Insurance for retirement

Longevity risk and retirement planning have been a hot topic since PM Lee Hsien Loong indicated in his NDP Rally Speech 2007 that the government intends to introduce some kind of mandatory annuity out of one's CPF min sum.

CPF savings currently earn 2.5% & 4% interest rate on ordinary account (OA) and Special, Medisave & Retirement accounts (SMRA). The first $60K earn an extra interest of 1% so the min CPF interest rates for 2008 & 2009 are 3.5% (OA) and 5% (SMRA) for most people. Setting aside the CPF min sum fully in cash, one will receive a monthly payment of $790 from his age 62 for about 20 years.

However, the available products on the market disappoint me, most using the 5.25% yield ONLY for illustration -- this figure is as good as nothing because it is by no means the company's commitment (not even its best estimate) but rather a cap yield imposed by MAS regulation. Buying annuity products from participating insurance company with the CPF min sum usually gets the insured much less than the CPF's $790 though it extends the monthly payment for life. But how many think that they will live significantly longer than age 82?

NTUC Income offers two relevant products:

Growth Plan is a single premium endowment plan with the initial investment and declared bonuses fully guaranteed at maturity. It can be purchased with cash, CPF or SRS.

• Projected yield* ranges 4.04% ~ 4.48% for the term of 10 to 30 years
• 125% of the premium together with bonus is payable in one lump sum upon death or total / permanent disability
• the sum assured is doubled if the death or disability is a direct result of bodily injury by accidents

*note: the actual returns on 10-yr term were 4.92% (1996-2006), 4.98% (1995-2005), 5.23% (1994-2004).

Classic Annuity ensures a regular and growing income stream for life. Investing the CPF min. sum ($99,600 as of 7/2007) at age 55 guarantees $523 plus a non-guaranteed bonus component of $633 ~ $1247 at age 62 & 87 respectively (assuming 2.75%).

Tan Kin Lian's blog on this subject is interesting and worth reading...

Great Eastern offers the following relevant products:

Endowment 5 is a five-year premium plan with policy term 10~20 years.

• Projected yields range from 3.29% for 10-yr term to 4.05% for 20-yr term.
• Optional protection against 30 major illnesses is available at extra premium.

Choice Investment is a single premium endowment plan.

• Projected annual returns range from 2.9% (6-yr) to 4.34% (25-yr)
• It attaches a 125% of the one-time savings amount as guaranteed life insurance.

Lifetime Income Plan is its annuity product. Investing the same CPF min. sum guarantees $535 monthly starting from age 62. In exchange of the bonus payout, it includes the death benefit being a lump sum of $104,948 minus what one has withdrew monthly.

The Canadian-based provider, Manulife Financial, recently launches a variable annuity product in Singapore, Secure Retirement Plan (US$).

• Over up to 10 yrs, the Guaranteed Withdrawal Benefit (GWB) increases from 100% to 150% of the subscription (i.e. 5% pa)
• Potential step-up on every 5th policy anniversary up to age 80 if the market value of the portfolio has risen & higher than GWB.
• By electing Income For Life at age 65 or older, a 5% pa of the GWB is receivable for life.

note: although the insured enjoys a guaranteed and relatively handsome 5% return for the initial 10 yrs, he may lose any investment yield over the subsequent 20 yrs while his drawing annually. The step-up mechanism makes up at certain extends but the chances are limited to every 5th policy anniversary. The insured will unlikely benefit unless the market steadily goes up over the period.