This is an article on how to analyse retirement products specifically single premium types.
A typical retirement product is manufactured by insurance company. Typically when you buy a retirement product you will consider the following:
- The period of ‘accumulation’ phase and the length of ‘payout phase’.
- Whether is the premium single premium or regular premium?
- Whether the payout is limited to certain number of years or perpetual?
- What is the quantum of the payout? How much is guaranteed and how much is projected?
- Whether is there a maturity benefit?
Due to so many parameters, I always make life simple for my clients by using the following 3 factors in selection of a good retirement product namely:
- Does the retirement product provide a good hedge against longevity risk? Longevity risk means outliving beyond your resources.
- Does the retirement product provide some kind of inflation hedging?
- Does the retirement product provide a high assurance of monthly payout? For a retiree, having a high retirement regular income is very important. On the other, living behind a bequest and having a large maturity benefit are unimportant. In fact, having a large maturity benefit can be a problem because that will mean the retiree is subjected to ‘reinvestment risk’. Reinvestment risk exists because when there is a large maturity benefit, the retiree has to find another product to buy when he is already very old. Most retirement products have a maximum entry age.
Here are three retirement products which are single premium type: PruGolden Income Premier, NTUC Income Guaranteed Life Annuity and Aviva MyIncomePlus for a female next age birthday of 51. I will write about regular premium in another blog. The following is a table of summary:
|PruGolden Income Premier||NTUC Income Guaranteed Life Annuity||Aviva MyIncomePlus|
|Premium type||Single premium||Single premium||Single premium|
|Payout start age (next birthday)||60||60||61|
|Guaranteed Monthly Income||$350 every month for 20 years increasing annually at simple interest of 4%. Lifestyle Multiplier Benefit of $2100 at 60.||$453.25 every month until the death of the insured.||$870 every month for 15 years.|
|Total Guaranteed Income over the policy term||$118,636 (provided by benefit illustration)||NA. Depends on the life of the insured. The product is better than the Prudential for a payout period beyond 21.81 years.||870 x 12 x 15 = $156,600.|
|Total Guaranteed Income divided by Total Premiums||102% (provided by benefit illustration)||NA. Depends on the life expectancy of the insured.||156600/115014 = 136%|
|Any non-guaranteed payout?||Yes, there is a non-guaranteed monthly income.||Yes, there is a non-guaranteed monthly income.||Yes, there is a non-guaranteed maturity benefit.|
|Total Income (guaranteed + non guaranteed @ 4.75%) divided by total premiums||215% (provided by the benefit illustration under Payout mode).||NA. Depends on the life expectancy of the insured. The product is better than the Prudential if the payout period is more than 27.5 years.||216% (provided by benefit illustration @ 4.5%).|
Let’s look at the 1st criterion which is whether does the product hedge against longevity risk.
PruGolden Income Premier payout is 20 years while Aviva MyIncomePlus is only 15 years. These two products do not provide for any hedging against longevity risk. On the other hand, NTUC Income Guaranteed Life Annuity provides a perpetual income as long as the retiree is alive.
Let’s look at the 2nd criterion: Is there any form of inflation hedging?
Aviva MyIncomePlus’s payout does not rise over time because there is a significant maturity benefit at the end of 15 years. PruGolden Income Premier monthly income rises at 4% every year at simple interest plus another non-guaranteed income which depends on the participating fund’s performance. For NTUC Income Guaranteed Life Annuity, its monthly income rises depending on the participating fund’s performance. It may be seen that Aviva MyIncomePlus is the worst since there is no increase in monthly payout but one must realizes that the absolute initial payout is the highest among the three products at $870 while PruGolden Income Premier’s initial payout is the lowest. Therefore, there is no clear winner for these three.
The 3rd criterion is whether the retirement product provides a high assurance of monthly payout?
To determine what is meant by ‘high’ assurance of monthly payout, we look at the total guaranteed monthly payout vs the amount of premium invested. For PruGolden Income Premier the ratio is 102%. For Aviva MyIncomePlus, the ratio is 136%. For NTUC Income Guaranteed Life Annuity, the ratio depends on how long one lives. The longer a person lives, the better the ratio. The NTUC Income Guaranteed Life Annuity’s ratio will exceed that of PruGolden Income Premier if the retiree lives beyond 21.81 years assuming both products’ do not have any non-guaranteed monthly income (i.e. the par fund for both is zero all the way). According the Complete Life Table 2008-2013, the life expectancy (i.e. the average length of life) of a female at age 60 is 26.4 years in 2013.
I have totally ignored the non-guaranteed portions. Over the years, many policyholders have been greatly disappointed with the (non-guaranteed) performance of the par funds such as that of Dr. Yik Keng Yeong who complained about the disappointing performance of his endowment. It could be better to invest in equities for the long-term to get this ‘non-guaranteed’ portion after all this is how insurance companies do it by investing in high risk investment for the long-term while investing in bonds to ensure they are able to meet their obligations for the ‘guarantee’ part.
Among these three products and without any other constrains, I would recommend the NTUC Income Guaranteed Life Annuity due to the following reasons:
- It is the only product among these three that hedge against longevity risk.
- Aviva MyIncomePlus has to be excluded as there is no hedge against longevity risk. Moreover, it has significant high reinvestment risk. The retiree, at 75 years old, has to find another product to reinvest this maturity benefit. There is a high possibility that there is no product available for such an age.
- PruGolden Income Premier has to be excluded because its total guaranteed payout is only 102% of the single premium. Almost its entire upside is not-guaranteed.
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