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
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
Chavdar Russev, CFA, Associate PM