Retirement annuity is generally used as an income stream for retirees. An individual would pay the insurer a one-off premium or a series of regular premium to accumulate wealth, which would be annuitised and be paid back to the individual during the retirement life. As retirees look for a stable income replacement after retirement, they may seek annuities providing high guaranteed income with or without potential non-guaranteed income.
Note that buying an annuity is exchanging liquid assets into stable future income, surrendering it for urgent use may incur a significant loss. The insured may also suffer financial losses if the unfortunate event of death occurs early during the policy. 10Life calculates the score for each retirement annuity product by its guaranteed return, projected return, early surrender coverage.
There is a large variety of Qualifying Deferred Annuity Policy (QDAP), with different premium term, annuity income start age and annuity income term. 10Life separates available products into three main categories based on target customer segment.
- QDAP (Savings), focusing on the return of savings in the medium term (annuity income starts far earlier than the general retirement age)
- QDAP (Retirement), focusing on mid- to long-term retirement planning (annuity income starts at retirement age; annuity income term of 10 years or 20 years can be selected)
- QDAP (Longevity), focusing on hedging longevity risk (annuity income starts at retirement age; annuity income term as long as possible)
Assumptions (QDAP Retirement)
- Issue age 45, Male
- Premium payment term: 10 years (or nearest)
- Annual premium amount: US$7,800 (equivalent to HK$60,000)
- Annuity income start: age 65
- Annuity income term: 10 years or 20 years
Guaranteed Return Score
Insurers are obligated to pay the guaranteed income as a living benefit to the policyholder. 10Life calculates the guaranteed cash flow by considering the premium paid and guaranteed income in the scenario that the policyholder is alive at the age of 85.
10Life calculates the present value (PV) of income received versus premium paid discounted by the risk-free rates assuming the policy commences today. Risk-free rates of different currencies are determined by the long-term yields of the respective government bonds.
- USD: United States Treasury Bonds
- HKD: Hong Kong Exchange Fund Notes
The risk-free rates may be updated from time to time to reflect changes in the market.
The Guaranteed Return Score is calculated by the ratio of PV of income received and PV of premium paid, compared against the benchmark.