Should I ride on riders or get rid of them?
Thanks for the encouraging response to the last two articles of this three-article series on “cleaning-up” we do at fidentiaX. The aim of the cleaning-up, as explained in the previous article, is to ensure superior returns to the investors. To refresh the previous articles talked about converting non-annual premium paying contracts to annual premium paying contracts and opting for accumulation option for contracts with cash payouts. This article focusses on contracts with the riders attached to the base policy.
Riders, in simple terms, are the supplementary benefits added in the primary life insurance contract and come at an additional premium. Some of the common riders that come along with life insurance contracts in Singapore market include rider for Critical Illness (CI) and Total and Permanent Disability (TPD). Riders can come handy for enhancing protection against unfortunate events like CI and TPD.
So yes, riders are great when the aim is to enhance protection and it makes perfect sense to attach the relevant riders at the time of buying life insurance contracts. The question then is, why we at fidentiaX, get rid of them? The answer lies in the usefulness of riders once it is put on the marketplace for sale. The usefulness of the riders for the investor is limited given the investor is unlikely to get benefited out of rider and is more keen on higher returns.
Clearly, the impact is best understood with the help of an example. To ensure comparability, let’s go back to the sample policy we demystified in the previous articles. I have reproduced the specifications below. The readers would appreciate that the structure of Option I is exactly same as the annual premium payment policy in the previous articles. Option II represents the contract with CI rider and has a higher premium to reflect rider premium. The maturity benefit and the timing of benefits are same for both the Options.
From an investors perspective, if the riders remain attached, s/he would pay higher premiums for the same amount of benefit. And this would lead in depletion of value. In this example, the yield of the contract increases by 0.08% by removing rider. However, this could be anywhere between 0.04% -0.15% depending on the age of the policyholder and amount of additional protection through riders. Given at fidentiaX we aspire to offer superior returns to the investors we further clean-up the contracts by detaching the riders.
Now that we have gone through the cleaning-up activities in detail, it might be a good idea to summarize them. As part of cleaning-up, fidentiaX does following at the time of processing the contracts from seller to buyer:
1. Convert all non-annual premium payment contracts to annual premium payment mode
2. Switch to accumulation option for all contracts with cash payout option
3. Detach riders for all contracts with optional riders
The following graph quantifies the impact of each cleaning-up activity on the sample contract we discussed over the three articles.
Given the absolute impact can vary depending on numerous factors like policy term, premium payment term, amount and timing of cash payouts and nature of riders, the graph shows the relative impact of each of the activities. However, it is not difficult to gauge that cleaning-up could add to the yield by approximately 50%!
Disclaimer: The intention of the article is to educate. The premiums and benefit amounts are fabricated but realistic. The author appreciates that riders, when attached wisely, could turn out to be an efficient way of enhancing the protection even though they come at a cost of Internal Rate of Return.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.