Tan Kin Lian's Blog: Participating Annuity

Wednesday, September 26, 2007

Participating Annuity

Dear Mr Tan

Your blogspot is really helpful to the public. I have also been reading your recent articles on annuities in the Straits Times with great interest.

I have two annuities, both participating but with a refund feature, if I die within 15 years or less.

Upon reading your recommendation I asked my NTUC income agent if I could switch to a non refund policy and thus obtain increased monthly payouts. He said there is no such policy, ie without refund, right now.

When I bought my annuity, it projects a bonus of 2 to 2.75 % yearly. Can it exceed 2.75% in good years?

MY REPLY:

The two annuity policies that you bought gave good value. Although the guaranteed interest rate is around 2.5%, you will enjoy a variable bonus that is likely to increase the net return to around 5% per annum. The actual bonus depends on the investment yield in each year. It can exceed 2.75% in good years.

If you look at the illustration given to you at the time that you bought the annuity, you will see that the payout is projected to increase over the years due to the addition of the bonus.

Most people bought the annuity with the refund feature. Although it pays a slightly lower return, it is still quite attractive. It will take a few more years before people are familiar with the concept of the "no refund" annuity.

I advise you to keep these two annuity policies. They give good value. The Straits Times will soon be publishing another article about why the participating annuity is suitable for today's environment.

2 comments:

Anonymous said...: Hi Mr Tan,

Being an actuarial, you are probably the best person to comment on this idea.

If I recall correctly, you recently suggested that the govt/cpf board take over the running of the annuity, to save cost and hence ensure better returns for all.

To take that idea further, why not the govt revamp the whole CPF concept, so that part of the monthly CPF contributions go towards the purchase of a "wholistic insurance product"?

Currently, as it stands, our medisave can be used to buy Shield insurance. Then, we have our OA which can be used to purchase DPS insurance and Eldershield.

My idea is this. For the $X that is contributed into CPF monthly, why not, say Y% of this $X goes into paying premiums for a "wholistic insurance product", which covers death (DPS), annuity, H&S (shield), Critical Illness, Long Term Care (Eldershield), etc.

The benefits I can think of from such a govt backed scheme includes:
a) Citizens not buying insurance products from FP which they do not need. (reduce mis-selling/mis-buying)
b) With the vol/pooling, the govt can guarantee bonuses of at least 5%, with the non-guaranteed bonus portion dependent on how the money is invested.
c) Insurance companies can sell riders, or complementary products, to supplement this rudimentary "wholistic product".
d) Such riders / complementary products can be sold online by insurance companies, since they are simple enough to understand. This will reduce cost.
e) Tie S'porean back to their homeland, since this insurance will cover only in Spore.
f) Sell riders for those who wish to extend their coverage to regionwide / worldwide.

And to make it fair for all Singaporeans,
a) Make it opt-out for new entrants to the CPF board, ie new working adults.
b) For those current CPF members, allow opt in so that those who may have bought policies in the past, with gaps, they can cover the gap thru this scheme.

For insurance companies, they may then turn their attention to selling Term products / Riders / new innovative supplementary products, to complement. Also, for those who choose to opt out of the "wholistic product", the insurance companies can still meet their needs.

Do you think such an idea is workable?; September 27, 2007 2:43 PM
Tan Kin Lian said...: It is much more difficult than you described.

What you propose is like a social security scheme.

From my understanding, the Government does not wish to introduce such a scheme.; September 28, 2007 12:00 AM