Saturday, May 17, 2008

Return on Vivolife policies

Catherine Choong posted a detailed posting on Vivolife (i.e. whole life policy with premiums paid for 20 years) in The Online Citizen. She pointed out several benefits of the policy, (which I accept). The main drawback of the policy, in my view, is the somewhat low return to the policyholder at the end of 20 years.

A few weeks ago, a policyholder asked my advice on three Vivolife policies that he bought for his family. I calculated the return on the policies as follows:

1. 2. 3. 4. 5. 6. 7. 8.
Policy Premium Accum Expected Cash Value Gain % Taken
20 yrs @4.5% gain 20 yrs in CV away
Self $29,080 $47,666 $18,586 $34,907 $5,827 31% 69%
Wife $24,340 $39,890 $15,550 $29,478 $5,138 33% 67%
Son $23,420 $38,389 $15,969 $30,234 $6,814 42% 58%

The total premium paid for 20 years is shown in (2). If the premium is invested to earn a net yield of 4.5%, the accumulated amount is shown in (3). The expected gain is shown in (4). The cash value of the policy (based on a gross yield of 5.25%) is shown in (5). The gain in cash value is shown in (6).

Assuming a gross yield of 5.25%, the Vivolife policies took away between 58% to 69% of the expected gain, leaving 31% to 42% of the gain to the policyholder. If the gross yield is lower, the value to the policyholder will be even lower.

If the policyholder buy the insurance cover separately, the cost of the cover is likely to be not more than 20% of the expected gain (just my guess). A good adviser will be able to calculate this alternative cost for the customer to make an informed choice.

If these examples do not reflect a true picture of the return on the Vivolife policy, I hope that Caterine Choong will send some other examples to me. I shall be happy to post them here.

Note: I believe that the Vivolife gives better values compared to similar products in the market (although I do not have concrete evidence on this point).


Anonymous said...

its worth looking at the cash value project at the end of the 25 policy year. according to the 2007 annual report, there is a special bonus of 165% of accumulated bonus.

The main flaw with the policy is the annuity conversion option after age 60. In order to maximizes the returns of special bonus, you need to keep the policy for at least 25 years.

One who plan to convert to annuity at 60, will need to be below age (60 - 25) = 35 in order to maximize the annuity option.

How times flies... said...

Dear Mr Tan,
My posting on theonlinecitizen gave an example of a Vivolife policy, where premium is payable for 10 yrs (not 20 yrs as mentioned by you) but the coverage is for whole life.

Here are the details you requested:
Age 30 male (non-smoker).
Premium for a $100,000 Vivolife-10 yr premium term. Premium is $4251.75 a yr.
Total premium paid for 10 yrs is $42518 (round up). The cash value continues to grow even though premium is stopped.

At age 60 (that is, after the policy is inforce for 30 yrs), the cash value is $99306. If the policyholder surrenders the policy, he gets $99,306 (capital gain of $56788). Using a financial calculator, the yield is 4%p.a. This is similar to the coupon rate of long term government bonds.

Where can you find a zero coupon bond that allows you to pay in installments (instead of upfront) and yet offers you insurance coverage, as well as the flexibility to cash out and get a FULL refund + interests?

My investment savvy clients are familiar with asset allocation and they prefer to include Vivolife in part of their bond portfolio.

They classify Vivolife as an appreciating asset and Term policy is an expense. My clients are covered with both term and whole life policies.
Catherine Choong

Tan Kin Lian said...

Dear Catherine Choong,

I calculate the yield on this policy, kept for 30 year product to be about 3.5% p.a. (and not 4%). This yield is not guaranteed and depends on the future bonus. It can be higher or lower.

What is the cash value after 10 and 20 years? I think that the yield may be lower.

If the policyholder invest the premium to earn a net yield of 4.5% p.a. the total amount at the end of 30 years is $132,000. T0his is 33% higher than $99,306.

If he buys the insurance protection separately, it will cost him some premium that will be taken away from the $132,000.

Which is better for the policyholder? It is up to the policyholder to decide between the two options.

zhummmeng said...

I posted earlier that i would debunk Catherine Choong on vivolife. There are many flaws. My calculator cannot be found so I can't give you the figures.
Meantime i just mention a few things
#1.The return over 30 years is about 3% and not 4% assuming projection is earned.
#2. If you liken it to a zero coupon it is not.Zero coupon is safe if you hold it to maturity but vivolife is not safe and you may not get 3% if you consider the increased risk of the bonus structure.
#3.Comparing term with vivolife is like comparing an apple with a durian. The durian smells terribly, looks big and showy but hollow and useless and only potent outwardly but considering the premium you pay it is not.That is vivolife with frills on the outside to beguile the customers but actually hollow on the inside.Return is low and protection is low too and it needs the 125% to boost its appearance but savvy and streetwise cleints can see through the fakeness. Only the unwary, they may not. They are too trusting
#4. As you said, term is 10times cheaper but can buy 10times more coverage than vivo life but this is not the point. What is needed is more important and you need just nice to cover CURRENT needs or at the point in time , no more no less. This is insurance and not some fancifool stuff insurance agents like to cook up for their clients for half peace of mind.
The frills are cover up and any financial planner will not consider them when they conduct need analysis because the frills are not the issues. Only salesmen and women will consider them as selling points. They are actually distractions to divert the client's attention when making the sale.
#5.annuity option is the greatest self contradiction of this vivo life plan. Which is which? to keep whole life becuase you fear illness that might come at old age or to take out the money for retirement? A paradox of insurance agents or the company? The devil and the deep blue sea?
#6. Return so low, how to live life to the fullest. Maybe misery to the fullest? if you adjust for inflation it might even lose.
Needs are never the reasons when vivolife life is sold because it is expensive and cannot meet cleints' need fully.
I posted earlier that vivolife and all other limited premium plans should be renamed as MAYBE PlANS or Limited coverage plans.

Wealth Journey said...

Yes, I second Mr Tan's view.
Catherine, I think you are too focused on the comparison of the products.

Your perspective is coming from the vivolife angel. (Ie, how to prove Vivolife is a better product).. So, you might have not analyzed it from the angle of buying term. For a moment, pretend you are advising clients to buy term and invest the rest. How would you justify to your clients this is more beneficial to him?

May I suggest you follow this line of thought instead :-
1) If a customer is buying term, he might save $X amount as compared to buying a vivolife.
2) What can he do with the $X saved? He could invest it? or he could spend it?
3) Assuming he invest it, what is the expected total amount he will get at the end of a defined period.
4) Now, compared that amount with what he would have gotten from the vivolife policy.
5) Is he better off or worse off?

Anonymous said...

"They classify Vivolife as an appreciating asset and Term policy is an expense"

they are being fooled by an illusion. if taken further, everything else can be classified as an 'appreciating asset' if you simply bundle it with investment.

zhummmeng said...
This comment has been removed by the author.

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