Qualifying Deferred Annuity Policy
How to Choose a Qualifying Deferred Annuity Policy
1. Understand the policy structure
The main purpose of deferred annuities is to help individuals turn their accumulated savings into a stable stream of income over a period of time to address the financial risks arising from longevity. There are a variety of deferred annuity products in the market. You should understand the policy structure in order to choose one that suits your individual needs.
Deferred annuities can be categorized by the length of their premium payment period and annuity period. In general, the amount of each payout is fixed. For the same insured sum, if the annuity period is longer, the amount of each payout will be smaller. However, some policies may offer a step-up provision, whereby the payout amount will gradually increase over the whole annuity period.
On the other hand, the length of premium payment period may affect the accumulation period. For example, some products are designed for the minimum issue age of 18, a five-year premium payment period, annuitisation at the age of 75, and a 10-year annuity period. This means that the entire policy term can be over 60 years.
As at 6 March 2020, among all the certified Qualifying Deferred Annuity Policies (QDAPs), the policy with shortest premium payment period was five years, while the longest premium payment period was 15 years. The policy with shortest annuity period was 10 years while the longest was lifelong. The minimum issue age was 18 while the maximum was 75.
2. Assess your personal needs
The purpose of taking out a QDAP and individual circumstances vary from person to person. You should not blindly follow the choices of others. Before taking out a QDAP, you should consider carefully your personal needs, including long-term affordability, liquidity needs, whether the length of the premium payment period and annuity period suits your life planning, and so forth.
When choosing a QDAP, ask yourself a few questions, such as the age at which you intend to retire, your expected annuitisation age, and the length of your expected retirement life. For example, if you plan to retire at the age of 65, you expect a 20-year retirement life, and your other assets are enough to cater your financial needs for five years, you may need a QDAP with only a 15-year annuity period.
The QDAP is a long-term insurance product. Early surrender or termination of the policy may incur a financial loss. If you expect an unstable income, you may consider taking out a policy with a shorter premium payment period. On the other hand, if you would like to reduce the payment for each instalment, you may consider taking out a policy with a longer premium payment period. You may also choose to purchase more than one QDAP at different stages to create a mix of policies with different premium payment periods or annuity periods to accommodate your retirement plan.
3. Compare the internal rates of return (IRRs) of different QDAPs
You should compare the IRRs before taking out a QDAP. The IRR is a way to calculate future cash flow, including the premiums paid over the full payment period and all annuity income, at an annualized rate. In general, a higher IRR means a better investment return.
There are a variety of QDAPs available in the market. The returns are affected by many factors, including the length of the accumulation period and annuity period, the age of the insured, the currency of the policy, and the payment method.
To facilitate comparison, all QDAPs are required to disclose their IRRs, including the guaranteed portion (i.e. guaranteed IRRs) and total projected benefits (i.e. total IRRs) in the product brochures in the form of an example: a non-smoking male policy holder aged 45. In addition, personalized IRRs for the guaranteed IRR and total IRR should be disclosed in the benefit illustration during the selling process starting from 31 March 2020.
You should not only look at the return of different policies, but also consider the features of the policies and your personal needs.
4. Look at the fulfillment ratio
The fulfillment ratio applies only to products with non-guaranteed payouts, which are often affected by factors such as the insurer’s investment returns, claims experience and profits. The annuity income offered by most QDAP comprises this non-guaranteed part. The actual amount of the non-guaranteed payout in the end may be higher or lower than the amount projected in the benefit illustration when you purchase the QDAP.
To help members of the public understand to what extent the insurers have realised their projected non-guaranteed payout, insurers are required to publish the fulfillment ratio of relevant products on their websites. A ratio close to 100 means the insurer has come close to achieving its projected non-guaranteed payout. If the fulfillment ratio is equal to or more than 100, it means the insurer has completely achieved or outperformed its projected non-guaranteed payout. On the other hand, if the fulfillment ratio is lower than 100, it means the insurer has not achieved its projected non-guaranteed payout.
The QDAP is a relatively new product. Insurers can publish the fulfillment ratio only a year after launching a new product. You may make reference to the fulfillment ratio of similar products offered by the same insurer.
5. Pay attention to the surrender value
The QDAP is a long-term insurance product. Early surrender or termination of the policy may incur a financial loss. If you terminate the QDAP or surrender it at the initial stage, the surrender value may be far less than the premiums paid.
To better protect the interest of policy holders, the IA requires the insurers to set the surrender value at a level where insurers do not profit from early termination. The surrender value, including the guaranteed and non-guaranteed parts, is listed in the benefit illustration. You may also refer to the product brochure for the percentage of the surrender value over the paid premiums of the first year of the policy.