Picking up a Lifelong Income Plan

I’m buying a fixed income instrument through leverage. I can’t share the exact plan yet, but it’s a participating whole life plan which provides for lifelong income.

I was hesitant on buying such an insurance plan, as I did my own sums and I know it takes around 8-10 years to break even. If I pass away before that, I lose out and would be better off holding a bond or other fixed income instrument like an endowment. A year ago, I signed a plan and then got cold feet, and pulled out during the free look period.

The Best Time is Now

But there are significant reasons to rethink buying insurance now. Interest rates are at their lowest around 1.2%. It’s quite likely to stay down for the next 2-3 years, greatly reducing my borrowing costs.

Market valuations are also high, and I’m hesitant to keep deploying funds into the stock markets. I would also not leverage into unit trusts and bonds now, due to the chance of being margin called if there is another crash.

With a leveraged insurance policy, there is no chance of margin call. Its value can’t fluctuate and drop low enough for me to be forced to top up with cash. Instead, there are 2 other risks to be concerned about:

  1. Risk of insurers cutting bonuses
  2. Risk of borrowing rate raising beyond the return paid by the plan.

Both of these are on the low probability side.

Cashflow Projection

YearOpportunity costLoan costIncomeTotal
1$2,500.00$2,340.00-$4,840.00
2$2,500.00$2,340.00-$4,840.00
3$2,500.00$2,340.00-$4,840.00
4$2,500.00$2,340.00-$4,840.00
5$2,340.00$8,370.00$6,030.00
6$2,340.00$8,370.00$6,030.00
7$2,340.00$8,370.00$6,030.00
8$2,340.00$8,370.00$6,030.00
9$2,340.00$8,370.00$6,030.00
10$2,340.00$8,370.00$6,030.00
Total 10 year return$16,820.00
10 year average return %3.36%
Per year leveraged return after year 412.06%

Total Premium : $180,000

Sum Assured (where the interest is applied): $135,000

Borrowing rate: 1.8%

My priority banking will be giving me a loan of 70% of the total premium value. I put in $50,000, the loan to me will be $130,000, and the total premium would be $180,000.

Returns

I price in an opportunity cost of 5% a year, as it is an important factor in understanding your real returns. It’s the cost of missing out the profits that $50,000 could generate, while waiting for the 4 year accumulation period to end.

The 4 year return isn’t so hot. I pay the loan costs of 1.8% x $130,000 every year, leading to a negative return. On the 5th year though, the payout kicks in, and I start turning a positive. The net payout of $6,000 a year translates to $500 a month.

Even though borrowing costs are 1.2% now, I factor in a slightly higher rate as I don’t expect it to stay so low forever.

The longer I can stay alive, the better my overall returns will be.

Final Thoughts

I’m not super optimistic about my lifespan, and 20 years more for me will be fairly miraculous. But I think 8 years more is possible. By that time, this plan should break even and pay a steady return. Bonus if I’m still kicking at that point.

This is the kind of thing that will push me to live longer (not that I don’t have a lot to live for).

I’m pretty shallow and enjoy a cheap thrill. On my deathbed, I’ll be like “Next month I get another $500 ah? Ok ok I live a bit longer can, thx”

9 comments

    1. It’s 6K after deducting borrowing costs. Few things in life are guaranteed but I will be receiving payouts for a lifetime. They may reduce along the way but that is true of every other plan out there.

  1. Have you considered maximising your CPF to FRS and choosing BRS at 55 yrs old? This will allow you to earn 4% on principle with almost no risk. Furthermore, money is protected from your creditors and will be distributed directly to nominees without the need for a will.

    1. By going with this private annuity, I can possibly opt-out of setting aside the CPF retirement sum. This will preserve the capital for future generations.

  2. Your distribution layout looks like capital depreciating type…

    There are many insurers offering life annuity plan but can be broadly classified into 2 types.

    1. Capital Depreciating Type
    2. Capital Preservating Type

    Hope yours is the latter. Anyway since we are on this subject, maybe I will just share what are some possible considerations when selecting a life annuity like the one you just sign up when comparing all similar choices of what’s available in the market.

    1. First day cash value
    2. Cashback Payout date Yr
    3. Guaranteed Annual Cash Back
    4. Additional Non Guaranteee Annual Cash back
    5. When does Guaranteed Surrender Value equals to premiums savings (cashback payout option)
    6. Growth of Guarantee Surrender Value (cashback payout option)
    7. Total Surrender Value (inclusive of non guaranteed surrender value)

    Factor 7 may not be as critical cos value will definately fluctuate because of insurers respective par fund performance, claim experiences , future expenses.

    Factor 8, cost of funds (if financing is involved. Actually apart from premium financing, portfolio financing may be another viable options with better flexibility and ownership)

    I just completed a simulation on 6 insurers life annuity plans. If you wish to have a copy for your personal reference to compare against what you have signed up, feel free to let me know… 🙂

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