Sunday, September 23, 2007

Life Annuity at 65

The Government plans to introduce a Longevity insurance that pays $300 a month to a person from age 85 to a life time. Between 65 to 85, they will draw a monthly sum from their retirement account.

Many people do not like the idea of the Longevity insurance, as it pays out only from 85 and the payment is too small (and will be further depleted by inflation).

In my view, it is better for the Government to encourage people to buy a life annuity at 65, using the CPF minimum sum. Here are the advantages:

* The life annuity will give them a steady income payable for a lifetime.

* They do not have to worry about managing their retirement account for 20 years and be subject to a fluctuating interest rate that is pegged to the yield on Government bonds. They will also not suffer a drop in their income when they reach age 85.

If the life annuity is administered by the Central Provident Fund and the annuity payout is calculated using an interest rate of 4%, the payout can be quite attractive. These life annuitants should be exempted from the longevity annuity.
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2 comments:

Anonymous said...

as a insurance expert yrself, for so long, wont u think the ins premium for life annuity at 65 wud be v high and most old folks wont find it attractive..??

September 23, 2007 10:46 PM
Anonymous said...

I think this is better than earlier proposed one. So the payout instead of 20 years (say $x pm) from 65 to 85 will be from 65 to as long as one live (say $y pm)and both at 4 %. Of course $x will be more than $y but if even at 4% the difference is large it may not be good. Also to consider with/without refund. For instance is it preferable to receive $900 pm for 20 years than to receive $200 per month (which is not sufficient for living) for as long as one lives?
So the issue and choice is not so simple.

September 23, 2007 11:06 PM

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