A New Tax Avoidance Tool for 2020? Deferred Annuity with Tax Deduction, Break-Even Possible in as Little as 1 Year?!

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The government has introduced the Qualifying Deferred Annuity Policy (QDAP) to encourage early savings and retirement planning. Last year, media reports highlighted that BOC Life's deferred annuity plan (fixed term) offered a guaranteed break-even period as short as 5 years. Policyholders could surrender the policy immediately after completing contributions, and with a 17% tax deduction, achieve a guaranteed internal rate of return (IRR) of up to 5.9% over 5 years, earning it the label of a "tax avoidance tool" (see Note 1). Subsequently, the Insurance Authority intervened, stressing that QDAPs are intended for long-term savings and should not overly focus on tax deductions. As a result, the break-even period for BOC Life's QDAP was extended to 8 years (see Notes 2, 3). 10Life reviewed several QDAPs in the market with a 5-year contribution period and found that the shortest guaranteed break-even period is also 8 years.

QDAP "Prepayment" Product Design Breaks New Ground – Guaranteed Break-Even in 1 Year with Tax Rebates

Although QDAPs with a 5-year contribution period and immediate break-even have disappeared, we discovered that Generali's TaxJoy Deferred Annuity offers a prepayment option (hereinafter referred to as Generali QDAP (Prepayment)), which can shorten the policy's guaranteed break-even period. Operationally, policyholders must first establish a "premium deposit account" with the insurer, depositing a lump sum of USD 36,482, equivalent to 5 years of total premiums, into the account. The balance in this account even earns interest, which is used to pay the premiums. Subsequently, the insurer withdraws USD 7,800 annually (equivalent to approximately HKD 60,000, the tax-deductible premium cap) from this account to cover the premium, allowing policyholders to enjoy annual tax benefits. If the policyholder completes the 5-year contributions through the "premium deposit account," the guaranteed break-even period for the Generali QDAP (Prepayment) product itself is only 7 years (excluding tax deduction returns), which is faster than other QDAPs in the market (which require at least 8 years for guaranteed break-even).

More interestingly, when factoring in the tax deduction amount, the break-even period for Generali QDAP (Prepayment) could be further reduced. Following the above example, if the policyholder is in the 17% tax bracket as a high-income earner and surrenders the policy after 1 year, although the guaranteed cash value of the product is only USD 5,850, the policyholder can fully withdraw the remaining balance of the "premium deposit account" plus interest. When combined with the tax deduction return, the policyholder’s guaranteed income could rise to USD 36,857, exceeding the prepaid premium. In other words, Generali QDAP (Prepayment), with tax rebates, achieves break-even in just 1 year, with a guaranteed IRR of 1.0%.

If a Policyholder Surrenders Generali TaxJoy Deferred Annuity (Prepayment) After 1 Year

Policy Start Age	45 years old
Prepaid Premium (Full Term)	$36,482

Total Surrender Value at Age 46
(i) Guaranteed Cash Value	$5,850
(ii) Prepaid Premium Balance (Including Interest)	$29,681
(iii) Tax Deduction Return (17% Tax Rate)	$1,326
(i) + (ii) + (iii)	$36,857

1-Year Guaranteed Internal Rate of Return IRR	1.0%

The policy currency in the above table is in USD.

New vs. Old QDAP: New Model Balances Tax Deductions with Savings Incentives

Generali QDAP (Prepayment) allows policyholders to achieve ultra-fast break-even with tax deduction returns. Recall last year’s BOC Life QDAP, which became an industry "tax avoidance tool" due to its quick break-even and high returns. Can Generali QDAP (Prepayment) be considered the new-generation tax avoidance tool in comparison? 10Life attempts to compare the old and new generations of QDAPs, focusing on the guaranteed internal rate of return over the entire policy term after a 17% tax deduction, as detailed in the chart below. Assume the policyholder is a 45-year-old high-income individual in the 17% tax bracket.

The previous generation BOC Life Deferred Annuity Plan (Fixed Term) (discontinued in September 2019) allowed policyholders to surrender immediately after 5 years of contributions. With a 17% tax deduction income, policyholders could earn a 5-year guaranteed IRR of 5.9%, higher than the guaranteed IRR of 5.6% if the policy was held to maturity over 15 years. The product incentivised early surrender after contributions, indirectly reducing the policyholder’s motivation for medium- to long-term savings.

In contrast, for Generali TaxJoy Deferred Annuity (Prepayment via Premium Deposit Account), the guaranteed IRR for surrendering after 1 year (including 17% tax deduction) is only 1.0%. Surrendering after 3 years yields a guaranteed IRR of 3.2%, and as the policyholder continues to hold the policy, the guaranteed IRR rises, reaching 4.9% at maturity. This shows that the early surrender returns for Generali QDAP (Prepayment) are less attractive compared to the previous generation BOC QDAP. However, for policyholders in the 17% tax bracket, the liquidity risk of investing in Generali QDAP (Prepayment) is lower, and early surrender (after 1 year of investment) does not result in a loss. Of course, the purpose of purchasing a QDAP should be for savings, and policyholders can continue holding the policy to earn a higher IRR, which offers certain advantages in the current volatile, low-interest investment environment.

Generali QDAP (Prepayment) requires policyholders to deposit the full-term premium into the "premium deposit account" in a lump sum, which demands higher short-term liquidity. If the policyholder opts not to prepay and instead pays annually over 5 years, with a 17% tax deduction, the guaranteed IRR for surrendering after 5 years is 2.9%, lower than the prepayment version. However, if the policyholder holds the policy to maturity, the 15-year guaranteed IRR rises to 5.3%, surpassing the prepayment version. This return rate is considered ideal in the current QDAP market, as returns for QDAPs vary significantly. For more details, refer to the earlier article "Tax Deduction Returns of Qualifying Deferred Annuity Policies (QDAP) (March 2020)".

In summary, although Generali QDAP (Prepayment) with tax rebates achieves break-even in as little as one year, the ingenuity of the product lies not in tax avoidance but in reducing liquidity risk while balancing medium-term savings IRR growth.

Lastly, as we have mentioned in multiple articles, deferred annuities serve various purposes. The arguments in this article are based on medium-term returns after tax deductions. There are also many QDAP products in the market designed for retirement. When making a choice, it is crucial to clarify the purpose of the policy and the required income period, and to choose and compare carefully.

[Maximising Tax Deductions and Savings Returns: Compare Qualifying Deferred Annuity Policies]

Notes:

10Life Blog, 16 May 2019: ["Annual $10,000" Is Early Surrender Worth It Just for Tax Savings? Deferred Annuity Becomes a Tax Avoidance Tool!]

The Standard, 10 Sep 2019: “Insurance Chief Rejects Tax Loophole Claim”

Apple Daily, 9 Sep 2019: ["Accused of Tax Avoidance Abuse, BOC Life Amends Annuity Terms"]

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.

Last updated: 9 Apr 2026

10Life Editorial Team

Our team of professional content researchers focussing on insurance

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10Life Editorial Team

Our team of professional content researchers focussing on insurance

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New Tax Avoidance Tool 2020? Deferred Annuity with Tax Deduction, Break-even in as Fast as 1 Year?!

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