Where the costs of savings insurance sit: reading the illustration rates, effect of deductions, total distribution cost and surrender value table

Why you cannot see the costs of savings insurance

The costs of savings insurance are not charged separately as "fees"; they are built in when the premium is priced. They ultimately show up as how long the surrender value stays below the premiums paid, and how far the long-term return falls short of the illustration rate. A fund has a stated management fee, and the rate on a fixed deposit is what you receive, but the costs of a savings policy have to be read indirectly from the benefit illustration (Policy Illustration).

Two regulatory arrangements help readers "see" the costs. First, MAS Notice 320 requires the Product Summary of a participating policy to list the types of charges levied and state that they are already allowed for in the premium (Notice 320 Appendix B, last revised 16 Nov 2020). Second, the benefit illustration format prescribed by LIA includes two columns, "effect of deductions" and "total distribution cost", and states that total distribution cost "is not an additional cost to you; it has already been allowed for in calculating your premium" (LIA, MU 22/24 Appendix IV(b), 28 Jul 2026; this template is the ILP version, and the participating policy template uses the same basis). Once you can read these two columns, you will have a fair idea of where the money goes.

Where the costs come from

Under LIA's definition of the effect of deductions, the gap between premiums and the eventual surrender value is the accumulation of the following kinds of cost (for participating policies, also the portion expected to be transferred to shareholders):

Distribution costs are one of the main reasons early surrender values are low, which is the background to the LIA and MoneySENSE guide's warning that on early surrender "You may lose all or nearly all of the total premiums paid" (Your Guide to Participating Policies, May 2020).

4.25% and 3.00%: what the illustration rates are

The benefit illustration for an SGD participating policy must show non-guaranteed benefits at two investment rates of return. From 1 Jul 2021, LIA set the cap on the Upper Illustration Rate at 4.25% p.a., with the lower rate required to be at least 1.25 percentage points lower, giving a cap of 3.00% p.a. for the lower rate; the previous caps were 4.75% / 3.25% (LIA media release, 2 Jun 2021).

Three points are key to understanding these two figures (all based on the wording of the LIA page):

1. They are caps, not a uniform standard. Insurers may illustrate at lower rates, and the illustration rate "should not be higher than the insurer's view of the investment returns achievable over the lifetime of the Par policies".
2. They are assumptions about the par fund's investment return, not the policy's annualised return. The policy's return is further reduced by the costs listed in the previous section, so even if the fund's long-term return really did reach 4.25%, the policy's internal rate of return would be noticeably below 4.25%.
3. They "do not represent upper and lower limits of the investment performance of an insurer's Par Fund". Actual experience may be above the upper rate or below the lower rate.

So saying "this endowment returns 4.25% a year" is wrong. The correct statement is "illustrated at an assumed fund investment return of 4.25%, the total surrender value in year N is such-and-such".

Reading the illustration column by column

The benefit illustration for a participating endowment usually lists values at the end of each policy year, one row per year. The main columns are as follows (column names vary by insurer):

The most common misreading is to look only at the "total surrender value (upper)" column. A sounder approach is to look first at the guaranteed column to establish the breakeven year and maturity amount in the worst case, then at the lower rate to understand the outcome if bonuses are low, and only last at the upper rate.

Effect of deductions and total distribution cost

The effect of deductions answers the question: "If my premiums were simply accumulated at the illustration rate, how far short would the total surrender value actually provided by this policy fall?" LIA defines it as the difference between the two, representing the accumulated cost of insurance, distribution costs, expenses, surrender charges, expected tax and (for participating policies) expected transfers to shareholders. It is usually large in the early years (because surrender charges and distribution costs are front-loaded) and then gradually falls as a proportion.

Total distribution cost to date is, in LIA's words, "the sum of each year's expected distribution-related costs, without interest", covering "commission, costs of benefits and services paid to the distribution channel". It is not charged on top, but it tells you two things: how large distribution costs are, and in which years they are concentrated.

When reading these two columns, ask three questions:

1. At year 5, year 10 and maturity, what proportion of cumulative premiums paid does the effect of deductions represent?
2. In which year does total distribution cost more or less stop rising? This usually coincides with the period of low early surrender values.
3. Does the difference in the effect of deductions between two proposals come from different protection costs (for example, a different sum assured multiple) or from different expenses and distribution costs?

Using the two illustrated values to estimate the breakeven year and long-term return

You can extract three key indicators from a benefit illustration without sophisticated tools (the following is an illustrative method, not specific to any product):

1. Guaranteed breakeven year: find the policy year in which the guaranteed surrender value first reaches or exceeds cumulative premiums paid.
2. Illustrated breakeven year (lower / upper): find the year in which the total surrender value at each rate first reaches or exceeds cumulative premiums paid. The distance between these three years is the contribution of non-guaranteed bonuses to breaking even.
3. Internal rate of return (IRR): enter each year's premium as a negative cash flow and the surrender value (or maturity value) at the end of a chosen year as a positive cash flow, then use a spreadsheet's IRR function. Do this once each for the guaranteed column, the lower rate and the upper rate to get three rates of return. The IRR on the guaranteed column is the contractually guaranteed outcome; the IRRs on both illustrated rates are non-guaranteed and will always be lower than the corresponding illustration rate, the gap being the annualised expression of costs.

Figures calculated this way are only for understanding the structure and comparing proposals, and are not indicative of future results. For the effect of premium mode, see single versus regular premium.

TER and net investment return in the annual update

After purchase, the other side of cost shows up at par fund level. MAS Notice 320 requires the Product Summary to disclose the par fund's total expense ratio (TER) and net investment return for the past three years, and insurers must also send an annual bonus update each year. Take, as an example, the 2025 participating fund update published by one local insurer (Great Eastern Life, Participating Fund Update for 2025; a single-insurer example used only to show how to read the columns, not for comparison. Related-party disclosure: the team behind this site's content represents Great Eastern Financial Advisers, which, like Great Eastern Life, belongs to the Great Eastern Holdings group). Its par fund TER (excluding the US-dollar portfolio) averaged 1.55% over ten years and was 1.13% in 2025; for the US-dollar portfolio it was 2.05% in 2025. The document defines TER as the fund's total expenses as a share of fund assets, with expenses that "include investment, management, distribution, tax, and other expenses".

Remember when reading this column: TER is a fund-level total expense ratio, not a charge deducted separately from your policy. It is already reflected in the fund's net investment return and, through that, in the bonuses declared each year. Because it includes distribution expenses, it overlaps with the "total distribution cost" in the benefit illustration, and the two cannot be added together to estimate total cost. The right way to compare is to set the fund's net investment return (looking at three-, five- and ten-year averages) against the illustration rate used in the benefit illustration, to judge how far the illustrated assumption is from the fund's actual experience. Past performance is not indicative of future results. For a full explanation of the par fund and bonus mechanics, see how a participating endowment works.

What to line up when comparing two benefit illustrations

Two proposals are comparable only on the same basis. Before comparing, check item by item:

1. Currency: SGD and USD policies differ in illustration rate rules, fund portfolios and currency risk, so their figures cannot be compared directly.
2. Premium mode and total premium: single premium, limited-pay and regular-premium plans naturally have different breakeven curves, so compare within the same premium mode.
3. Policy term and comparison points: compare at the same years, such as year 10, year 20 and maturity.
4. Illustration rates: confirm whether both use 4.25% / 3.00%, or whether one uses lower rates.
5. Guaranteed column: compare guaranteed surrender values and the guaranteed breakeven year first, then the illustrated values.
6. Cover: the death benefit multiple and riders (such as premium waiver) change the cost of insurance and the effect of deductions.
7. Cost columns: compare the effect of deductions and total distribution cost for equivalent cover.
8. Public comparison tool: compareFIRST, run jointly by CASE, LIA, MAS and MoneySENSE, offers like-for-like comparison in its endowment category and can be used as a cross-check (compareFIRST, accessed Oct 2026).

For the full pre-signing checklist, see 12 checks before you sign a savings policy. If you would like a benefit illustration read column by column against your own circumstances, you can register your needs through the contact options on this site.