Manulife Income Plus

This and similar products “guarantee” a nominal level of income for life. But are they a good deal? The following summary-analysis will demonstrate why sophisticated investors are not interested in these products.

While information from the providers is not very transparent, it is clear that potential investors are paying a huge price—their entire principal. In return they receive a small benefit that is not worthwhile for the vast majority of these investors. Such products may be appropriate in rare cases. As an example, an elderly person who is prepared to live very modestly on a small nominal income, whose expenses will be largely unaffected by inflation, who does not have potential heirs; and who expects to live an unusually long time after exhausting his RIF, and likely who only uses this for his RIF. Without all such factors, the product is not worthwhile, in our opinion.

Let’s take a straightforward case of how much the guarantee costs in expected returns, which largely go as profit to the insurer and the mutual fund companies through MERs of 3–4% (plus penalties for cashing out beyond planned amounts).

As an example, a person with $500,000 would be giving up about $1 million of expected accumulated assets after about 20 years. For 30 years it would be about $1.75 million. While the client is paid 5% per year, the insurer is earning vastly superior market rates that the buyer will not see.

The insurance company, assuming that it will still be in existence (or perhaps be propped up by the government in 20 years plus down the road, and assuming that the insurer is then allowed to continue its guarantee without change) is making a return of about 2–4% beyond what it pays out, plus the client is being charged exorbitant fees every year.

One other factor: Historically, inflation has been about 4% a year. It is just a matter of time before we return to this rate or even exceed it. This means that a client will need more than 5% annual return in a few years’ time. In addition, if an investor draws down more than allowable to maintain the guaranteed return on investment (which is the main selling point of the plan), then that guarantee is void. No such penalties exist for an account managed by a portfolio manager.

A client could, in fact, duplicate the “guarantees” of an “Income Plus” type plan merely by buying government bonds using a 28 year timeline at current bond rates, take out more money than allowed by the Income Plus type of plan (perhaps to compensate for inflation) —and still be actuarially ahead of the insurance company products because of the effects of the fees charged and withdrawal penalties for unplanned withdrawals.

The bottom line: A client, by being more attached to the market (with its volatility, but also with long time consistent growth and compounding) will be better off. The stock market performance is unaffected by normal inflation. In fact, good companies have been successful at maintaining their profitability in such times. The best solution is, therefore, to go with a Portfolio Manager who can provide the best of both worlds—a flexible rate and the ability to withdraw without penalty, and even with the high likelihood of a great deal of wealth to bequeath. Insurance products just can’t compete.

Sam Wiseman, CFA, Chief Investment Officer
Chavdar Russev, CFA, Associate PM