I am going to cover some of these insurance retirement plans, since I have the resources to do so.
I am doing this in order to let readers see it from my perspective.
This is so that, if you met up with an adviser and this is put in front of you, you got another way of looking at it.
Since I written a whole section on retirement planning & financial independence, it does make sense for me to view these plans, putting those considerations in mind.
AXA Retire Happy Plus belongs to a class of limited payout retirement plans.
However, specific for AXA Retire Happy Plus, there is an option to accept payout over the lifetime (till age 99 years)
The general idea is:
- they are an accumulating plan then during a predefined age, it starts paying out cash flow till the assured passed away or when the end of the tenure has reached
- the cash flow payout contains a guaranteed component and a non guaranteed component
- the non guaranteed component will depend on the investment performance of a participating fund
- both the guaranteed and non guaranteed cash flow payout increases over time, at 3.5% per annum to combat inflation
- there is minimal death benefit since this is not the overall goal of the plan. Should the assured passed away, the death benefit is 101% of the premiums paid
- a total permanent disability multiple rider that pays out in lump sum additional 5 times of your first selected retirement income upon diagnosis of TPD. Like all TPD policies, it is in effect till 65 years old
- premium waiver riders can be attached to the plan (read what are premium waivers)
- you can choose to keep the cash flow payout with them, and you will earn a non guaranteed interest rate, benchmark against a basket of fixed deposits
The following illustration from the brochure explains things better:
Sam choose to contribute premiums over 25 years and chose to payout 5 years later at age 61.
Sam can choose different duration of premium payments from 5, 10, 15, 20, or 25 years or a Single Premium (one lump sum).
Sam can choose when the retirement payout starts provided it is 5 years away from the last premium payment.
In this illustration, Sam chose to pay out all his accumulated assets over 15 years as cash flow. Same has a choice of 15, 20 years or lifetime.
At this point I think AXA Retire Happy is a rather flexible plan. A lot of plans leave me wanting because you cannot contribute a lump sum or that you cannot space out the distribution over the lifetime.
Regular Contribution, with 20 year payout starting at 65 years old
For some future comparison, we generate for a 40 year old (close to what I am going through), paying 10 years of $50,000/yr premium, and starting our cash flow distribution at age 65, for 20 years:
You notice that both the payout starts low before increasing over time.
Some retirees will like this because they see the 3.5% escalation as protecting their purchasing power over time.
But how do we measure the performance?
Measuring the Internal Rate of Return of the Plan
The rate of return that you will get, depends on the performance of the participating fund.
When you purchase a cash value insurance policy like this one, you are transferring the investment management to the insurance company.
I usually use the above diagram to illustrate how you should look upon your wealth management. The same concept is applicable to your insurance policy that has a cash value.
You feed your policy by paying the premiums through your disposable income. The insurance company takes your premiums and deploys it into equity, bonds and cash. The income earn from equity and bonds is fed back within the fund itself.
The manager determines how much cash back it gives back to you.
The table shows the rate of return of the participating fund for AXA Retire Happy Plus. In some years it is positive, and in some years it can be negative.
I want you to note the average performance over the past 3, 5 and 10 years.
Your rate of return, is determined by the rate of return for the participating fund.
In the benefits illustration, you will see the rate of return.
What it means is that if your participating fund achieves a rate of return of 4.75%, your internal rate of return over this period (40 years old to 84 years old, 44 years) is 3.75%/yr.
This 3.45% includes the 3.5% inflation escalation.
If the participating fund yields 3.25%, then the rate of return is 1.92%.
Think of internal rate of return as the “interest rate” you earned for contributing your money over this 44 years, and what you get per year.
With this you can compare it against your Singapore savings bonds or Singapore government securities.
The 10 year yield of the latest Jan 2019 Singapore Savings Bond is 2.45%.
What this means is that potentially the Singapore Savings Bond would yield more than this AXA Retire Happy Plus.
Based on the historical returns of the participating funds, it might not hit the illustrated 3.75%/yr. Of course, we won’t know about the returns of the future but we can reference from the past.
What if we only compute the internal rate of return of the guaranteed portion?
We computed the internal rate of return of the guaranteed portion and it is 1.29%.
This means that if you contribute and withdraw from this policy and it only earns the guaranteed amount, its like earning only a 1.29% interest per year.
I think your returns should sit somewhere between 1.92% to 3.75%.
The Expenses and Costs to the Policy Holder
Based on the illustration, the policy holder will pay a premium of about $499,973 in total over 10 years.
The total distribution cost, which is the cost from the premiums that are used to pay for advice, commissions to your adviser and the firm, is $53,617.
That is about 10.72% of the premiums.
The total expense ratio shows the expense incurred from managing the participating fund. At an average of 10% for the past 3 to 5 years, that looks rather high, compared to some of the other participating funds.
What about a Lump Sum Premium, Life time Distribution?
Due to its flexibility, I thought it is appealing for me to have the following permutation:
- Lump Sum Single Premium Contribution
- Distributing Cash Flow for Lifetime
So I got my friend to come up with a single premium quote for $200,000 in premium at 40 years old and start taking annual cash flow from age 50 to age 99.
In all honesty, after getting this, I thought it would be better to pay a single premium at age 45 years old and then take distribution 5 years later at 50.
In that case, it would make this really look like an annuity. But I shall not trouble my friend to do this.
This will increase overtime to a range of $18k to $36k at age 99. I think I will struggle to think what I can do with $300/mth
The internal rate of return, depending on the investment rate of return, is higher at 2.02% to 4.05%.
It is higher compared to the previous regular premium quotation.
I think what made it lower was the escalating nature. Usually, if a policy have this feature, they will start the income distribution at a lower base. This is the same for the CPF Life with Escalating feature.
The yield on the single premium Retire Happy Plus looks far lower than contributing to the CPF Life annuity.
I believe the main reason is, unlike the Retire Happy Plus, CPF Life pools the people’s resources together and thus you will receive mortality credits, which boost the return.
The distribution cost on this single premiums is $11,647. Against a policy cost of around $200,000, the distribution cost is 5.8% of the premiums paid, much lower than the 11% for the previous regular premium policy.
Suffice to say, I feel compelled to contribute to CPF Enhanced Retirement Sum then this policy.
While on paper, I like the flexibility of contribution and distribution, the internal rate of return, when compared against similar retirement insurance plans, are not the highest.
You could be mistaken that the escalating payout feature is a major advantage.
The internal rate of return of the policy based on guaranteed, non guaranteed returns tell us that if we compared against a non inflated payout product, the non inflated payout product might give you more cash flow over time.
This policy could be modeled as a single premium annuity, but it does not give you that return.
The upside of a retirement plan is that, for an annuity, if the assured passes away, you might only get a smaller bequest.
For such a retirement policy, should the assured passes away, the remain death benefit or cash flow, would be passed to the next generation.
I will probably profile another similar retirement plan next week, then we see how that plan measures up to this one.
A plan like Retire Happy Plus is meant more for retirement distribution.
Whether it is suitable for you or not, it will depend a lot on your overall plan. From my experience, plans like this do not work on its own, but as part of a retirement strategy.
If you are unsure such a plan fits into your overall strategy or not, yet you would like someone that is competent, trustworthy enough to review your retirement strategy, let me know.
I can put you through to my friends who have integrity, and may be able to help.
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