What LIA’s Reduction in the Illustrated Investment Rate of Return Means

With effect from 1^st July 2021, the Life Insurance Association of Singapore revised the caps on illustrated investment returns for participating policies.  The upper illustrated investment rate of return drops from 4.75% per annum to 4.25% per annum.  The lower IIRR drops from 3.25% per annum to 3.00% per annum.  It is the first revision since 2013, when the cap was reduced from 5.25% to 4.75%, and it reflects a sustained low-interest-rate environment that has compressed the realistic return expectations of participating funds globally.

What a Participating Policy Actually Is

A participating policy provides both guaranteed and non-guaranteed benefits.  Premiums are pooled with other participating policyholders into the insurer’s participation fund.  The fund is managed collectively — invested primarily in fixed income securities with a smaller allocation to equities and other growth assets.  The returns generated by the fund are shared with policyholders through bonuses — either reversionary bonuses declared annually and added permanently to the policy value, or terminal bonuses paid on maturity, death, or surrender.

The policyholder participates in the fund’s experience — upside and downside — within the smoothing framework that the insurer manages.  The guaranteed component is fixed.  The non-guaranteed component depends on how the fund actually performs across the policy’s lifetime.

What the Illustration Rate Is — And Is Not

The IIRR is a regulatory illustration tool.  It is not a promise.  It is not a forecast.  It is not a guarantee.  It is a standardised rate used to show the client a plausible range of what the policy might produce under two scenarios — optimistic and conservative — so that the comparison between different products is conducted on consistent assumptions rather than each insurer using whatever illustration rate makes their product look most attractive.

The fact that this requires clarification reflects a persistent industry problem: clients frequently conflate the illustrated return with the expected return.  They do not mean the same thing.  The illustration at 4.25% does not mean the fund will return 4.25%.  It means that 4.25% is the upper bound within which the insurer is permitted to illustrate.

The actual return depends on the participation fund’s investment experience across the full lifetime of the policy.  That experience is shaped by interest rates, equity markets, credit spreads, mortality experience, expense management, and lapse rates — variables that no illustration rate can capture.

Why the Rate Was Reduced

The sustained low-interest-rate environment is the primary driver.  Participation funds invest a significant proportion of their assets in fixed income securities — bonds — whose yields are directly linked to prevailing interest rates.  When central banks globally suppressed rates to near zero following the 2008 financial crisis and maintained them at those levels for over a decade, the income generated by fixed income allocations compressed accordingly.

A participation fund invested in bonds at 1% to 2% yields cannot realistically project long-term returns at 4.75% without either stretching the equity allocation — which increases risk — or compromising the accuracy of the illustration.  LIA’s revision brings the illustration cap closer to what the fund can realistically be expected to deliver in the current environment.  The precedent is the 2013 revision from 5.25% to 4.75%.  That revision reflected the post-2008 rate compression.  The 2021 revision reflects the fact that the rate environment did not normalise as expected — it deepened.

The Critical Point: Existing Policies are Not Affected

Policies purchased before 1^st July 2021 are not affected by the illustration rate change.  The illustration rate in the original policy document is not a promise of return — it was always an illustration — and the bonus scale for existing in-force policies follows the insurer’s established annual review process, which is separate from the LIA illustration guidelines.

AIA Singapore has confirmed it is maintaining the bonus scale for all current in-force policies.  The illustration rate revision affects new policy applications submitted from 1st July 2021 onward.  It does not retroactively alter the economics of existing policies, and it does not indicate that bonuses on existing policies will be cut.

Does the Rate Cut Mean Returns Will Be Lower?

Not necessarily.  This is the question that will be asked most frequently and answered most poorly.  The illustration rate is a ceiling on what can be shown in a policy document for regulatory comparison purposes.  It is not a performance target.  A participation fund that has been delivering 5% returns does not suddenly deliver 4.25% returns because the illustration cap changed.  The fund’s actual performance depends on its investment portfolio and the market conditions in which it operates — not on the LIA’s illustration guidelines.

What the revision does signal is that LIA considers 4.75% an unrealistic upper illustration rate in the current environment — and it is correct.  Showing clients an illustration at 4.75% when the realistic long-term return expectation of the fund is materially lower creates a false impression of the policy’s likely performance.  The revision is a correction toward honesty, not a prediction of lower actual returns.

AIA’s participation fund delivered 10.9% in 2025 and has a 10-year average return of 4.97% above the new illustration cap.  The illustration cap constrains what can be shown in a document.  It does not constrain what the fund can actually earn.

Are Participating Plans Still Worth It?

Yes — for the right client and the right objective.

The participation fund’s advantage is stability and smoothing.  The policyholder does not experience the full volatility of the underlying investment portfolio.  In strong years, the fund retains surplus.  In weak years, it draws on that surplus.  The result is a more stable accumulation trajectory than direct investment in the same asset mix would produce — at the cost of some upside in exceptional years.

For the client who wants guaranteed cash value, stable non-guaranteed bonuses, life protection, and a long-term savings vehicle that does not require active management or high-risk tolerance, participating policies remain competitive.  The comparison with bank deposits at sub-1% per annum is unambiguous — even at reduced illustration rates, the participation fund comparison is favourable.

For the client with a higher risk appetite and a longer time horizon, an investment-linked policy with equity-heavy fund selection offers higher potential returns at the cost of higher volatility.  The two instruments serve different needs and are not direct substitutes.

The Practical Implication for New Buyers

If you are considering a participating policy and the illustration in the policy document has changed from what you saw before 1^st July 2021, the change reflects the LIA’s revised cap — not a change in the insurer’s investment strategy or commitment to the policyholder.  The non-guaranteed illustrated returns in the new document will be lower than those in an illustration prepared before 1^st July 2021.  This does not mean the policy is worse.  It means the illustration is more honest.  The appropriate question to ask your adviser is not “why are the numbers lower” but “what has the participation fund actually delivered over the past 10 years, and how does that compare to the illustration?”  AIA’s 10-year average of 4.97% provides a real-world data point against which the 4.25% illustration cap can be contextualised.  The illustration is the floor for the conversation.  The fund’s actual track record is where the conversation should begin.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code