My friend Chris from Tree of Prosperity recently asked whether there is some truth to a nasty rumour that some endowments ramp down the guaranteed component of returns on a particular day. The quantum dropped by 3.75% to 2.75%.
Personally, I have not heard anything like that.
Even if there is, it is quite unnatural for an insurance company, who just structure and market their plan to change the bonus rates so fast. There is some thought process that goes into it.
If things necessitate a change, it will be something they do later down the road.
Lastly… where can you find an endowment with a guaranteed 2.75% IRR nowadays?? The endowments or whole life today have to combine guarantee and non-guarantee components to get an IRR close to 3.7% (and you will need the more optimistic investment scenario)
In any case, the only recent cut in their 2020 bonus declaration happens to be from Manulife.
So here are some details.
Which Manulife Insurance products are affected by the 2020 Bonus Cut?
If you have a Manulife plan with cash values, you might wonder if the bonus on your plan will be cut. Cash value plans invest the premiums in participating funds, which are invested in equity, bond, cash, property by the insurer’s fund managers.
The following set of participating funds are not affected but the bonus cut:
- Participating plans launched before Jan 2005
- Ex-John Hancock Pte Ltd Participating policies
- Single premium short-term endowment products
- Participating plans denominated in USD and issued after Jul 2017
The participating funds affected by the cut are:
|Par fund||Bonus Action|
|Participating plans launch between Jan 2005 and Jun 2013||Reduce reversionary bonus/cash bonus/income payout|
|Participating plans launch in Jul 2013 (including DBS products)||Reduce reversionary bonus/ cash bonus/ income payout except |
Maintain bonus rates for the current selling products
So the plans affected are selected and not all of them.
DBS and Manulife form a 15-year bancassurance partnership around 2015. So the policies affected were those sold within this 15-year span.
If you recently purchase some policies or short-term ones, you are not affected.
This cut affects future declarations.
How it works is that every year, your endowment or whole life will declare this bonus call a reversionary bonus. It is like the policy value of your plan will start very negative.
Then this reversionary bonus will keep adding and adding and adding. Eventually, after a long number of years, your policies will become positive and have returns near the tail end of the plan.
What was declared in the past will still be maintained and won’t be cut. It is that future declaration will be cut.
Usually, these cash-value have a terminal bonus, which is a bonus at the end of the policy. This is not affected by the cut unless, for your policy, a specific part of the terminal bonus is based on the reversionary bonus.
Honestly, I really cannot stand all these complex terms used in this insurance world.
But in short, the impact of the cut is that reduces future reversionary bonus, which means that the final amount you will get is less than the projected amount your financial consultant explain to you.
In any case, these are the products with bonus maintain:
- LifeReady Plus
- Manulife Educate
- Manulife Spring
- ManuWealth Secure
- Ready Lifeincome
- ReadyPayout Plus
- RetireReady Plus II
- RetireReady Plus (III)
- Signature Income (II) -USD
- Signature Income (II)
- Signature Life
- Signature Life -USD
The ones with bonus cut:
- Life Protector
- Life Protector Plus
- ManuFlexi Growth
- ManuFlexi Saver
- ManuIncome Plus
- Manu 3G
- Manulife ReadyIncome
- Manulife ReadyPayout
- ManuProtect Life
- ManuRegular Payout
- ManuSignature One
- ManuSmart Choice
- Premier Saver
- RetireReady Plus
- SaveSmart Plus
- Signature Income – SGD
- Single-Premium Endowment @60
- Smart Retirement @60
- Smart Saver
- Star Protector
- Ultimate Cash 100/200
- Ultimate Protector
- Ultimate Saver
Reduced Paid-Up Plans are Affected as Well
Some of you might have stopped paying the premiums to your policy by converting your policy to a reduced paid-up policy.
Your plan, if it lands as one of those that have their bonus cut, will be affected as well.
This is not too surprising.
Why does Manulife think there is a need to cut Bonus?
Not too long ago, it was announced that the future policy illustration investment rate will be lowered to 4.25% and 3.00%. (You can read the reasons here)
The reasons given by Manulife is not too different.
Interest rates have dropped significantly with the Singapore Government 10-year bond has moved from 2.47% in 2016 to 0.84% in 2020.
With a sustained low-interest-rate environment, returns on bonds will be lower.
Manulife observes that insurers conduct par bonus reviews annually and in the past 2 years a number of insurers have announced a cut.
Manulife has not made any bonus reduction since 2016 so they only make an adjustment only if they felt the interest rate decline is significant and persistent enough.
They expect the current low-interest environment to persist.
Manulife did say that… if they feel that there is a sustained upward trend in interest rate, there is a chance that future bonus allocation can be increased.
Special Attention to Manulife Signature Income
The interesting thing I find is that out of all the products, Manulife paid special attention to their Signature Income (I) and specifically sought to address why they need to cut bonuses for Signature Income (I) and not the others.
I suppose Signature Income should be a VERY popular regular passive income product that retirees buy to get their passive income for their retirement.
Cutting this would affect their plan.
Basically, the lower interest environment poses a challenge now because this product was structured in a period where the interest rate environment is higher.
I think planners are interested to know that with this change, how does the Signature (I) payout compare to the Signature Income (III) payout.
Basically, Signature Income 1 has a higher guaranteed payout than Signature Income 3.
After the cut, Signature Income 1’s non-guaranteed payout is reduced.
- The total payout is slightly lower than Signature Income 3
- The surrender value is higher than Signature Income 3
Here is some projection:
|Illustrated 40 year plan with $1 million||Sig Inc 1 before bonus cut||Sig Inc 1 after bonus cut||Sig Inc 3|
|Guaranteed Annual payout (% of single premium)||1.6%||1.6%||1.24%|
|Non-guaranteed annual payout||1.93%||1.55%||2.03%|
|Total annual payout||3.53%||3.14%||3.27%|
|Total surrender yield (paid out)|
|at Year 10||1.26%||1.03%||0.97%|
|at Year 20||3.28%||3.02%||2.81%|
|at Year 40||3.89%||3.64%||3.49%|
|at Age 99||3.99%||3.77%||3.51%|
Based on the illustration, if we consider the total payout, Signature Income 3 now have a higher annual payout but over the lifetime, Signature Income 1 will still have a higher payout.
If you ask me, the difference is not too big of a difference in percentage but in absolute dollars, it will depend on your planning.
Signature Income 1 was cut probably because the guaranteed component is higher.
This is interesting because… thought leaders will tell you to get the plan with the highest guaranteed component.
Then in the end they have a higher probability that the bonus cut will affect them first!
So is there a difference between high or low guaranteed components?
The Last Word
The bonus cut is not something new.
For the longest time, I have crowd-sourced from readers and friends their endowment policy yield after maturity. You can read Does your Insurance Saving Plans (Endowment) give you 3 to 5% returns? (note: I am still looking for crowd sourced returns! If you have a mature plan do let me know!)
Friends have told me the final return yield is less than projected (but not all).
If there is one takeaway, it is that volatility in returns, and the value of your investment ultimately affect almost all investment products.
If the basic building blocks of the investment products is equity, bonds, property, there is sure to be volatility and things that are uncertain.
Endowment plans have a higher bond component and this ultimately affects them more. Bonds are volatile but ultimately much less volatile than bonds.
Bond rates have been falling for years and we are not sure if there are even further room for bonus cuts (personally I don’t think so).
Lastly, the product is not your retirement plan or financial plan. It is a component of your financial plan.
Bonus cut… is a feature of endowment plans.
You need to think about whether when you purchase.. you bought a product or a financial plan that comes with a product.
The sound planning is to assume a conservative payout instead of an optimistic payout that these insurance plans like to illustrate.
This means using either that old 3.25% investment return or something slightly higher.
If the returns look unappealing, that is because… this is how it is! But at least you want your plan to build on more sound fundamentals.
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Sunday 5th of September 2021
Hi Kyith ...
Just like FC, I received this Signature 3 (w leverage) recommendation from a DBS RM. Basically, $300K (cash) + $700K (loan from DBS). 4 or 5 years later, payout starts & DBS will deduct the interest for the 700K loan & the rest will be paid to the policyholder (up till 120yo). If interest rate goes > 4%, monthly payout will be Zero or negative (policyholder pays the bank). Would like to hear your thoughts.
Monday 6th of September 2021
Appreciate your response. Yes, a "peace of mind" is very important.
Sunday 5th of September 2021
HI CK, you can check my reply to FC. I think they market this to a lot of people.We been getting some feedback from our advisers internally that prospects or existing clients were asking them about this. Thanks for sharing the breakdown.
I tell our advisers internally that I like to evaluate how sound is a product by asking myself: If this is the holy grail, am I comfortable basing all my income on just one of these products? This means that suppose the net cash flow after interest is $7000. But you need $70,000 in income. So you need 10 times this amount. Can you imagine at 85 year old, you still have such a large debt holding? perhaps it makes more sense to be less leverage.
I find that this kind of policy prey on those who struggle to see what is the most important. In this case, it is to fulfill the income needs with enough peace of mind.
Also likely the income is not inflation adjusting and you do not have the flexibility to take out more cash flow if you need more (unless maybe you take out a policy loan on the policy)
Sunday 5th of September 2021
hi Kyith, coincidentally, i was introduced this Signature Income 3 not too long ago. however, it has leverage to it. all in all, is a simple product that provides a lifetime passive income. but not sure what are the downsides i.e. increase in interest rates. what are your thoughts on this?
Monday 6th of September 2021
@Kyith, agree on the return part. the numbers definitely look "better" than other policy. partly due to the the leverage part..
one thing though, you mentioned "heir". you mean like passing down to kids after policy holder's death? i did ask the same question too. if the policy can be pass down to the next generation. , but it was a clear "no". coz the policy is leveraged. if it was non-leveraged, then it can be passed down.
in your experience/opinion , what would be the realistic i/r to asssume? i used 2% as an average rate for the lifetime fluctuation for my calculations
Sunday 5th of September 2021
Hi FC, the change in interest rate is one, which you mentioned. The other thing is that bonus rates (like this) can be cut. Typically the income is not adjusted for inflation. While the leverage internal rate of return look good, do be aware of that the return is based on payout + surrender value. If you need the income, it doesn't help that the returns are good but only your heir will get to enjoy it.
If interest expense is variable, it means the payout is variable. In your financial plan, you need to have adequate buffer to cushion the scenario if interest expense go up and your payout goes down.
Utlmately, leverage reduce your capital needed and improve the projected return. But this may not be what you need.
If you need $21000 in income and the leverage cash flow is only 7000, you will need three of these policy to net you that return. EAch of those policy is leveraged 70%. Are you able to stomach that level of leverage throughout your retirement?