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Old 05-09-2018, 06:42 PM   #601
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Is it prudent to look for a different insurance agency for DII to not "put all your eggs in one basket"?
That's kind of a tie breaker consideration, but fortunately you probably won't have that problem because Prudential doesn't sell DII. Aviva does (and so do Great Eastern and AIA), but it might be prudent to cancel your Aviva coverages and then pick up the term life insurance coverage again once you have at least one dependent, and if that's allowed. Aviva's SAF/MINDEF Group Term Life Insurance is quite a good value -- when/if you need it. (The accident insurance I can definitely pass up, assuming your core coverages are good.)
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Old 05-09-2018, 09:37 PM   #602
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Hmm... try posting the code that appears after imgur.com i'll find it from there
i.imgur .com/St2vrCk.png

Hopefully this works?
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Old 05-09-2018, 10:36 PM   #603
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Ok, let's check two scenarios.

1. You keep your current plan and surrender it at age 65 when your children are independent, you are ready to retire, and you don't really need life insurance anymore. Prudential PAR Fund performs at an average of 4.75% so you get your G + NG surrender value of $172983

2. You surrender your plan, and replace it with Aviva Direct Term Life + Critical Illness with $150k coverage from age 28 to 65. The premium is $360 per year. So you take out the current surrender value of $7539, invest that, and then invest the balance $1528 per year.

Now, in order for your Plan 2 investments to hit $172983 at age 65, you will need to achieve 4.39% IRR.
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Old 05-09-2018, 10:56 PM   #604
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Prudential PAR Fund performs at an average of 4.75%....
Will it? That's an assumption, and it's a bold one.
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Old 05-09-2018, 11:44 PM   #605
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Will it? That's an assumption, and it's a bold one.
I think you have missed the point. We are comparing Scenario 1 and 2 here.

So let's say in scenario 1, Prudential gets 4.75%. With the same market conditions, how much will you be getting if you go self-investing in scenario 2?

If times are bad, and Prudential only gets 3.25%. With the same market conditions, you are going to get less when self-investing in scenario 2. Similiarly if times are good, and Prudential gets 6%, your self-investing performance will also be greater.
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Old 05-09-2018, 11:59 PM   #606
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I think you have missed the point. We are comparing Scenario 1 and 2 here.
OK, I think I understand you now. Let me see if I can summarize the main point.

Your calculation shows that if Prudential delivers 4.75%/year returns, net of their high costs (to the policyholder), you, as a DIY investor, would have to achieve 4.39%/year returns over the same time period to match Prudential. So you can fall 35 basis points below Prudential's performance and still come out ahead doing this on your own.

I think I'd take that bet, and DIY. But that's me, and it's an interesting bet. For example, there is some SDIC backstopping on that insurance policy which might have some minor value.

There are some individuals and firms that'll make higher offers to take the policy off your hands than what the insurance company offers in surrender value, right? It's worth getting a couple quotations on that, then re-running the numbers with the higher third party surrender value.
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Old 06-09-2018, 12:55 AM   #607
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There are some individuals and firms that'll make higher offers to take the policy off your hands than what the insurance company offers in surrender value, right? It's worth getting a couple quotations on that, then re-running the numbers with the higher third party surrender value.
As always, I find myself learning new things from reading this thread (and the ST thread). It was only after reading this post that I discovered that there are entities out there in the business of buying over endowment policies and the like. My question is - what's in it for them? It seems like a bad value proposition, since the company doesn't receive any "benefit" from the insurance side of the policy, and they only get the relatively low payout (compared to investing the same amount on your own) for the premiums they have to continue to pay under the policy.
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Old 06-09-2018, 03:40 AM   #608
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As always, I find myself learning new things from reading this thread (and the ST thread). It was only after reading this post that I discovered that there are entities out there in the business of buying over endowment policies and the like. My question is - what's in it for them? It seems like a bad value proposition, since the company doesn't receive any "benefit" from the insurance side of the policy, and they only get the relatively low payout (compared to investing the same amount on your own) for the premiums they have to continue to pay under the policy.
Nah, this is a great deal for the companies, because:
1) They offer a lot less than the policy is actually worth;
2) They can borrow to fund the purchase, and borrow cheaply.

Imagine that you're one of these companies, and someone comes to you with a policy that's going to pay off $100,000 in one year's time. You'd pay, say, $95,000 for that policy all day long, because you can (probably) borrow that $95k from the bank at around 2% for one year. The buyer's getting a raw deal, but they're coming to you because they need the money now, not in a year's time or twenty years' time or whatever.

On day 365, the policy pops off and pays you $100k. You pay back about $97k to the bank, and you've just made $3k for very little risk and just a bit of patience. Drinks on you tonight.

The only thing you have to do is make sure you don't inadvertently offer more than $98,000 for the policy, because then you're losing money.

If the policy's got a long time to run, the numbers get even worse. If someone came to me and asked me what I'd pay for a $100,000 life policy on a 55-year-old dude, I'd probably say "right, if I borrow 1-year and roll the loan for 30 years, I can probably borrow at 3%, so I'm going to charge 5% to put some margin in there for me; the dude's probably going to pop off in 30 years but let's say 35 to be safe... I'll pay you, what, $16,500? Well, if you don't like it, you can wait thirty years..." The only way I lose out is if short-term interest rates rocket higher and stay higher, or if the dude lives to be like 130.

Hilariously enough: it's actually possible to screw this up! A company called JG Wentworth, based over here in the States, is in the business of buying these "structured settlements"—life insurance policies, lawsuit payouts that pay a fixed amount every year, lottery winnings that pay a fixed amount every year. And they've managed to screw the business up so badly that they've gone bankrupt twice in the last decade.

(The business of buying these structured settlements, annuities, life policies, etc etc, is surprisingly competitive. So the margins are slim, and the customer acquisition costs are through the roof; that's what blew up JG Wentworth.)
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Old 06-09-2018, 09:56 AM   #609
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As always, I find myself learning new things from reading this thread (and the ST thread). It was only after reading this post that I discovered that there are entities out there in the business of buying over endowment policies and the like. My question is - what's in it for them? It seems like a bad value proposition, since the company doesn't receive any "benefit" from the insurance side of the policy, and they only get the relatively low payout (compared to investing the same amount on your own) for the premiums they have to continue to pay under the policy.

A lot of policies, especially the endowment ones, are structured to have low surrender values in the early years, which then sharply rises when approaching maturity. For example, I have a 30 year endowment plan that I'm halfway through. The first 15 years is giving me an IRR of about 2% but the next 15 years is giving me an IRR of about 7%.
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Old 06-09-2018, 10:52 AM   #610
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Thanks alot, BBCW and Tangent for all the advice and help given. Especially thanks to Tangent for actually calculating the IRR to beat that amount. I should've realized earlier how to answer that question myself, so thanks a lot for showing me the light haha.

Now, in order for your Plan 2 investments to hit $172983 at age 65, you will need to achieve 4.39% IRR.
Your calculation shows that if Prudential delivers 4.75%/year returns, net of their high costs (to the policyholder), you, as a DIY investor, would have to achieve 4.39%/year returns over the same time period to match Prudential. So you can fall 35 basis points below Prudential's performance and still come out ahead doing this on your own.
If times are bad, and Prudential only gets 3.25%. With the same market conditions, you are going to get less when self-investing in scenario 2. Similiarly if times are good, and Prudential gets 6%, your self-investing performance will also be greater.
It makes sense that in a bull market, I could probably DIY better than Prudential since they would keep some of the profits for themselves, but if times are bad like the 3.25% scenario, would there be a risk of them offloading the costs to insurance holders? I'm not very clear on why DIY would necessarily do worse in a bad scenario (assuming some typical global/local stock+bond index choices like IWDA+ES3+some bond component). Sorry if this is a dumb question.
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Old 06-09-2018, 11:43 AM   #611
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It makes sense that in a bull market, I could probably DIY better than Prudential since they would keep some of the profits for themselves, but if times are bad like the 3.25% scenario, would there be a risk of them offloading the costs to insurance holders?
That's exactly what would happen. That 4.75% (net of costs) is a projection, not a promise. The only reason the insurance companies use 4.75% is because that's what the Monetary Authority of Singapore lets them use in their marketing simulations.

Tangent314 calculated that if Prudential actually achieves and delivers 4.75%/year over the life of the policy to the policyholder, then an investor who achieves a lower return/year over the same period would beat Prudential, as long as the lower yield is no more than 35 basis points lower.

If Prudential only achieves 3.25%/year, let's suppose, then an investor accomplishing 3%/year should beat Prudential. Both numbers fall, and both numbers rise, together. You don't have to beat Prudential's actual returns to beat; you just have to come reasonably close to their returns to beat.

It appears to me that a prudent investor taking an appropriate level of risk would indeed consistently beat Prudential. That's especially true if you can obtain a higher surrender value from a third party than Prudential is offering, and often you can. However, this decision is still somewhat "interesting," and I think some policyholders would still choose to ride along with Prudential once this deep into the policy. Which is by design, really. The insurance company understood and understands this deal quite well, and the insurance company has done and will do well.

I don't want to discount completely what insurance companies do in offering such deals. There are many people that feel uncomfortable investing on their own, or they're unable to invest prudently in an age-appropriate way, or they really need the discipline of a premium bill, or they just like their insurance salesperson, or some combination. If the insurance company's offer is convenient to you, and if you don't mind paying something for that convenience (and understand the deal at least reasonably well), I certainly have no objection. That said, there are some really, really awful products that insurance companies sell that really don't add value, or even subtract it.
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Old 06-09-2018, 12:24 PM   #612
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It appears to me that a prudent investor taking an appropriate level of risk would indeed consistently beat Prudential. That's especially true if you can obtain a higher surrender value from a third party than Prudential is offering, and often you can.
thanks to BBCW & Tangent314, i had surrendered an endowment policy back to the insurance co.
may i know what are the upside / downside of selling the endowment to a 3rd party instead?
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Old 06-09-2018, 12:35 PM   #613
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It makes sense that in a bull market, I could probably DIY better than Prudential since they would keep some of the profits for themselves, but if times are bad like the 3.25% scenario, would there be a risk of them offloading the costs to insurance holders? I'm not very clear on why DIY would necessarily do worse in a bad scenario (assuming some typical global/local stock+bond index choices like IWDA+ES3+some bond component). Sorry if this is a dumb question.

No, your SV will never go down it value. It will always go up by at leas the difference in the G value, so in those cases they may lose money.



Looking at some of the retirement plans that project G+NG SVs for 3.25% and 4.75%, and provide fairly flat payout benefits, it seems that they insurance companies give you about 2.8% returns for 3.25% PAR fund performance, and about 4.0% for 4.75% PAR fund performance.

In practice, it looks like they also smoothen out the returns over about 3 years.
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Old 06-09-2018, 01:06 PM   #614
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Tangent314 calculated that if Prudential actually achieves and delivers 4.75%/year over the life of the policy to the policyholder, then an investor who achieves a lower return/year over the same period would beat Prudential, as long as the lower yield is no more than 35 basis points lower.
Note that 4.39% is specific only to this plan. Depending on the plan and the number of years the plan has been in force, this number can vary quite widely.

Remember those private life annuity policies you were discussing about on another thread? Those are offering ~4.0% returns on 4.75% PAR fund performance...
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Old 06-09-2018, 01:38 PM   #615
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this time round, i stand on the side of bbc

i do not believe in endowment insurance. it is like cpf life. it is locked up for a long, long time.

if i were to diy and buy shares or ut or ssb, i can encash it anytime i like. i dont have to wait for the full 30 years before i can see any profit.
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