Scoring Methodology of QDAP (Tax Savings)

Introduction

Qualifying Deferred Annuity Policy (QDAP) satisfies the Insurance Authority (IA)’s criteria on deferred annuity products in premium size, premium payment term, annuity income term and product disclosures. The premium paid is tax deductible under salaries tax or personal assessment, subject to a cap of $60,000 per year. Based on the highest marginal tax rate (17%), the maximum tax savings is $10,200. The rate of return is an important factor of deferred annuity products, where the value can be enhanced by higher guaranteed and projected returns. The rate of return can be further enhanced if the tax savings element is considered, particularly for policyholders on high marginal tax rates.

As the taxation impact varies by each individual, 10Life rates the QDAP (Savings) products based on three factors - guaranteed return, projected return and early surrender coverage.

General Assumptions

  • Male, issue age 45
  • Premium payment term of 5 years
  • Annual premium HKD 60,000/ USD 8,000

Guaranteed Return Score

The insurance company is obligated to pay guaranteed annuity income as a living benefit to the policyholder. There may also be a guaranteed cash value if the policyholder chooses to surrender before the end of the policy period. 10Life calculates the guaranteed cash flow by taking into account the premium paid and guaranteed income in the scenarios that the policy is terminated/ surrendered at age 60, age 65 and age 70.

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 average ratio of PV of income received and PV of premium paid at different scenarios, compared against the benchmark. The current benchmark is set at 1.05 times, which means a product would achieve a score of 10 with ratio more than or equal to 1.05 at age 60, age 65 and age 70. 



Projected Return Score

Some products also offer non-guaranteed income and terminal value for the policyholder in the policy projection, which is subject to change by the insurance company. 10Life calculates the projected cash flow by taking into account the premium paid and projected income in the scenario that the policy is terminated/ surrendered at age 60, age 65 and age 70.

10Life calculates the present value (PV) of income received versus premium paid discounted by the market rates assuming the policy commences today.

We use the Capital Asset Pricing Model (CAPM) to derive market rates of the respective currencies based on the risk-free rates and risk premium. The risk-free rates and market risk assumptions may be updated from time to time to reflect changes in the market.The Projected Return Score is calculated by the average ratio of PV of income received and PV of premium paid at different scenario, compared against the benchmark. The current benchmark is set at 1.05 times, which means a product would achieve a score of 10 with ratio more than or equal to 1.05 at age 60, age 65 and age 70. 




Since the implementation of GL16 in early 2017, insurance companies are required to disclose fulfillment ratios of non-guaranteed dividends or bonuses. However, at this stage, the published data available in the market mainly cover the fulfillment ratios of the first few policy years, making it insufficient to determine the ability of insurance companies fulfilling these long-term non-guaranteed returns. Moreover, products and market assumptions are constantly changing, making it difficult to predict future returns based on past returns. Therefore, 10Life does not take published fulfillment ratios into the calculations of the Projected Return Score.

Early Surrender Coverage Score

While the intended use of QDAP (Savings) is not for early cash-out, there may be cases where an urgent unexpected use of cash is required after purchasing the product. 10Life calculates the Early Surrender Coverage Score based on the guaranteed benefit per premium paid in the following scenarios:

  1. Surrender at the 5th policy year
  2. Surrender at the 10th policy year




The Early Surrender Coverage Score is based on the average of these 2 scenarios.

Overall Score

In evaluating QDAP (Savings) products, 10Life puts the most emphasis on guaranteed return, followed by projected return and early surrender coverage. The score weightings are presented in the following table. 

Overall Score
100%
Guaranteed Return Score
60%
Projected Return Score
20%
Break Even Year Score
20%

10Life strives to offer an unbiased scoring methodology to compare insurance products through data analyses and mathematical calculations, based on public information from insurance companies. 10Life scores are for reference only, and do not constitute any insurance sales advice. As everyone has different insurance needs and affordability levels, you should seek independent advice from licensed advisors before purchasing insurance. 10Life may review the scoring methodology from time to time to improve the product comparisons. If you have any questions or suggestions on the methodology, please email us at enquiries@10Life.com.

Updated on 5 March 2020 
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