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When we purchase an annuity product, the insurance intermediary will provide us with an illustration document outlining the benefits of the policy (usually known as a proposal), which lists basic information about the client, as well as key information of the policy, such as the premiums, annuity income, policy term and death benefits, etc.

 

Insurance proposals are often difficult to understand for many consumers because they are packed with numbers and tables. While insurance intermediaries will explain the content of the proposal to the clients, consumers, if they can grasp a few important points themselves, would be able to understand the products better in order to protect their own interests.

Three key points

The main purpose of annuities is to help annuitants convert their money into a steady stream of income over the long term to address the financial risks brought about by longevity. Therefore, when we look at an annuity proposal, we should focus on three main areas, namely the premiums, annuity income and income period.

1.  Premiums

Points to graspPoints to note
Are the premiums covered by a one-off payment or paid in instalments? Make sure you have the financial capacity to pay the premiums in full and reserve adequate cash for daily expenses and contingency purposes.
If paid in instalments, how long is the contribution period? How much is each instalment?
What is the total premium?

 

2.   Annuity income: 

Points to graspPoints to note
Is the annuity income distributed monthly or annually? What is the guaranteed amount of each payout?

Non-guaranteed annuity income / dividends / rewards are estimated figures and are not guaranteed. They could be zero in the worst case scenario.

  What is the non-
  guaranteed amount
  of each payout?
  How much is the
  total amount of
   each payout?
  What is the
   progressive
   incremental ratio
   of the payouts
   (if any)?

Annuity incomes that increase every year can help balance inflation risks. However, the premiums for such products may also be higher.

 

3.  Income period:

Points to graspPoints to note
When will the annuity income start? Does the payout time match with your needs? Generally, payouts of an immediate annuity will begin right after the premiums are paid. Payouts of a deferred annuity, however, will begin after a certain period of time or at a certain age of the insured.
How long is the income period? Make sure that the income period matches your life expectancy and your needs (you can refer to the life expectancy of Hong Kong people: men around 82 and women around 88).
What is the total annuity income of the whole income period?

(For a life annuity, one may make reference from the life expectancy of Hong Kong people to compute the total amount of annuity income.)
Distinguish between how much of the amount is guaranteed and how much is non-guaranteed, particularly for products that highlight to offer high returns.

Accumulation vs. withdrawals

The annuity income, surrender value and death benefits are usually presented under two sets of tables in the proposal based on “accumulation” and “regular withdrawals” calculations respectively. The accumulation-based table assumes that an annuitant does not withdraw the annuity income and keeps all the guaranteed and non-guaranteed income in the policy to receive a non-guaranteed policy interest. As a result, the calculated total accumulated amount may look very appealing. However, consumers should note the assumptions made and the non-guaranteed factor.

The purpose of an annuity is to convert money into a steady stream of income over the long term to help annuitants cope with expenses during retirement. Therefore, annuitants withdrawing their annuity income should be the norm and the intended outcome of annuity products. Therefore, consumers should place more importance on the numbers listed in the regular withdrawals-based tables.

Other information to note

Points to graspPoints to note
Surrender value Early surrender or termination of the annuity plan may incur significant financial loss. To avoid surrender, consumers should make sure they have adequate financial capacity to pay the premiums in full, as well as adequate liquidity.
Death benefits The death benefit would be determined by the time of death occurred, whether during the premium contribution period or the income period. In the case of the contribution period, the beneficiary can usually receive no less than the premium paid in full as death benefit. If the annuitant passes away during the income period, different plans have different death benefit arrangements or options.
Additional cover (e.g. prepayment for critical illness, premium waiver for permanent disability, etc.) Additional protection is not the main purpose for purchasing an annuity. Therefore, consumers should not take this as a key consideration.

Comparing annuity products

Annuities are long-term insurance products and may involve a rather large sum of money. Consumers should make comprehensive comparisons before purchasing an annuity policy. The selection process should be conducted by comparing apples to apples. Generally speaking, when the premium amounts, contribution period and income period are the same, the higher the annuity income the better. But the amount of the guaranteed income and non-guaranteed income should be noted. To compare products with different premium amounts, contribution periods and income periods, you should look at the internal rate of return. For details, please refer to Do annuities offer good returns? In addition, consumers should also consider the credit risk and service quality of the insurance company.

 

 

28 December 2018