Q: Wilfred, I bought the Manulife InvestReady last year. I was given 10% Capitavouchers of the annualized premium. The premium I am paying is $12,000 for 3 years. Thereafter, I was told I could surrender at no charge or simply continue with the policy without the need to pay premium. There is an administrative charge of 0.7% per year throughout the policy period and supplementary charge of 1.8% per year for the first 10 years.
My financial adviser told me that this is a good deal because despite the administrative charge of 0.7% and supplementary charge of 1.8% per annum, I get to enjoy a return of (10%/3 – 0.7% - 1.8%) = 0.83% per year on average (assuming no return from the underlying market). Therefore, I intend to put all my money I have set aside for my BTO which is expected to be in completion 4 years from today and hence I intend to surrender at the end of 4 years.
Based on your policy you bought, there is indeed no surrender charge on the 4th year onwards. However, your financial adviser’s calculation is not in order.
The 10% Capitavouchers you had was for policies received by Manulife from 1 September 2017 to 15 December 2017. The promotion is already over. Nevertheless, I will help you calculate your reduction in yield based on the 10% voucher you received.
Below is the surrender table illustration assuming you only pay premium for 3 years. I assume you bought the InvestReady-Wealth which is the one that has minimum insurance coverage. I will use the 4% illustration – which means the illustration that is based on 4% underlying market return (before cost). The surrender values for the end of 4th year, 10th year and 20th year are highlighted below:
If you keep for 4 years, the cash flow is - 90%x12000, -12000, -12000, 0, +36178. The IRR is 1.316%. Therefore, the reduction in yield is 4%- 1.316% = 2.684%. Hence, contrary to the advice given to you by your financial adviser, your return is reduced by 2.684%. This is also known as expense ratio in the investment world. Since the illustration used 1.5% pa management fee for the underlying funds, the reduction in yield attributed to the policy itself is 2.684-1.5 = 1.184%.
If you keep for 10 years, the cash flow is- 90%x12000, -12000, -12000, 0, 0, 0, 0, 0,, 0, 0 , +37275. The IRR is 0.769%. Therefore, the reduction in yield is 4%- 0.769% = 3.231%. The reduction in yield attributed to the policy is 3.231-1.5 =1.731% which I found it too high.
If you keep for 20 years, the cash flow is - 90%x12000, -12000, -12000, 0, 0, 0, 0, 0, 0, 0 , 0, 0, 0, 0, 0, 0, 0, 0, 0 0, +46306. The IRR is 1.517% %. Therefore, the reduction in yield is 4%- 1.517% % = 2.483 %. The reduction in yield attributed to the policy is 2.483-1.5 = 0.983%.
Conclusion on the Manulife InvestReady
Despite getting the 10% Capitavouchers upfront, there is still a reduction in yield. While the Manulife InvestReady may be suitable in some other circumstances but what is certain is that the calculation done by your financial adviser is not in order.
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