As the population is ageing, many people have considered pre-emptive financial planning in preparation for a lengthy retirement life. Starting from April 2019, citizens are even eligible for claiming a tax deduction for enrolling in “Qualifying Deferred Annuity Policies” (“QDAP”) certified by the Insurance Authority (IA). The Consumer Council surveyed 23 QDAPs offered by different insurers and found significant disparities in various aspects, including the issue age, minimum premium amount, premium payment term, accumulation period, annuity period and internal rate of return (IRR). Among the plans with a 5-year premium payment term, the Guaranteed IRR ranged from the lowest of 0.01% to the highest of 3.33%, showing a considerable difference. Meanwhile, the annuity period, which provides retirement income, ranged from the required minimum of 10 years to the longest of lifetime coverage. Generally speaking, even for the same plan, the shorter the premium payment term and the longer the accumulation period or annuity period, the Guaranteed IRR would be relatively higher. Besides, the IRR is also impacted by a number of factors, including the sex and age of the insured, as well as the premium payment mode. Therefore, those planning to apply for QDAP should enquire with the insurer about the IRR specific to their own personal plan and compare various plans across different insurers before choosing the most suitable one.
Furthermore, the coronavirus pandemic has impacted the livelihood of many people. Should the policy holder be unable to bear the premium due to financial difficulties or even unemployment, certain Qualifying Deferred Annuity Policies could allow holding over of premium without affecting the protection. Thus, apart from comparing the IRR and terms and conditions of different products, those interested in taking out a QDAP should put their personal financial position and capacity into consideration.
The operational principle of deferred annuity is to allow the policy holder to make premium contribution in specific term of years (premium payment term) while the insurer invests and accumulates the premium during the accumulation period. Upon completion of the accumulation period and commencement of the annuity period, the policy holder can choose to collect an annuity income at regular intervals, or continue to accumulate the annuity income with the insurer to earn interests. Furthermore, tax-deductible premium is also a selling point for QDAP. Based on the progressive rates of the 2020/21 year of assessment, each policy holder can save up to $10,200 in taxes per year.
This survey included a total of 23 QDAP plans from 18 insurers, among which relevant information of 2 plans was gathered from their insurers’ official websites by the Council as they were not able to provide details upon the Council’s written request.
The QDAP plans certified by IA met all of the following conditions, including a minimum total premium of $180,000, a premium payment term of at least 5 years, and an annuity period of at least 10 years. The various plans surveyed were mostly launched based on these basic requirements. The premiums vary with options for every budget. On comparing the plans with a 5-year premium payment term, the annual premium ranged from $36,000 to $105,447, representing a three-fold difference, while their annuity period ranged from 10 to 30 years. Besides, some plans offer annuity until the policy holder reaches a designated age. 6 of the plans offered annuity until the policy holder was 99 years of age, or even lifelong.
Return on investment is surely expected. Consumers can compare different plans based on their “Guaranteed IRR”. The calculation of the “Guaranteed IRR” excludes any external factors such as inflation and generally includes the total premium, guaranteed monthly annuity income, guaranteed cash value, and guaranteed bonus, etc. At the same time, consumers can reference the “Total IRR” provided by the qualifying deferred annuity products, which includes the Guaranteed returns plus other “Non-Guaranteed” projected returns. Plans containing “Non-Guaranteed” returns, despite having a higher Total IRR, also have a relatively higher risk whereas in extreme situations, the “Non-Guaranteed” portion could even be zero. Therefore, consumers should pay attention to the details and proportion of the “Guaranteed” and “Non-Guaranteed” returns and choose prudently before taking out a QDAP.
The Council found that the Guaranteed IRR for different plans vastly varied. On comparing the plans with a 5-year premium payment term, the Guaranteed IRR ranged from the lowest of 0.01% to the highest of 3.33%; while the Guaranteed IRR for plans with a 10-year premium payment term ranged from 0.24% to 2.9%. Consumers should be mindful that the Guaranteed IRR provided by different plans will inevitably vary even if the premium payment term, accumulation period and annuity period are the same. Taking 3 plans with Guaranteed IRRs ranging from 1.98% to 3% as an example, in the hypothetical situation of a 45-year-old non-smoking male policy holder paying an annual premium of around $40,000 over a 5-year premium payment term and collecting annuity for 30 years starting from age 60, the total guaranteed income ranged from $297,000 to $363,600, marking a 22% difference.
Even under the same plan, the Guaranteed IRR would ultimately be impacted by various options selected by the consumer, in the premium payment term, the length of the accumulation period and the annuity period, payment mode, and etc. For instance, for one of the surveyed plans with a 5-year premium payment term and a Guaranteed IRR as high as 3.33%, it had an accumulation period of 10 years, settlement in USD and annual premium payment. If the accumulation period is halved to 5 years, the Guaranteed IRR would drop to 3.17% accordingly. If the premium payment mode is changed to monthly, the Guaranteed IRR would drop to 3.09% whereas settling the premium in HKD would lower the Guaranteed IRR to 3.16%. Taking another plan in the survey which offered the options of 5-year and 10-year premium payment terms as example. With an identical accumulation period and annuity period, the plan with a 5-year premium payment term had a Guaranteed IRR 0.1% higher than that of the plan with a 10-year premium payment term.
Consumers should also heed that the premium payment term could be as long as 10 years. In the event that the policy holder is temporarily unable to settle the premium due to financial difficulty, 11 (48%) QDAP plans could offer an extended grace period or unemployment benefit, etc., that allow the policy holder to hold over premium payment within the specified period without affecting the protections. Taking the employment benefit as an example, if the policy holder was continuously unemployed before the age of 65 for an extended period beyond the specified limit (generally 30 days or more), they could apply for deferment of premium payment with the insurer. The grace period is extended from generally 1 month after the premium due date to 1 year after, during which the policy holder could still enjoy the protections. For early policy surrender, for instance at the end of the first policy year, the surveyed plans offered a surrender value ranging from 14% to 82.4% of the paid premium. Also, the guaranteed payback period of the surveyed plans ranged from 8 years to 28 years even upon completion of the 5-year premium payment term.
Upon surveying the various plans, 8 (35%) accepted applications from persons as young as 18 years of age, while 5 (22%) accepted applications as senior as 75 years old. Despite the attractive benefit of tax deduction for QDAP premiums, consumers should request a quotation from insurers based on their personal situation and compare various plans. Do not base such an important and far-reaching decision simply on the IRR advertised in product brochures or oral description.
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