premium financing for annuity

[reddevil0728]

Hello! i am also doing research cos an independent FA is recommending me a Manulife Signature Income III annuity. 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 annuity. 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 fluctuate/increase. Now is a great time for bankers/agents/FAs to sell this cos the interest rates are at all-time low, i.e. one-month SORA (from MAS website) or COF (cost of funding) is at 0.2-0.4%pa plus the fixed spread that banks charge is around 0.6-1%pa. While this means the interest rate I pay will be "only" around 1+pa% for now, interest rates are at the bottom of the barrel given this are extraordinary times of low/negligible interest rates/yields. Interest rates are certainly going to go up as the Fed has indicated so. Given historical rates , 1M SIBOR (now SORA) was up to 3+%pa in the early 2000s (from MAS website). I hv to ensure I am not surprised and can afford the likely increase in interest payments every month.

2) As the interest servicing costs increase, I have to be prepared that the overall annuity payout may not be as high as expected. (The annuity will usually hv a fixed guaranteed payout but this payout is technically subtracted from my initial lump sum premium, so I am essentially paying back myself in small sums over a long period of time/upon death, instead of splurging it off at a go.) 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, cos anyway, the money is locked up till age 55/forever but the rates are guaranteed and i get a regular confirmed payout under CPF Life. hmm..).

Pros
5) 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.


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. Then, agents/FA earn a (high?) fee for selling them, usually 2-3% commissions of premium value i.e. earn S$7k for a S$350k single premium.

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.)

Good that u r carrying out more due diligence to better understand the pros and cons of premium financing. Maybe u hv to see if u can commit to a lifetime of premium financing. Also, do see if u have any other alternatives with this sum of money too.

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..

Anyway, if u do proceed this premium financing arrangement, congrats to the agent/FA servicing u $$$

if u want to consider such thing. go banks directly, your interest rate would be lower. and the premium will be the same since same company.

 

[reddevil0728]

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?

What would UHNWI know that others don't? because they do buy such stuff

 

[mummynew]

Happydays

For premium financing, you may want to look at two things:

1. bank interest rate (can be as low as 0.5% + SORA) and
2. BI of various insurers offered by the respective bank.

Bank may offer lower rate with a not-so-good retirement plan (in terms of returns) or
it may offer higher rate with a better retirement plan or
higher rate with not-so-good plan or
lower rate with a better plan

It is only with the above overall computation/comparison that you can get to know which gives you the best bet of your money. If you don't have the stamina to comb thru various banks of their offers, a reliable FA with bank tie-ups may still be a more convenient way to sieve out the 'best'.

Lastly, if possible, break your money into two parts to buy two plans (so that in the event 'something go wrong', you have an option to surrender one or both. This part, I am not sure whether got any 'large premium discount' involved in such breaking up into more than one plan).

*I happen to have a fresh manulife III with me from a friend asking for opinion. I calculated for her on an about 20 years single premium plan, the xirr is around 2.4% without premium financing which is not attractive in my assessment. But she is extremely risk adverse and so such plan maybe suitable for her instead of parking money in bank account. Anyway, I also advised her to ask around before deciding but if she is 'lazy', then so be it. (Older plans are better to give above 3% returns which is 'safer' esp in the scenario of premium financing).

**'Promotions' are quite common nowadays for insurance products. So don't rush to get the 'CNY Promotion' that I know 'ending' end Feb.

Good luck!

 

[boredboiboi]

Happydays

For premium financing, you may want to look at two things:

1. bank interest rate (can be as low as 0.5% + SORA) and
2. BI of various insurers offered by the respective bank.

Bank may offer lower rate with a not-so-good retirement plan (in terms of returns) or
it may offer higher rate with a better retirement plan or
higher rate with not-so-good plan or
lower rate with a better plan

It is only with the above overall computation/comparison that you can get to know which gives you the best bet of your money. If you don't have the stamina to comb thru various banks of their offers, a reliable FA with bank tie-ups may still be a more convenient way to sieve out the 'best'.

Lastly, if possible, break your money into two parts to buy two plans (so that in the event 'something go wrong', you have an option to surrender one or both. This part, I am not sure whether got any 'large premium discount' involved in such breaking up into more than one plan).

*I happen to have a fresh manulife III with me from a friend asking for opinion. I calculated for her on an about 20 years single premium plan, the xirr is around 2.4% without premium financing which is not attractive in my assessment. But she is extremely risk adverse and so such plan maybe suitable for her instead of parking money in bank account. Anyway, I also advised her to ask around before deciding but if she is 'lazy', then so be it. (Older plans are better to give above 3% returns which is 'safer' esp in the scenario of premium financing).

**'Promotions' are quite common nowadays for insurance products. So don't rush to get the 'CNY Promotion' that I know 'ending' end Feb.

Good luck!

The promotion for manulife is extended till april as of today morning. And for the single premium signature income, the promotion is also till april initially, hopefully is not given wrong info to u in order to pressure into buying.

 

[mummynew]

The promotion for manulife is extended till april as of today morning. And for the single premium signature income, the promotion is also till april initially, hopefully is not given wrong info to u in order to pressure into buying.

Ya, those 'deadlines' are usually the 'last straw' to make some ignorant few to sign on the dotted lines. Friend told me 'deadline' is end Feb and I just told her promo are plentiful and so pls respect her own money and don't anyhow sign. Will tell her 'deadline extended'. Thanks for your update!

*I used to think Manulife's plans are quite ok but looking at their expense ratio like very high and so am having second thought about it after I looked at their latest plans (of course need to compare with other insurers in order to be fair).

 

[boredboiboi]

Ya, those 'deadlines' are usually the 'last straw' to make some ignorant few to sign on the dotted lines. Friend told me 'deadline' is end Feb and I just told her promo are plentiful and so pls respect her own money and don't anyhow sign. Will tell her 'deadline extended'. Thanks for your update!

*I used to think Manulife's plans are quite ok but looking at their expense ratio like very high and so am having second thought about it after I looked at their latest plans (of course need to compare with other insurers in order to be fair).

Feel free to nudge me if u need to generate others plan. Generated before for u few years back

 

[mummynew]

Feel free to nudge me if u need to generate others plan. Generated before for u few years back

Will keep you in mind when I need quotes for genuine interest (my FA retiring soon (used to be under historical ICS then slowly converted into an FA)).

Since my 20s, I only look at numbers and not so bothered about who is the person selling me. Last time more troublesome when FAs were not so common, that I had to call up insurers one by one to get their quotes and do comparison on own to decide on the 'best'.

 

[mummynew]

Hello mummynew and boredboiboi - thanks for your tips!

The FA says so far Manulife provides the "best" returns (i.e. up to 9%pa) with premium financing after comparing a few. He quickly gave me a look of the slide with some comparison charts which i didn't catch properly, and didn't share w me after the call so i'm not sure how he arrived at Manulife (or maybe Manulife gave the highest commission? i am not sure whether it is rude to ask the FA how much commission he gets from Manulife & other life insurers).

The FA also declined to provide the product summary of the Manulife annuity product to me, says he needed a copy of my NRIC and that i shld hv interest in the annuity before sending me. I'm not so keen to provide my NRIC so quickly, so I'll just research based on public info / brochure on Manulife's website for now.

Looking at your 'up to 9% pa' made me take a re-look at previous msgs (9% sounds like a legacy product).

I made a mistake coz my friend's BI is Manulife RetireReady+ III and yours is Signature III.

I just used ballpark numbers from the brochure and the XIRR is above 3% (without financing) which is more decent for Signature 3.

Your FA so atas that need IC that can give product summary (I don't remember it is a 'norm').

Take your time really coz it's not like buying 'salted veg' from market. (think premium financing for manulife products are available from DBS and CIMB and maybe some other banks as well - my knowledge two years ago).

*I don't ask about commission. I only look at numbers from various plans that can give me the 'best bet' and pick that product. Whatever FA can make from that product is his/her efforts / luck.

 

[boredboiboi]

Will keep you in mind when I need quotes for genuine interest (my FA retiring soon (used to be under historical ICS then slowly converted into an FA)).

Since my 20s, I only look at numbers and not so bothered about who is the person selling me. Last time more troublesome when FAs were not so common, that I had to call up insurers one by one to get their quotes and do comparison on own to decide on the 'best'.

Thanks =) good night.

 

[boredboiboi]

Hello Limster, oh anyone in sales will definitely want to make the most commission, this isn’t charity work heh. But if they hard sell and turn off customers or mis-sell, your bank / insurance stocks will suffer too.

The FA I spoke to didn’t hard sell cos he didn’t ask me to decide right away during our first conversation. What he told me kinda checks out from what I am reading online (eg interest payments I pay will fluctuate, total payouts I get not guaranteed, hv to put for long term else I lose out etc) so I am assuming he didn’t mis-sell too!

But the FA's sales “tactic” was - how much do I want to live on comfortably when I retire, and claimed it's very achievable to earn up to 9%pa on the lump sum (albeit with premium financing). The part about how much premium i need to set aside and how much financing came only later. I thot it’s quite easy to be greedy to say yes! I will like to receive S$6-7k cash (or even S$10k!) a month and don't worry about the details later if i not gonna touch the lump sum (but I understand this is the potential upside and it is through borrowing money from the bank..)

Your fixed/floating rate loans analogy means u still got some kind of financing/leverage.. so..

Russian bonds.. I just googled, no more Russian bond issuers in Singapore to give rebate alr.. how to sell..

***

Hello mummynew and boredboiboi - thanks for your tips!

The FA says so far Manulife provides the "best" returns (i.e. up to 9%pa) with premium financing after comparing a few. He quickly gave me a look of the slide with some comparison charts which i didn't catch properly, and didn't share w me after the call so i'm not sure how he arrived at Manulife (or maybe Manulife gave the highest commission? i am not sure whether it is rude to ask the FA how much commission he gets from Manulife & other life insurers).

The FA also declined to provide the product summary of the Manulife annuity product to me, says he needed a copy of my NRIC and that i shld hv interest in the annuity before sending me. I'm not so keen to provide my NRIC so quickly, so I'll just research based on public info / brochure on Manulife's website for now.

You are welcome.
I can quote and send to you if you want. Because the leveraging plan for FA only manulife can be done, the rest of the plans by other insurers that FA can sell cannot do leveraging that is why he say its the best returns but that is base on after leveraging

 

[oceanicmanta]

if I may add 2 other considerations / clarifications :

1) the financing rate of X% + SORA ... is X fixed throughout term of policy ? (have read about mortgage loans in the past where the X can also be changed by the Bank)

2) with financing, once $ is borrowed, the Interest starts payable from Day 1, but the Annuity Payout happens only after X years later. Shld take note of the cashflow in those initial years.

 

[yoongf]

Bank fixed rate is not truly fixed on a number. Its always a fixed discount to their board rate. In certain situations, their board rate may move.

The bank is not obligated to finance your annuity forever. All loans are subject to a right of review and if u have been a notti customer in other banking matters (like crypto), bank might want to end the relationship with you. This can be quite stressful.

Hmm.. does such loan installments affect MSR/TDSR calculations?

 

[Nancy Fancy]

There are several premium financing products sold in the market currently and some products do have earlier payout compared to others.
eg. our GE PLR : payout from 25th month
For clients concern about cash flow may pay attention to when will the payout start

 

[BBCWatcher]

Hmm.. does such loan installments affect MSR/TDSR calculations?

I don't see why not.

 

[boredboiboi]

Thank u, which insurer or FA are you from?
I contacted Manulife for the product summary of Manulife Signature Income III, waiting to hear back!

From 1 of the FA. U can pm me your dob with email or whatsapp and how much premium and i generate for u and send to u. And now weekend most likely they wont reply. I quote only take few mins. Assume u r male non smoker?

 

[Nancy Fancy]

Bank fixed rate is not truly fixed on a number. Its always a fixed discount to their board rate. In certain situations, their board rate may move.

The bank is not obligated to finance your annuity forever. All loans are subject to a right of review and if u have been a notti customer in other banking matters (like crypto), bank might want to end the relationship with you. This can be quite stressful.

Hmm.. does such loan installments affect MSR/TDSR calculations?

Yes, it does affect MSR/TDSR calculations... however only the monthly interest need to be taken into consideration.

 

[Happyhappydays]

Thanks all again for the comments!

I decided I won't proceed with premium financing after all. I am pretty risk adverse, so don't think I'll sleep well if the bank decides for various reasons, to exercise its right to increase the fixed spread and/or the 1-month SORA/Cost of Funding goes back to historical highs (though I've been assured this will be rare because it means mortgage loans out there will go nuts.)

I think annuities are still useful though to complement CPF Life, so will still look around!

 

[boredboiboi]

Thanks all again for the comments!

I decided I won't proceed with premium financing after all. I am pretty risk adverse, so don't think I'll sleep well if the bank decides for various reasons, to exercise its right to increase the fixed spread and/or the 1-month SORA/Cost of Funding goes back to historical highs (though I've been assured this will be rare because it means mortgage loans out there will go nuts.)

I think annuities are still useful though to complement CPF Life, so will still look around!

As long as u done ur own work most probably u wont regret

 

[justjy]

Thanks all again for the comments!

I decided I won't proceed with premium financing after all. I am pretty risk adverse, so don't think I'll sleep well if the bank decides for various reasons, to exercise its right to increase the fixed spread and/or the 1-month SORA/Cost of Funding goes back to historical highs (though I've been assured this will be rare because it means mortgage loans out there will go nuts.)

I think annuities are still useful though to complement CPF Life, so will still look around!

Hahaha! if you want an alternative investment let me know bah.

 

[Happyhappydays]

Hahaha! if you want an alternative investment let me know bah.

sure what do u hv to offer?