intermittently. When insurers do the math, they factor in a ton of assumptions, like investment returns, economic conditions, claims scenarios, and lapse rates.
Carefully Analyze Savings Insurance Returns
Many Agents and brokers love to hype up high investment returns for insurance products on social media, but they often emphasize projected returns , which include guaranteed returns and non-guaranteed dividends. How much dividends are paid out depends on factors like the insurer’s investment performance, claims payouts, and operating expenses. In extreme cases, dividends could drop to zero. So, the returns you actually get might end up higher or lower than the figures in the Benefit Illustration document.
Non-Guaranteed Dividends Reviewed Annually
Insurance companies are required to review the performance of the participating fund every year, with the Appointed Actuary preparing a report on non-guaranteed dividends in line with the requirements of the Hong Kong Actuarial Society . The Appointed Actuary must also periodically assess the assumptions used for dividend calculations under Guideline 16 and provide updates to the board of directors for appropriate adjustments.
After regular meetings with the actuarial team specializing in the participating fund, if the Appointed Actuary finds that the fund’s accumulated performance isn’t meeting the original product expectations, they might consider reducing non-guaranteed dividends . Due to lags in policy data, these dividend realization rates often only become clear in the later years of the policy.
Why Does Dividend Realization Rate Tend to Drift Over Time?
The longer a participating policy runs, the greater the chance that the dividend realization rate will drift. This happens because non-guaranteed dividends make up a lower proportion in the early stages of the policy, but their share increases significantly over time.
How Insurance Companies Take a Cut from Your Money
The First Method: Using Your Premium as Commission
Insurance companies deduct a portion of your premium as commission for agents or brokers. This is taken out before any investments, which can definitely impact your future returns. Let me illustrate with a simple math example for a single premium policy: if the agent or broker’s first-year commission is 15%, and assuming the fund’s annual return after expenses is 4%, it would take about 5 years for the policy to break even and start making money. That’s why participating funds often stress long-term investing—if you’re in it for the short haul, policyholders might never recoup their costs.
| Policy Year | Policy Cash Value |
| 0 | 100 * (1-15%) = 85 |
| 1 | 85 * (1+4%) = 88.4 |
| 2 | 88.4 * (1+4%) = 91.94 |
| 3 | 91.94 * (1+4%) = 95.61 |
| 4 | 95.61 * (1+4%) = 99.44 |
| 5 | 99.44 * (1+4%) = 103.4（Break Even and Profitable） |
* For simplicity in calculation, the above example does not consider the portion of returns withdrawn by the insurance company in investments. This will be detailed later.
The Second Method: Policy Admin Fees + Investment-Related Management Fees
Besides commissions, participating policies also charge clients regular fees, which mainly include:
- Policy Admin Fees: These cover expenses for claims departments, IT, and other operational costs like “lights and maintenance.”
- Investment-Related Management Fees: These are charged by asset management companies and depend on the assets held in your policy.
These two fees aren’t very transparent, and insurance companies can raise them at their discretion. In fact, they might be higher than buying funds directly, and since they’re charged annually, they can add up to a significant amount over the long term.
Why Don’t Underperforming Fund Companies Get Fired?
Fund managers need sharp investment insight to achieve returns that beat the market (alpha). However, even outperforming the market is no easy feat.
For instance, one insurance company’s funds have shown negative long-term excess returns, and after adding management fees from the insurance and fund companies, the performance dips even lower. Yet, because the asset management company is a subsidiary of the insurance firm , the insurance company might not switch managers even if the funds consistently underperform the market.
The Third Way: Siphoning Your Profits
For participating policies, insurance companies set a profit sharing ratio to claim a portion of the profits and losses from the participating funds. Ideally, this aligns the interests of the insurance company and policyholders, working together for the best long-term returns. However, over time, since participating funds tend to make more profits than losses, it effectively reduces the returns for policyholders.
How Much Return Does the Insurance Company Share With You? You Can Actually Check!
In participating products, insurance companies establish a profit sharing ratio to distribute the profits and losses of the participating funds to policyholders. For example, the company might allocate 70% of the profits to policyholders and keep 30% for itself.
The exact profit sharing ratio depends on the product. But here’s a key point: even within the same company, different products can vary. Here’s an example from a certain insurance company’s whole life critical illness policy:
| Product | Profit Sharing Ratio |
| A | 65% |
| B | 60% |
Insurance Companies’ Investment Blacklist
In recent years, ESG themes like “Environmental Protection”, “Social Responsibility”, and “Corporate Governance” have been hot topics in the fund world—and insurance companies managing client funds are no exception.
Each insurance company’s investment blacklist varies, but they often include industries that cause pollution, such as coal mining, tobacco, and gambling. Some companies go a step further by examining individual companies for environmental damage and adding them to the blacklist.
Is an Investment Blacklist a Boon or a Bust?
Opinions on blacklists and their impact on investment performance are divided. Some argue that narrowing the investment universe—focusing on “white list” companies like renewable energy—leads to overbuying and lower returns. Others say companies on the blacklist are doomed long-term, so avoiding them makes perfect sense.
Decoding Insurance Company Asset Allocation
How is Guaranteed Return Achieved?
Savings insurance typically offers guaranteed returns. To achieve these guaranteed returns, insurance companies generally allocate part of their assets to fixed-income products, such as Government Bonds , Investment Grade Corporate Bonds .
High-Return Investment Options
To achieve higher expected returns, insurance companies allocate the remaining funds to higher-risk growth assets, such as stocks, real estate projects, private equity funds, and so on. These growth assets are prone to losses, which explains why expected returns aren’t always realized.
Insurance Companies Can’t Invest All of Your Premiums
After deducting expenses like payments to intermediaries (Agents or Brokers) and the insurance company’s operating costs, insurance companies must set aside a portion of the premiums collected to pay policyholders in case of claims or surrenders. This portion is liquid funds and can’t be used for long-term investments. The percentage set aside depends on the insurance company’s risk appetite.
You Can Be Your Own Investment Manager
There’s no secret to how insurance companies invest. If you’re savvy with investments, you can invest in passive bond or stock ETFs that track the market, building your own portfolio. These ETFs have lower expense ratios than actively managed funds, helping you diversify risk and reduce investment costs.
Finally, here’s a little question for everyone. Insurance companies have their own investment portfolios and also manage those of their policyholders. So, when an investment opportunity arises, will they prioritize their ‘own child’ or their customers?
- * The content and examples in this article are for reference only and do not constitute any investment advice or an offer or solicitation for the sale of investment products. Investments involve risks. Past performance does not guarantee future returns. Before making any investment decisions, you should consider your financial situation, investment experience, and objectives, and determine if the product is suitable for you.
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