One of my client showed me this policy as her friend wanted to prospect her to buy this product.
The PruGolden Retirement that was proposed to her was a regular premium retirement product that provides a stream of monthly income starting at the retirement age of 65 years old for a period of 20 years. The PruGolden Retirement’s monthly income consists of $1000 (guaranteed) and $595 (non-guaranteed portion). There is a non-guaranteed maturity benefit of up to $48,200.
In terms of premium, the PruGolden Retirement will cost her $4972 a year for 26 years. Her next age birthday was 34.
Comments:
It is interesting to note that the PruGolden Retirement benefit illustration did not even state the internal rate of return (IRR). So there is no way for a customer to compare with alternative product. But no worries, I used a software I created to determine that the IRR is 2.18% per annum based on the $1000 guaranteed monthly payout. If we include the projected benefits, the IRR is 4.11% per annum.
I have problem with this proposal because:
- The premium quoted was not even affordable. The financial adviser did not even do a simple fact find to determine the appropriate premium to propose. Under the law, it is mandated that the financial adviser conduct a fact find. I know exactly how much my client can afford because it is my practice to conduct a full fact find. If a customer refuse to provide the personal information, I will not proceed with the case anyway even if I can make an easy sale.
- The second reason I did not think the proposal is suitable is because the payout period is only 20 years. So the payout ends at the age of 85. Using my linear regression curve shown in this blog post Life Expectancy and the Importance of Retirement Planning, the projected life expectancy for age 65 in the year 2048 for a female is 0.2038(2048) - 323.65 = 93.7 years old! Hence, the 20 years payout is too short.
- The third reason that I did not think PruGolden Retirement is suitable is because the guaranteed IRR is too low. With the rising interest rate, we are beginning to see products that are of higher IRR.
In any case, I proposed an alternative product that is suitable and has an IRR of 2.6% per annum (guaranteed) and the projected IRR is 4.24% per annum.
This case highlights the importance of doing due diligent. Due diligence can be done by the following way:
- Ask your financial adviser what is the IRR (guaranteed and projected). If your financial adviser does not know how to calculate, you can use my online tool to do so: HERE..
- Whether the premium is affordable and ask the financial adviser to PROOF to you mathematically you can afford it. This is also known as needs analysis.
- Whether the benefit is appropriate (e.g. payout period).
- Why this product and not another one? If your financial is a tied agent, you do not need to ask this question because tied agents can only recommend products from ONE company only. If you are dealing with an Independent Financial Adviser (IFA) like myself, you can ask for 3 quotes from different product providers. Also when dealing with an IFA, you can also ask whether would investment in Exchange Traded Funds / Stocks / Unit Trusts be more appropriate.
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wilfred,
does it make sense to break up a sum (set aside for annuities) of 240k into 120k each and buy 2 x different annuities?
would this increase the IRR?
personally, i disregard the non guarantee portion of the BI and simply compare the guaranteed portion of the BI.
does the above make sense to retirement planning?
It depends on the product. If the product provides a large sum discount, breaking up into smaller pieces could actually decrease the IRR.