Annuities: Delving a bit deeper!
Thanks for the overwhelming response to the previous article on annuities, which established the importance of annuities especially for Singaporeans. The article demystified a few basic annuity types. This article is the second in the series and aims to decipher relatively more complex variants of annuities.
Before we dive into understanding other forms of annuities, I believe it is important to touch briefly upon their presence in the Singapore market. In Singapore, annuities in their purest form are hardly sold. In fact, most annuity products are an extension of participating endowment plans and the annuity features are bundled into the base plan. In light of the existing market practice in Singapore, in this article, I would demystify the variants of annuity products and also identify the corresponding features of the participating endowment plans. Hopefully, this would equip the readers to better interpret their respective endowment plans.
Participating Annuity: it provides a series of income for the entire lifetime or till a pre-defined time period. However, each income payment has two components: guaranteed and non-guaranteed. The non-guaranteed depends upon the performance of the underlying participating fund.
Annuity for Disabled: it is similar to guaranteed annuity but offers a higher payout for a disabled life. The rationale being expected lifetime of a disabled policyholder is shorter than that of a healthy policyholder. The higher payouts can start right at the inception or during the policy term. In this example, higher payouts start at the age of 75!
Joint Life Annuity: it provides income as long as at least one of the partners is alive. However, the payouts generally reduce after the demise of one of the spouses as the expense also reduce. This policy ensures that both the partners are covered even if only one of them is alive. In this example, it is assumed that one of the partners expires at the age of 85.
To clarify, for simplicity, I have taken examples as though the underlying policies were immediate annuities. However, these could very well be deferred annuities with an accumulation phase and a payout phase. In the Singapore context, these could be whole life participating policy wherein the cash payout start a few years after the inception. This period between inception and beginning of payout is referred to as accumulation phase in the context of annuities.
There are a few more types of annuities that exist in other parts of the world. For example, variable annuities are very popular in the Americas but don’t exist in Singapore. Hence, I have chosen to not talk about them. However, I believe readers would be more keen on better understanding CPF LIFE and my next article would focus on it.
I hope that these introductory articles on annuities helped you in getting a feel for one of the key insurance products used for retirement planning. These, I believe, would also be helpful in better understanding the endowment policies that are prevalent in Singapore.
Before I sign-off, I wish to remind that you can send your queries to hello@fidentiaX.com. Additionally, I would be happy to respond to your queries on Twitter during #AskTheActuary session this Monday at 8 PM Singapore Time. In case you are unable to be online during the session, you can always tweet before the session and I would pick it up when I go live!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.