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A deferred 10 year annuity
27 Apr 2022 (417 views)  

A 65 yo woman was offered an annuity that pays a guaranteed monthly income of $834 for 10 years from age 70. There is a non-guaranteed portion of between $38 and $343. The insurance company did not explain how the non-guaranteed portion is calculated. The policyholder has to pay a single premium of $100,000.

The policy contract is explained in a 31 page document that is incomprehensible to a lay person or to an expert for that matter. 

The policy contract is actually a participating life insurance policy with high distribution cost and high deductions. It allows the policyholder to make a monthly withdrawal from age 70 but does not explain how the withdrawal affects the cash value of the policy.

This is a bad way to design and market an annuity policy.

I will now explain what is the proper way to design an annuity policy that is clear and fair to the policyholder. 

I assume that the insurance company is willing to take the risk and offer the policyholder a return of 3% p.a. for investing the single premium for 15 years. As the insurer is likely to earn more than 3%, it can keep the excess for its profit. It will take the risk that the actual return is less than 3%.

Based on this structure, the insurance company is able to offer the policyholder a monthly income of $1,099 for 10 years starting fro age 70. 

There is no need to give a 31 page document containing a lot of irrelevant and incomprehensible information. 

If the insurance company is willing to offer a return of 4% p.a., the monthly payout can be increased to $1,201.

Alternatively, the insurance company can provide a guaranteed return of $1,099 (calculated on 3% interest) and a non-guranteed portion that depends on the actual return of the fund during the past year or averaged over the past 3 or 5 years. 

I suggest to the regulator, i.e. the Monetary Authority of Singapore, to disallow any insurance company from designing an annuity that is actually based on a participating life insurance policy. This structure is too complicated and can be manipulated by the insurance company to the detriment of the policyholder. 

Tan Kin Lian
 

A deferred 10 year annuity
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A 65 yo woman was offered an annuity that pays a guaranteed monthly income of $834 for 10 years from age 70. There is a non-guaranteed portion of between $38 and $343. The insurance company did not explain how the non-guaranteed portion is calculated. The policyholder has to pay a single premium of $100,000.

The policy contract is explained in a 31 page document that is incomprehensible to a lay person or to an expert for that matter. 

The policy contract is actually a participating life insurance policy with high distribution cost and high deductions. It allows the policyholder to make a monthly withdrawal from age 70 but does not explain how the withdrawal affects the cash value of the policy.

This is a bad way to design and market an annuity policy.

I will now explain what is the proper way to design an annuity policy that is clear and fair to the policyholder. 

I assume that the insurance company is willing to take the risk and offer the policyholder a return of 3% p.a. for investing the single premium for 15 years. As the insurer is likely to earn more than 3%, it can keep the excess for its profit. It will take the risk that the actual return is less than 3%.

Based on this structure, the insurance company is able to offer the policyholder a monthly income of $1,099 for 10 years starting fro age 70. 

There is no need to give a 31 page document containing a lot of irrelevant and incomprehensible information. 

If the insurance company is willing to offer a return of 4% p.a., the monthly payout can be increased to $1,201.

Alternatively, the insurance company can provide a guaranteed return of $1,099 (calculated on 3% interest) and a non-guranteed portion that depends on the actual return of the fund during the past year or averaged over the past 3 or 5 years. 

I suggest to the regulator, i.e. the Monetary Authority of Singapore, to disallow any insurance company from designing an annuity that is actually based on a participating life insurance policy. This structure is too complicated and can be manipulated by the insurance company to the detriment of the policyholder. 

Tan Kin Lian
 

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Jackie loh  27 Apr 2022  

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