Question: "Wilfred, my friend recommended me the TM Retirement GIO as a form of annuity. Can you comment on this product?"
Answer:
The TM Retirement GIO is an inferior annuity. I randomly select another annuity that has similar parameters as the one that was quoted to you for comparison purpose. Let’s call it as Product X.
The TM Retirement GIO that was quoted to you by your friend has a premium of $10,554 a year for 5 years. At 60 years old, it will pay a lifetime guaranteed annual cash payout of $2000 and a non-guaranteed $3800. The guaranteed annual cash payout to total premium ratio is 2000/(5*10554) = 3.8%. The total cash payout to total premium ratio is (2000+3800)/(5*10554) = 11%.
For Product X, the annual premium is $11,245.17 for 5 years. At 60 years old, the monthly payout is $300 (guaranteed) + $278 (non-guaranteed) = $578 for life. The guaranteed annual cash payout to total premium ratio is 300*12/(5*11245.17) = 6.4%. The total cash payout to total premium ratio is (300+278)*12/(5*11245.17) = 12.3%.
| TM Retirement GIO | Product X | |
|---|---|---|
| Guaranteed annual cash payout to total premium ratio | 3.8% | 6.4% |
| Total annual cash payout to total premium ratio | 11% | 12.3% |
As it be seen above, in terms of guaranteed cash payout, Product X is 6.4/3.8- 1 = 68.4% more superior compared to TM Retirement GIO.
In terms of total payout, Product X is 12.3/11 -1 = 11.8% better.
Why is TM Retirement GIO so inferior compared to Product X? This is due to one unnecessary feature of TM Retirement GIO which make the product very costly which is the cost of insurance. Apparently, TM Retirement GIO death benefit is always 101% of total premium paid plus a non-guaranteed terminal dividend. The fact that the entire premium is returned to the estate makes the policy very expensive. For annuity, having the total premium return to the estate is unnecessary unless there are dependents. But if one has dependents, he or she cannot even retire!
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What happen to the money when you pass away before payout starts and during payout?
It depends on the specific annuity product.
But TM Retirement GIO is capital guaranteed right? Is Product X capital guaranteed?