premium financing for annuity

[Jonlovefood]

hi folks, what are the pro and cons of such plans? does the pro > con if i dont intend to touch this sum of money?

 

[reddevil0728]

hi folks, what are the pro and cons of such plans? does the pro > con if i dont intend to touch this sum of money?

Interest rate would probably be the biggest risk?

and some would suggest you can do better via other methods

 

[limster]

seems like agents are pushing plans and products where the returns get lower as the interest rate rises? i hear that some RM are also trying to unload perpetuals on unsuspecting clients, like lemmings rushing into a burning house as the smart money leaves

at this point, I want to be making investments where the return increases as interest rate rises....

 

[reddevil0728]

seems like agents are pushing plans and products where the returns get lower as the interest rate rises? i hear that some RM are also trying to unload perpetuals on unsuspecting clients, like lemmings rushing into a burning house as the smart money leaves

at this point, I want to be making investments where the return increases as interest rate rises....

HNW people utilised premium financing for a reason.

 

[Jonlovefood]

I've looked at the historical interest rates, running at a worse case scanario, returns are still decent with little - no downside risk. given that i do not intent to touch this sum of money, it seems attractive to me.

 

[reddevil0728]

I've looked at the historical interest rates, running at a worse case scanario, returns are still decent with little - no downside risk. given that i do not intent to touch this sum of money, it seems attractive to me.

historical interest rates is not an indication for future interest rate.

do you have any housing liability? and do you have kids?

 

[Jonlovefood]

historical interest rates is not an indication for future interest rate.

do you have any housing liability? and do you have kids?

Yes i know, but it gives u a sense of the overall interest throughout an entire market cycle. if it rises, the payout could be adjusted upwards as well as they usually invest in bonds.

Housing fully paid, no kids.

 

[reddevil0728]

Yes i know, but it gives u a sense of the overall interest throughout an entire market cycle. if it rises, the payout could be adjusted upwards as well as they usually invest in bonds.

Housing fully paid, no kids.

Really? Do such annuity increase payout?

 

[Jonlovefood]

Really? Do such annuity increase payout?

yes, life participating funds.

 

[reddevil0728]

yes, life participating funds.

Do you mean like declaration of bonus?

 

[boredboiboi]

yes, life participating funds.

Nope. It wont increase like what u said. Usually payout according to the tables. If earn more company will keep the more and payout out when the market is down. We call it the smothering effect.

 

[limster]

if insurance company is so good at generating returns, wouldn't it be better to buy shares in the insurer?
I'm vested in Prudential and Aviva , every year collect dividends

 

[reddevil0728]

if insurance company is so good at generating returns, wouldn't it be better to buy shares in the insurer?
I'm vested in Prudential and Aviva , every year collect dividends

It’s more of the premium financing.

it’s like leveraging

 

[Jonlovefood]

Nope. It wont increase like what u said. Usually payout according to the tables. If earn more company will keep the more and payout out when the market is down. We call it the smothering effect.

safe to say that the payout table is likely to happen?

 

[boredboiboi]

safe to say that the payout table is likely to happen?

Yes. But sometime they do cut bonuses but that is not a common 1. Like for so many decades, the max i heard is 3 times from a insurers over many years. So it quite safe to say the payout on the higher side of 4.25% will happen. I do help client with the leveraging annuity as well. If u need 2nd opinion, we can discuss =)

 

[mummynew]

My TM annuity plans are about 8 years old. Wait 5 years then can collect monthly payout for life (meaning so far collected about 3 years monthly payout). So far so good as in paying according to BI (future payouts still yet to know but policy breakeven at 10 years).

 

[mummynew]

Yes, if want to commit bigger sum plans, better to be guided by a reliable FA who can present to you multiple plans from different insurers for comparison instead of getting directly from bank RM (who most of the time only presents to you one plan that may not be the best).

 

[reddevil0728]

But do note that getting doing premium financing directly from bank, your spread from premium financing is usually better.

 

[Happyhappydays]

(Edited) Hello! i am also doing research cos an independent FA is recommending me a Manulife Signature Income III annuity (correction: later on, i realised this is actually not an annuity per se, this is a whole-life participating plan that insures the person till age 120, only found out after i saw the product summary). The FA suggests I put in S$100k of my own money and then borrow S$250k from a bank for 1+%pa interest cost for the duration of the policy, so can put a single premium of S$350k into the plan. Considered as "premium financing" or "leveraged financing".

The below is what i have listed for myself as pros and cons, happy for more views/ correction!

Cons
1) The interest I'm gg to pay to service the annuity will most certainly increase from now. I hv to ensure I can afford the increase in interest payments every month. Post-edit: A FA i checked confirmed that the bank also reserves the right to change the fixed spread but i was assured this will be "rare".

2) As the interest servicing costs increase, I have to be prepared that the overall annuity payout may not be as high as expected. There’s a chance (though the possibility is very low I suppose) that my interest payments may become more than the payout at times, perhaps when interest rates peaked to all time high and markets crashed.

3) Even with premium financing, the "breakeven" point usually takes 10 years or longer. The non-guaranteed payout is well, not guaranteed. I really have to be very sure I don't need the lump sum for at least till the breakeven and i am prepared to service the interest payments for the whole period.

4) I also have to be prepared to forgo other forms of usage or investments for this sum (eg wondering shld i just top up my CPF instead)

5) Edited to add one more "con" that was raised by a helpful HWZ member that my monthly interest payments will go into the MSR/TDSR calculations. I've also confirmed this with the FA.

Pros
6) I can get back what I put in with my initial amt of cash, IF I don't surrender the policy before the breakeven year. So I understand this is why it is principle "protected", so as long as I don't touch it for a long time. (But again this is assuming my interest payouts don't go through the roof and eat into my surrender value).

Overall, I can see why banks love this arrangement cos I pay them a decent & regular fixed spread. If i default on my interest payments, they can easily claw back the S$250k i owe them since they can surrender the S$350k policy completely. So this arrangement has zero risk to the bank.

I’m also just curious why this product was recommended to me cos I am not a high net worth individual (and hv to resort to hwz to do research!) which they normally target. Wealthy ppl can utilize leverage very well, cos they have the capital backing to do so, with multiple investment portfolios & arrangements to cover any potential shortfall/losses. Not sure if it is a result of low interest rates i.e. banks are flushed with so much cash so looking for various ways to lend out and now, even targeting ppl like me. (Sorry, I’m digressing here.)

I asked a senior colleague (not a banker/FA/agent) who said that buying an annuity by itself can be a prudent thing to do (i.e. I pay myself back in small sums over time in a disciplined & sustainable way, instead of potentially spending the lump sum at a go unwisely). He then asked me if I needed the money to pay for the annuity i.e. am I taking up the premium financing because I can’t afford it. If I can afford the annuity plan on my own, he suggests taking up the annuity based on my current affordability. And don’t take up the extra financing, just because… well he says there is no need to be so greedy by the (potential) upside. So right now, I’m still deliberating haha..

Post-edit: In the end, I didn't proceed because of 1).

 

[limster]

I’m also just curious why this product was recommended to me cos I am not a high net worth individual (and hv to resort to hwz to do research!) which they normally target.

If the FA wants to become a HNW individual, fastest way to do that is to sell the products that pay him the highest comms.

Buying this product is like buying a house that is burning down but the fire is still small so the seller hopes you don't notice the smoke. Interest are going to rise so guaranteed your financing costs will increase.

However, since I am holding shares in OCBC, UOB, and DBS, getting higher dividends from them will depend on their ability to CONvince customers to lock themselves into floating rate loans.

The last time I took a floating rate loan which was in 2009-2010 for my property, banks were pusing fixed rate loans with special offers .. around 3%++ because banks also know that interest rates were going to drop. I said no thank you and my housing loan was 0.98%+SOR, and SOR basically dropped close to 0 and they send me a letter saying that negative SOR will not reduce my interest rate below 0.98%

So the savvy customer will usually find that not following what the bank RM or agent or FA is hard selling is usually a good thing. Anyone's RM calling him/her to buy Russian bonds?