The circumstances surrounding the novel coronavirus put the cross-strait jet setting life of Mr. Chang, the vice president of a financial holdings company, on hold. Making more trips back home, he was shocked to discover that his mother was having cash flow problems.

This was completely unexpected to him.

Mrs. Chang, nearly 80 years old, is retired from a career working for the central bank. She has a good retirement pension, and is quite frugal. Upon making thorough inquiries, Chang found that it was insurance premiums that were eating up the majority of his mother’s available cash.

She takes out a gridded piece of paper, on which she has recorded her purchases of various financial planning products and when she can expect to get money back, along with the names of each policy’s beneficiary.

All told, she purchased 14 whole life savings insurance policies with over NT$10 million in coverage, all of which will pay for themselves when they mature in at least six years.

“Right now I’m worried about how to cancel them so that my mother can have these funds available to spend over the next 10 years,” relates Chang.

Chang’s mother is not an unusual case, but actually a microcosm of Taiwan’s miraculous culture of personal finances.

For a dozen years straight, insurance premiums have amounted to 17.48 percent of Taiwan’s GDP, the highest ratio in the world. Even Wellington Ku, chairperson of the Financial Supervisory Commission, whose role sometimes calls for stepping in to take strict financial measures, has a combined nine whole life savings policies with his wife. Among the current Cabinet, Mr. and Mrs. Hsu Kuo-yung, minister of the interior, rank first for holding the most policies at 40.

Is being world’s number one a good thing?

Led by the United States Federal Reserve, around the midpoint of last year central banks around the world started lowering interest rates. Fixed annuity rates, which have the largest impact on insurance policy holders, were adjusted downward at the same time. In April, the NT dollar annuity interest rate dropped below two percent, and under three percent for policies in US dollars. This marked a five-percent drop for each of them compared to two years ago.

The declared annuity interest rate is the yield from insurance company profits shared with clients, beyond the fixed government interest rate. When insurance companies are strong and capable investors, making money on the global stocks and bonds markets, declared annuity interest rates are high.

The declared annuity interest rate was drastically lowered in April, greatly diminishing the appeal of whole life insurance policies. New Financial Supervisory Commission regulations will be rolled out this July, requiring increased death benefit ratios and reductions in the proportion that can be used towards investment in savings. In addition, the Insurance Bureau is busily discussing the reduction of the fixed interest rate.

Is whole life insurance still appealing after lowered interest rates?

Let us take a look at a current popular variable annuity additional optional life insurance policy, paid on an annual basis over a period of six years. At the fixed US dollar annuity rate of 2.25 percent, even if the declared annuity interest rate remains steady at a dream-like 3.25 percent, once the policy matures in the seventh year the internal rate of return (IRR) for a 40 year-old policyholder would still be just 1.35 percent, a mere 0.7 percent higher than the current US dollar fixed savings interest rate.

Returns on whole life insurance higher the later it is paid out

However, if the policyholder is willing to wait 10 years before taking payments, the rate of return can be raised to 1.95 percent. According to industry projections, if three forces come together premiums can increase by 20 to 30 percent. “Right now only the declared annuity rate has been reduced. But starting on July 1, a lot of products will no longer be offered for sale,” relates Solution Huang, vice president of Fubon Life.

Nearly every insurance company stresses that the whole life savings insurance that swept Taiwan over the last decade will never go away. That said, going forward the whole life insurance battlefield will be all about when and how to collect annuities and dividends, as well as different types of protections. 

Presently, insurance companies offer policyholders a multitude of new policy options, from payouts in installments, to using dividends to purchase more coverage, while also retaining death benefits.

Han-Wei Lin, chief actuary and senior vice president of Shin Kong Life, relates that his company has offered whole life policies for which annuities can be paid out once the policyholder reaches a certain age. Due to the longer accumulation period the return rate is higher on such policies.

Among the new products rolled out this year, most insurance companies have given customers the option to use dividends to purchase higher coverage amounts, rather than withdraw money. In addition, they have fortified such protection functions as disability, special accident benefits increase, major burns, food poisoning, and doubled accident payouts to differentiate their policy offerings.

Going forward, before buying whole life savings insurance, policyholders must take inventory of the policies already in their hands to avoid repeat purchases of redundant protections they do not need.

Aging society has greater need for long-term care protections

“When the return rate is no longer attractive, only those needing tax and estate planning will use insurance products as financial planning tools,” asserts Hsien-Nung Kuei, chairman of the Taiwan Insurance Institute.

At this time, insurance policyholders are still liable for taxes on insurance payments, so the only advantage is that they are not required to pay supplemental health insurance premiums. Following the death of the policyholder, the designated beneficiary is granted a tax exemption of up to NT$33 million, thus insurance remains a key vehicle for heavy hitters to save on taxes.

In addition to tax savings, Kuei believes that as it moves toward becoming an aging society, Taiwan truly needs insurance with in-kind benefits.

Whole life insurance that no longer just pays out cash, but promises to cover six types of in-kind payments for medical care, nursing, long-term care, health management, hospice care, and funeral expenses, would better suit policyholders’ needs.

The problem is that in Taiwan the insurance industry is currently not permitted to offer long-term care services, administered under the Ministry of Health and Welfare.

Apart from adjusting whole life savings insurance, Cathay, Fubon, and Taiwan Life are set to make “guaranteed minimum benefits” policies a priority going forward.

Guaranteed minimum benefits annuities are a variation on single payment quasi discretionary investment-oriented policies popular in recent years. Previously, insurance companies granted full discretion to investment trusts to handle premiums. Under such an arrangement, they required that as long as net value reached a certain level, a monthly return on profits was paid to the policyholder.

Monthly returns were packaged as monthly interest in order to satisfy Taiwanese investors’ taste for having cash in hand. However, the shortcoming is that net unit profits from such managed investments are often less than NT$10, amounting to allotting oneself principal, with death payments undetermined.

Guaranteed minimum benefits policies are just getting started in Taiwan. Each year the insured pays a 1.7 percent management fee to the insurance company, which guarantees a minimum death benefit after the policyholder passes away. Of this, 0.5 percent goes to the insurance company to purchase guarantees that a set payment can be paid upon death. The main appeal of such an arrangement is that the customer can draw funds from the policy while they are alive, and leave an inheritance to their children and grandchildren.

Although guaranteed minimum benefits policies can avoid the drawbacks of fluctuating payments during one’s life and after one’s passing, standards governing monthly interest rates are fairly strict. Accordingly, no interest is paid out on poor investment performance resulting in net profits of NT$8 or less, and although the projected rate of return is 3.8 to 5.0 percent, returns are not necessarily stable.

Momentous changes in the insurance market have made guaranteed returns products things of the past. Now, taking on risk has become the rule for those seeking higher returns.

When insurance can truly solve problems, policyholders will not nitpick about such minor issues as interest payments.

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Translated by David Toman
Uploaded by Judy Lu