If you are getting ready for your retirement, you have to tackle the problem of securing a long term, low volatile cash flow, while keeping your assets intact.
This is a problem posted to me many of times.
My solutions is that if you invest in a portfolio of equities and bonds, you have to live with the volatility. However, if you build up your competency, you could safely withdraw 3 to 3.5% of your wealth, and adjust your spending systematically. (do read this further in my retirement planning / financial independence preparedness section)
If this is too much for you, a retirement plan, or an anticipated whole life plan might be helpful.
Yesterday, one of my readers was asking me about this whole life plan Infinite Harvest by China Taiping Insurance Singapore. This product, I feel targets the affluent, but probably is something that the emerging affluent would take note as well.
So I got one of my friends to help draft a benefits illustration for the policy.
The Infinite Harvest is an Anticipated Whole Life Insurance plan. In a past article, I introduce readers to insurance plans that provide dividend cash flow consistently.
Little did I know there is a name for such policies. Had I know, I would not have butchered some names for it.
However, the important thing is to understand what these kind of policy does.
An anticipated whole life insurance provides you with a long duration of consistent cash flow:
- you pay a premium which is invested into a participating fund managed by the insurer
- after certain years, the whole life policy provides you with a cash flow annually
- the cash flow are usually part guaranteed and non guaranteed
- aside from the cash flow, the policy also accumulates in value
- if the assured passes away, the death benefit are usually higher than the premiums paid
The Infinite Harvest is an anticipated whole life that is geared for retirement purpose, but as you see, there are other use of it as well. You can see it as an asset to provide an income stream other than your job.
So here are some of the main features:
- The plan is a single premium whole life insurance policy. This means that instead of paying monthly or annual premiums, you pay a lump sum premium at the start
- After 5 years, the policy will pay out a monthly cashback/cash flow. This cashback is made up of a guaranteed and non guaranteed component. The frequency is only monthly. You cannot change the frequency
- If you do not wish to take a cashback, you can accumulate the cashback. The accumulated cashback earns a return at a non-guaranteed rate of return
- If you have selected cashback, you could switch to accumulation mid way and vice versa
- You can set the assured to another beneficiary. You can also change the owner of the policy. This means that you can set the assure to your son, and later on passed the policy to the son
- If the assured passed away, 2 things would be paid out. The first is a death benefit less the debts owed, which is the higher of (101% of the single premium you paid originally or the guaranteed surrender value). The second thing is a non-guaranteed terminal dividend
- If you choose to surrender the policy anytime. If you surrender in day 1, you will get back 80% of the single premium. (If premium is $500k, you will get back $400k). The surrender value will increase over time. You will also get a non guaranteed terminal dividend
- By the 10th year, if you surrender, you will get back 100% of the premiums paid
- You can choose to do a partial surrender of the policy, but the minimum monthly cash back has to be at least $400/mth
- There is no medical underwriting required. This is more of a retirement product
- Available to Singaporeans, PR, and passers by in an approved list of country
- The total distribution cost, which includes commissions, benefits paid to the distribution channel is about 7.5%. So for a $500,000 single premium policy the cost you pay is $37,450
I find anticipated whole life policy very similar to investing in a investment property. In my article previously, I tried to highlight the similarities:
I do find the total return (rental/dividend income yield + capital appreciation) to be rather different.
From what I understand, you cannot leverage with Infinite Harvest, like some of the other anticipated whole life we talked about (such as the OCBC Premier Life Generation mentioned in the second section)
In the illustration above, we see a mother Susan spending $224,824 to purchase Infinite Harvest. The life assured is on her son. She owns the policy. For the first 18 years, Susan owns the policy and from the 6th year, she received a monthly income of $800 (guaranteed + non guaranteed). When her son reaches 18 years old, the policy is transferred to the son, and the son continues to received the payout.
In this hypothetical scenario, the policy provides a cash flow for 79 years. When the son passes away, Susan’s grand children will received a death benefit made up of the value of the initial premium and also a terminal dividend.
I think this is what a lot of people are looking for. Capital preservation and growing income stream.
The Illustrated Yield or the Projected Internal Rate of Return of Infinite Harvest
The first thing you need to sort out, is to find out how is the projected rate of return of the policy.
Why do we need to do this?
So that we can establish a good basis, to compare against other prospective retirement financial assets.
My friend Wilfred Ling, a fee based financial adviser, help me come up with an illustration which fits my profile, which is a 40 year old, looking to pay a premium of $500,000.
Now, your monthly cash back has a guaranteed and non-guaranteed component. The amount of non-guaranteed component depends on the investment rate of returned achieved by the participating fund (your premiums are put into an investment fund, where the insurer will invest to provide the returns).
There are 2 investment returns illustrated: 4.75% and 3.25%. This is not the returns you get. Look upon the returns you get as the returns when the participating fund achieves an average return of 4.75% or 3.25%.
The following table shows the annualized cash back that the assured can get depending on the investment return:
So for example, on year 6, the guaranteed monthly cashback is $8850/yr.
This guaranteed yield is 1.77% of the $500k single premium. If the investment return is 3.25%, the non guaranteed cash back is $5150/yr. The yield is 2% for this non guaranteed portion. If the investment return is 4.75%, the non guaranteed cash back is $12,903/yr. The yield is 3.5% for this non guaranteed portion. So it totally depends on the participating funds return and is by no means guaranteed.
I was provided with a cash flow schedule from 40 years old to 120 years old. So that is a 80 year cash flow schedule.
In the first year I will have a cash outflow of $500,000. From the 6th year onward, every year there will be guaranteed and non guaranteed cash inflow.
At the end of 80 years, I surrender the policy or passed away, I or the beneficiary will have a large cash inflow.
We are interested to find out the internal rate of return or IRR for the stream of cash flow. In the BI, this is called the “Illustrated Yield”. Think of IRR as the interest per year you earned from this stream of cash outflow, inflow over 80 years. What is the interest per year you earned.
With the IRR, you can then compare to:
- your 0.65%/yr fixed deposit
- your 2%/yr Singapore Savings Bond
- 5-7% ETF portfolio
- and the 5-7%/yr total return for REITs.
The benefits illustration provided 2 projections based on a 4.75% investment return and 3.25% investment return.
Long time readers of mine would know I would compute my own internal rate of return. However, I realize based on how the benefits illustration is list out, I have no way of doing it.
The top one shows the result if you take distributions and the one at the bottom shows the result if you do not take distributions but reinvest at a non-guaranteed rate.
So for the first one the cash flow would look something like this:
- Year 1: -$500,000
- Year 6: +$21,743
- Year 7: +$22,514
- Year 8: +$23,302
- Year 60: +$1,075,678 (surrender or passed away and received death benefit)
Notice that the annual cash back is going up.
The second one the cash flow would look something like this:
- Year 1: -$500,000
- Year 60: +$4,576,704 (surrender or passed away and received death benefit)
Wow! the surrender value at year 60 is big.
Both assumes the illustrated investment rate of return of 4.75%.
You will notice that the yield upon surrender, which is equivalent to the IRR is around 1.69% for the guaranteed, and 3.98% for the guaranteed + non-guaranteed. While the end value of the accumulated way is bigger, the IRR is actually smaller.This is for 60 years.
The benefits illustration also listed the total illustrated yield / yield upon surrender / IRR till 80 years old (about 40 years duration) as 2.71% for investment return 3.25%/yr and 4.05% for investment returns 4.75%. The 4.05% is close to the 3.98% given in the other section but with a shorter duration.
The 2.71% IRR for investment return of 3.25%/yr is something you should take note of, for your conservative planning.
How good is this?
We can compare against other investment assets and see how this stacks up.
I have gone through some retirement plans in the past and you can compare this against their result (comparing against their projected 4.75%/yr investment return):
- The OCBC PremierLife Generation – (anticipated whole life) IRR of 3.81% for 40 years
- Aviva MyRetirement Choice – (endowment) IRR of 3.64% for 20 years
PremierLife generation might be comparable, but MyRetirement Choice is more of an endowment than an whole life insurance.
The guaranteed amount alone is not appealing. If we were to buy such a product, we would think our return would be between 1.69% and 3.5%. Remember the above IRR was generated with an investment return of 4.75%. The future might be rather different.
Taiping Insurance’s Lack of Past Participating Fund Returns
Since we stress so much that that a large part of the returns is dictated by how well the participating fund do, it might make sense to review the insurer’s past track record in managing these stuff.
Unfortunately, Taiping Insurance Singapore is so new to Singapore that they do not have a past participating fund.
China Taiping Insurance Singapore (CTPIS) is not so well known in Singapore. They originate from the Tai Ping Insurance Singapore branch, which was established as far back as 1938. Its parent is China Taiping Insurance group,, which is a Chinese State-owned and administered financial and insurance group.
In August 2018, CTPIS got their license as a composite insurer from MAS to carry on life business in Singapore.
Investing in a new insurer such as this always brings about some uncertainty.
However, suppose you estimate that their return would be close to the mean, if not it may make sense to see how low insurer returns could be.
You can see that on an average the investment returns could reach 4%, but often it is around 3.5%.
Thus, if you are interested in a whole life insurance policy like this, it might make sense to look at the projection of 3.25% investment returns instead of the 4.75% one.
We can see the current asset allocation of the participating fund for the policy:
You can compare the fund to something like a 30% equity and 70% bond portfolio. The volatility is going to be much lower, and largely driven by bond future returns. The returns are not going to be out of this world since we are in a very low interest rate environment.
There is a strong correlation between current bond yield and future bond returns. So if current bond yield is low, future bond returns is low.
Another thing to note is that you can view the participating fund as a prudent manager controlling how much you could spend.
The manager of the participating fund will have to smooth out the returns. This means that if this year is good and the portfolio earns 10%, they have to systematically keep some of the returns for the years where the portfolio earns -3% for the year.
It is the same as how you should manage your stocks and cash or stocks and bonds portfolio in retirement. Many might not be sophisticated enough to employ a systematic way of controlling how much they can spend each year, so that they can smoothed out their retirement cash flow.
So you can see the appeal of such products.
Does Infinite Harvest’s Cash Flow provide Adequate Income to you?
While evaluating the IRR is important, that is more of a performance measurement.
Ultimately, the reason why we purchase plans like this is that the cash flow it gives out goes towards paying part of the annual living expenses.
Based on the 3.25% investment return, the first year cash flow is $14,000. This gives us a cash flow to premium yield of 2.8%.
This looks on the low side and I guess this might be the downside of a whole life. If its an endowment, where the endowment is paying out capital, the cash flow might have a higher yield.
Of this, about 1.77% of the single premium yield is guaranteed.
How you can look at this is to plan your expenses in 2 sections:
- Your survival expenses. The bare necessities that your family needs in retirement, or to offset a certain goal at the bare minimum
- Your rich life expenses. The discretionary part of life
Your survival expenses should be covered by the 1.77% to 2.10% of close to guaranteed cash flow. So if your survival expenses is made up of $12,000 a year, you probably need something close to $12,000/0.021 = $571,000 in premiums.
I do not know your situation but for different folks you might switch it around:
- Your survival expenses is satisfied by your CPF Life and rental property
- Your rich life expenses is made more concrete by a whole life plan like Infinite Harvest
Ultimately, plans like Infinite Harvest is just a financial product. What matters more is the overall plan what you are trying to execute.
Is the plan sound? Are you diversified enough such that if Infinite Harvest fail to deliver you are alright?
I think a policy like Infinite Harvest is not meant just for retirement. And I do not think it is a high return product as well. And we should be planning with a 3.25% investment return idea instead of the 4.75% investment return.
I think of it like you are in United States, and you could purchase those $50,000 to $100,000 properties and rent them out. Your wealth is not concentrated and can be more diversify.
The alternative is that you could purchase a $1 mil private property and spend the next 20 years to service the loan. If the family income is affected, the the whole family have to find the cash flow to service the loan.
If you collect an equity portfolio, or a equity exchange traded fund portfolio, together with bonds and whole life plans such as these, if your income is hit, you just stop buying new financial assets. You do not run into that vexing problem of finding money to service that mortgage.
Should you need it, you can tap upon the cash flow that comes from one of these properties, if not it will just accumulate.
If you wish to find out more about the Infinite Harvest from China Taiping Insurance Singapore, you can contact my friend Wilfred Ling, who writes at IFA.sg. Wilfred is a fee based financial adviser, very experienced. You can read the content he has written about financial planning on his site.
You could find out whether Infinite Harvest is suitable for your overall wealth plan, and if its not suitable that is OK. Wilfred happens to have access to Dimensional Fund Advisors (DFA) evidenced based funds as well.
The above link is an affiliate link. You get 20% off his financial planning package.
You can take a look at some of my past insurance reviews:
- OCBC’s PremierLife Generation Case Study
- PRUflexicash Case Study
- Aviva MyRetirement Choice Review
- Crowdsourced Insurance Savings Plans Return Table
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- Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
- Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
- Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
- Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
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