NTUC Income offers its policyholders the option to convert an whole life or endowment policy into a life annuity by giving an enhanced surrender value for the conversion. When exercising the conversion, the policyholder is given 5% more in surrender value.

A policyholder, who is now age 63 years old, is given the following offer:

a) Normal surrender value $68,120

b) Enhanced surrender value for conversion (5% more) $71,534.

c) Monthly annuity $269

I find the monthly annuity of $269 to be too low. The conversion rate is quite unattractive.

I calculated a fair conversion rate to be as follows:

At age 63, I have assumed the average payment period to be between 22 to 25 years. If the yield is 4% p.a. the monthly payout should be between $389 and $421.

If the policyholder takes out the surrender value of $68,120 and invest it to earn a yield of 4% p.a. and draws down the money over 22 and 25 years, the monthly payout should be $401 and $371 respectively.

I asked the policyholder to check with NTUC Income, if they have calculated the monthly annuity payout of $269 correctly.

I have quoted this example to show how to determine if the payout under a life annuity is fair.

Tan Kin Lian