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A misleading life annuity policy
26 Apr 2022 (1097 views)  

A policyholder, aged 65, was offered a life annuity policy. She pays a single premium of $100,000 and receives an monthly income of $843 (guaranteed) from age 70 for 10 years. There is a non-guaranteed income that varied from $38 to $343. There was no explanation on how the non-guaranteed income was computed.

From the actual investment return of the life insurance fund and the expense ratio, it was likely that the non-guaranteed income would be closer to the low end.

The benefit illustration comprised of 31 pages, which are difficult to understand. The policyholder is expected to sign that she has fully understood the details of the policy. I do not see how she can understand the details, as it is extremely complicated to a lay person.

She did not understand the contract, and approached me for my explanation.

I found that the policy is not a life annuity. It is actually a participating life insurance policy with a modest sum insured and reversionary bonus that are declared on the policy. The calculation of the reversionary bonus is complicated. I do not understand how the figures are derived.  

The policy allows the monthly income to be withdrawn from age 70 for 10 years. It is not clear how this withdrawal will affect the cash value. The benefit illustration assumed that the income is reinvested to earn 2.5% p.a. (which is not guaranteed).

The most important page is shown below. It shows the "effect of deduction". 

At the end of year 1, the cash value is $64,702 compared to the single premium of $100,065. The policyholder would have lost $35,363 if the policy is terminated in the first year. Why should be penalty be so high?

On year 13, the cash value is $99,061. This is still less than the single premium. What happened to the investment return on the single premium for 13 years?

The cash value jumped up sharply in year 14 and 15, based on the additional of "performance bonus". There is no explanation of how this works.

I have quoted the figures based on an projected investment return of 2.75%, instead of 4%. Based on the past performance of the fund, this is more likely to be the return that is expected.

If the policyholder takes out the monthly income, there will be little value in the policy at towards the end of the policy. The performance bonus is likely to be nil.

It appears to me that this policy will pay back over 15 years, the single premium that was invested. Most or all of the return from investing the $100,000 is likely to be fully taken away by the expenses and profit for the insurance company. 

It is better for the policyholder to put her money in the Central Provident Fund and use it to buy the CPF Life annuity, which is likely to give an attractive yield of 4%. However, I am not sure if this is still the expected return.

I do not understand why the regulator, i.e. the Monetary Authority of Singapore, allows the insurance company to issue a policy contract that is so complicated and appears to give an extremely poor deal to consumers.

Tan Kin Lian

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A misleading life annuity policy
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A policyholder, aged 65, was offered a life annuity policy. She pays a single premium of $100,000 and receives an monthly income of $843 (guaranteed) from age 70 for 10 years. There is a non-guaranteed income that varied from $38 to $343. There was no explanation on how the non-guaranteed income was computed.

From the actual investment return of the life insurance fund and the expense ratio, it was likely that the non-guaranteed income would be closer to the low end.

The benefit illustration comprised of 31 pages, which are difficult to understand. The policyholder is expected to sign that she has fully understood the details of the policy. I do not see how she can understand the details, as it is extremely complicated to a lay person.

She did not understand the contract, and approached me for my explanation.

I found that the policy is not a life annuity. It is actually a participating life insurance policy with a modest sum insured and reversionary bonus that are declared on the policy. The calculation of the reversionary bonus is complicated. I do not understand how the figures are derived.  

The policy allows the monthly income to be withdrawn from age 70 for 10 years. It is not clear how this withdrawal will affect the cash value. The benefit illustration assumed that the income is reinvested to earn 2.5% p.a. (which is not guaranteed).

The most important page is shown below. It shows the "effect of deduction". 

At the end of year 1, the cash value is $64,702 compared to the single premium of $100,065. The policyholder would have lost $35,363 if the policy is terminated in the first year. Why should be penalty be so high?

On year 13, the cash value is $99,061. This is still less than the single premium. What happened to the investment return on the single premium for 13 years?

The cash value jumped up sharply in year 14 and 15, based on the additional of "performance bonus". There is no explanation of how this works.

I have quoted the figures based on an projected investment return of 2.75%, instead of 4%. Based on the past performance of the fund, this is more likely to be the return that is expected.

If the policyholder takes out the monthly income, there will be little value in the policy at towards the end of the policy. The performance bonus is likely to be nil.

It appears to me that this policy will pay back over 15 years, the single premium that was invested. Most or all of the return from investing the $100,000 is likely to be fully taken away by the expenses and profit for the insurance company. 

It is better for the policyholder to put her money in the Central Provident Fund and use it to buy the CPF Life annuity, which is likely to give an attractive yield of 4%. However, I am not sure if this is still the expected return.

I do not understand why the regulator, i.e. the Monetary Authority of Singapore, allows the insurance company to issue a policy contract that is so complicated and appears to give an extremely poor deal to consumers.

Tan Kin Lian

Buy these financial books