On 16th Oct 2009, I was invited to Friends Provident launch on their new product at their market street office. The Global Wealth Builder Plus (GWB+) is targeted at high net worth market. However, a look at the product specification shows that the product is not restricted to Accredited Investor and so anyone with the necessary budget can buy.
The GWB+ is a regular premium investment-linked policy with no protection element in it. It has 49 funds to select from as on July 2009. It appears to be the same as the existing product Global Wealth Builder (GWB) except that the GWB+ requires a minimum premium of S$2250 per month.
In the industry, IFAs and banks that sell this kind of ILP are more familiar with another product from Zurich called the Vista. Familiarity with Zurich’s Vista is likely due to Zurich being earlier in the local market compared with Friends Provident. Anyway, the GWB and Vista is very similar. I was given the documentation and the latest benefit illustrator for GWB+ and I made some discovery with this kind of ILPs:
The GWB+, like its cousin GWB, has two accounts when a policyholder buys such a plan. During the first 18 months, all investments go into an account called the Initial Units. The Initial Units is where majority of the charges are deducted and it is an account which any withdrawal will incur significant penalty. The charges deducted for the Initial Units 1.5% quarterly based on the remaining balance of the Initial Units. These charges occur throughout the life of the policy. So for a 25 years plan, this quarterly charge will occur 100 times (because there are 100 quarters in 25 years). After 18 months, all subsequent regular premiums go into the Accumulation Units. Accumulation Units can be withdrawn without penalty. It appears that the only charges on the Accumulation Units is the Plan Fee of SGD 9 per month deducted quarterly.
This kind of ILP almost always give some “bonus units” for the first X months. IFAs often sell based on this and prospecting clients are often quite interested in such a bonus units because it appears that there is some kind of sure profit to be gain from this bonus units. For the GWB+, there is an additional 62.5% (valid to 31 December 2009) of bonus units being allocated. In ILP jargon, the premium allocation for the first 18 months is 162.5%! But wait - this extra bonus units are allocated into the Initial Units, not Accumulation Units. Remember, only the Accumulation Units can be withdrawn without penalty. So if anyone thinks he or she can make quick money after 1 year is going to be very disappointed. The surrender penalty for 12 months or below from policy inception is 100%! The surrender value immediately after 18 months is approximately 162.5% * (1 – 87%) = 13% of the NAV. From this simple math, there is no quick money to earn.
I decided to run some simulation to calculate the impact of these bonus units. Parameters I used are:
Premium = SGD 2250*3 = SGD 6750 per quarter.
Assumed investment return = 9% per annum or 2.25% per quarter
Charges: 1.5% per quarter on Initial Units;
SGD 27 Plan Fee per quarter deducted from Accumulation Units
Plan Term: 25 years
Mirror fund fee = 1.2% per annum
According to my simulation, the IRR based on 162.5% allocation for the first 18 months is 7.25% per annum. Sanity check: the BI shows that the yield is 7.13% per annum which is very close to my simulation. So I am on the right track.
I changed my simulation and set the allocation to 100% for the first 18 months and the IRR from my simulation is 7.12%! That is to say that the improvement due to the additional 62.5% bonus units for 18 months is merely a miserable 7.25-7.12 = 0.13% per annum! How could this be? The additional 62.5% in bonus units translates to 62.5%*18 = 11.25 additional months of premium which is nearly a year. Why this additional 11.25 months have no material impact on the yield of the plan? One reason could be because this additional units are allocated to the Initial Units which are subjected to hefty charges. So at the end of the term period, the amount left in the Initial Units are very little. As far as the reduction in yield of this policy is concerned, it is is 9-7.25 = 1.75% per annum. This is too high. Investing in stocks would incur 0% in management fee and if it is ETF, it cost just less than 0.5%pa.
Thus, it must be noted that the bonus units is merely a marketing gimmick. The bonus units do not provide with you a significant increase in your returns. Instead, the Friends Provident Global Wealth Builder Plus locks you in for a very long time. If you would to terminate or stop your premium earlier, you will incur a hefty financial penalty.
Here is the link to download my excel sheet simulation and the benefit illustration:
The remaining content of this article is for clients only.
If you are my client, login to continue.
Like this article? Subscribe to my newsletter below for more.