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 December 2022, 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 10 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 80.
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 sufficient to meet 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. Assuming the same total premiums, if your liquidity is adequate, 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 of different QDAPs
You may make reference to the internal rate of return (IRR) 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 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 policyholder 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 bear in mind that annuities are not growth-oriented. Their aim is to help policyholders spend their retirement savings in a disciplined way to deal with longevity risk. Therefore, 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 QDAPs 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 the past performance of the distribution of the non-guaranteed benefits of a product, insurers are required to publish the fulfillment ratio of the relevant products on their websites. A ratio of 100% means the actual payout was the same as that illustrated at the point of sale. If the fulfillment ratio is higher than 100%, it means the actual payout was higher than that illustrated at the point of sale, and vice versa.
The QDAP is a relatively new product and has not reached the annuitisation period. Thus, the fulfillment ratios for part of the payouts of relevant QDAPs are not yet applicable. You may make reference to the fulfillment ratio of similar products offered by the same insurer.
To learn more about the types and caculation of fulfillment ratio, visit the Fulfillment Ratio webapge on this website.
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 you paid. When choosing a QDAP, you should consider your long-term affordability, liquidity needs and retirement plan.
To better protect the interests of policy holders, the IA requires insurers to set the surrender value at a level at which 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.
6. Make use of QDAP Selection Made Easy
To help members of the public obtain information about QDAPs to facilitate smart decision-making, the IA launched a one-stop search tool, called QDAP Selection Made Easy. You can answer five questions, and the tool will sort out the QDAPs that best suits your preferences and provide important product information, including policy currency, premium payment period, annuity payment period, IRRs and issue age. You can also obtain a full list of QDAPs that are available in the market and review the relevant product information.