Thursday, May 15, 2008

Super Complicated Plan

I attended a training session arranged by one of the major Insurance Company recently. The session talks about this Annuity Plan that uses the Investment Concept to ensure a guaranteed income for the annuitant.

I thought that packaging of investment into an annuity is a good concept and heard that this plan was well received in matured countries like Japan and US. I was quite excited to know more as I thought such a plan will encourage people to take up some risk via an investment, yet still get the guarantee from the Insurance company that they will get an income for life.

We were shown why Singaporeans need to plan and blar blar blar in the first half of the session. Coming to 2nd half, I began to get deeper and deeper into confusion. I'm still confused because I never expect a plan to be designed till such complication.

Use an example to confuse you (Its okay to give up half-way)
50yrs old, male invested $100,000 into this plan. Just like to write a bit to show you how complicating this plan can be.

1) The $100k lumpsum is invested into a rather balanced/growth portfolio. This actual Investment value in the policy at any time is called "Account Value"(AC)
2) If the person choose to take out the refund immediately, he will get a 4% of his premium over next 25 years. It will be $4,000/yr. We call this "Gross Withdrawal Amount" (GWA)
3) If the person choose to take out the refund 5 to 10 years later, he will get a loyalty bonus equal to 25% to 50% of this premium to his "Gross Withdrawal Benefit" (GWB). GWB is like an invisible account to calculate GWA.
4) Person can opt for "Income for Life" after age 65 to mimic as an annuity plan, but the guaranteed withdrawal amount will be based on the GWB at that time.
5) There is a chance for the GWA to increase provided that his AC exceeds the original GWB on every 5th policy year.
6) If AC exceeds current GWB but below original GWB, the years to maturity will be extended instead of an increase of GWA. The term used is Potential for "Step Up"
7) Unless your investment grow at a rate of at least 8%p.a, I don't see a good chance of the GWA will be stepped up.
8) The evaluation date is exactly on every 5th policy anniversary. If the 5th year is a lousy year, then sorry. You are unlucky and you won't get a step up that year.
9) The worst case for this plan that the Client only get $100k out of his $100k that he put in. 0% yield.
10) Of course, the best case is that if the investment grow at 8% p.a and the GWA enjoys "Step up"

Confused? Let me show you their High Charges
* Confused? There are more to it. Scenerios all changed when you choose partial withdrawal, early redemption, annual top up, etc
* To justify the confusion, their charges must be high. Fund management fee as high as 1.65%. Account management fee of 1.8% and fund hedging fee of 0.25%. The yearly charges is as high as 3.7% p.a.
* I did not check out the commission structure. I believe it must be quite attractive considering the cost involved.

Conclusion
* The plan is so complicating that nobody will every remember what they purchased after 1 week. As a trained adviser myself, I find it hard to remember the features.
* There are so many things to lock you up your hard earned money and worst case scenerio is that you only get back your money after 25 years.
* The payout is not fantastically high. 4% of the investment amount is small. If your fund grow at 6%p.a and you take 4% yearly, your principal remaining will logically be intact or more than the $100k you put in.
* The charges involved are very high. The returns after charges even if the person choose not to take out any GWA till 80 yrs old is barely 5.24% when your fund actually performed 9%.
* If your fund really grow at 8%p.a, your own investment outside this plan will surely do better.

Advice
* Avoid such plan. Get an adviser to show you how to invest on your own. He will help you to strategize and construct a portfolio with regular reviews and rebalancing.
* The work he do is more and yet charges much lessor than they do.
* The only disadvantage is "No Capital Guarantee" for your $100,000. Frankly, the chance of losing $100,000 with a horizon of 25 yrs in a diversified portfolio is very low. You decide yourself...
* Why these Insurance Companies make plan until so complicating? Can they be made simpler for a layman to remember what they purchased???

5 comments:

la papillion said...

Hi,

Sounds like those structured products offered in the market these days, with their terminology and jargons :)

I'll gladly give it a miss.

Khiat Han Hwee Adrian said...

Someone emailed to me as follows:

Manulife SPR(S$) isn't that complicated. You just need to work out the cash flow then you will be able to see that it offers poor value over the long term. Some advisers are selling it as an investment, i.e guaranteed profit of 25% or 50% if no withdrawal made in the first 5 or 10 years respectively. NTUC Income's par annuity is still better. It's already an annuity, no need to wait till age 65 in Manulife's case. The guaranteed annual payouts are also much higher (not yet incl the bonus). You are right to point out that it'll be difficult to enjoy the stepup on every 5th year.

If there's no alternative in the market, then I would say Manulife's SRP may help address longevity risk of Singaporeans. But NTUC Income's par annuity clearly offers better value.

Jason

Anonymous said...

If this is complicated to you, go see those bank's structured product. I guarantee you won't know a shit.

Anonymous said...

The insurers are running out of ideas and in order to help their greedy dumb and stupid insurance agents and themselves they roll out products that look impressive and complicated to fool the customers. Manulife and NTUC are the fathers of this kind of products. What do the agents know and how much can the agents help the customers to know. The customers should avoid products like revosave and SPR to get avoid trouble.

wilfredling said...

Hi Adrian,

You may like to know that many IFAs are pushing this product like crazy.

I don't see any good in this product. If we compare say a person age 54 and deferred first payment at 64 (where the IFL starts) and than compare to NTUC Income classical annuity with the same parameters and defered period, you'll find that NTUC Income still win.

Thus it is always important for a client to engage a trust adviser.