Most Canadians are simply not in a situation when their RRSPs are maxed out, RESPs are fully contributed, mortgage is paid down aggressively and starting next year, TFSA is maxed out. I’d be surprised if someone in that happy situation even needs longevity insurance.

It is so true that the costs must be weighed against the benefits and IMHO, for IncomePlus, the cost is just far too steep. However, there will be more innovative products in the future — perhaps a similar product with low-cost funds that would be worth considering.

For example. a fire insurance policy may provide a tangible benefit but if it costs $150K per year and your ouse is worth $300K, then I’d say the cost is not worth the “tangible benefit”.

If you are in fact a financial advisor (as I am) I think you have made a lot of money recommending this IncomePlus product. As a result, I believe that you therefore feel you can’t concede that this product is very weak and far better options (albeit that pay you less) exist that would serve your clients better.

If I am wrong, please correct me.

On differing perspectives — well, opinions are like navels; everyone has one, but some are more interesting to gaze at than others…….

DAvid

I’m still puzzling through the differing perspectives here, because I think there’s a fair bit of talking past each other. If it were entirely about raw performance, I’d say there’s no place for GMWB products. But it’s not. The bond strategy illustrated may provide equal performance, but it doesn’t provide some of the advantages the insurance products do.

There are tangible benefits Matt has outlined above, which I believe suit a range of clients.

The question that he raised that didn’t seem a major issue until a few months ago is the long-term solvency of these companies.

Quotes:

- 65 year old male, single life, 5 year guaranteed payout, immediate annuity: 7.9%

- 50 year old male, single life, 5 year guaranteed payout, annuity deferred until age 65: 14.5%

So by waiting 15 years to collect your fixed annuity, you will earn 4% compounded (104%^15=200%), which is about what long term bonds currently pay.

In contrast, if you were to put your money down with IncomePlus, you would have to wait 20 years to double your payout (105% x 20 years = 200%).

So even if you are saving for retirement, the plain-vanilla deferred annuity beats the deferred IncomePlus scheme.

Btw, I’m not advocating fixed annuities, just comparing them to IncomePlus.

Michael: Exactly. The most aggressive investments available have a 75% stock / 25% bond split and over a time horizon that could be as long as 30+ years, I think a 8.5% average return assumption is reasonable (in fact, it may be tad optimistic because Bogle’s forecast is for the next 10 years).

Paolo: The distributions from IncomePlus is mostly treated as return of capital, at least in the initial years. I’m not sure what happens when the balance becomes zero. I guess distributions will be fully taxed at that point. So, my calculations do understate the taxes on IncomePlus and probably overstates the taxes on a bond portfolio.

Returns Reaper: Like Iwonder pointed out in the link, immediate annuities are paying out roughly 8%. I agree with you that there are probably better and cheaper strategies. I’m surprised that IncomePlus doesn’t compare all that favourably with even investments that have modest returns.

-Longevity insurance. Admittedly inflation will take it’s toll, and that’s an important consideration, but as long as you don’t start taking income until you’re 65 you’re guaranteed to receive the income until you die. This can’t be matched by a systematic withdrawal plan.

-Protection from bankruptcy. In the event of bankruptcy, an insurance policy can’t be seized by your creditors. Depending on your personal situation, this may be a significant concern or a very small concern, but it’s never zero. Bad things happen, and your non-registered portfolio is fair game for a creditor to come after.

-Potential tax deferral & growth. If you’re maxing out your RRSP (and TFSA next year!) a policy like this could be a place that you can stick money and have it grow tax-free for quite a number of years. The 5% bonus they’re offering for up to 15 years if you don’t take income is also attractive, in that it more than pays it’s own fees for whatever time period you can take this option. An investment that’s guaranteed to go up (even a little) after fees and overs some equity upside potential isn’t common in this environment.

The downside is clearly that it’s expensive. I can’t imagine taking your nest egg and handing it over to Manulife in a policy like this. Never mind the expense, you’re taking a significant credit risk on Manulife being solvent in 40 or 50 years. But I also think there are situations in which using this as a vehicle for a portion of your retirement savings isn’t crazy. I simply think that the benefits they offer come with a price tag, and those benefits should be evaluated in the context of that price tag. It’s insurance with a variable payout, not an investment.

I wonder how the IncomePlus would compare with the cost of purchasing an immediate annuity that provided the same income stream, and then investing the difference in a bond portfolio without withdrawing from it?

I’m not sure about Canada, but in some other articles I’ve read that talk about purchasing immediate annuities in the US seem to say it costs $12-$13 to buy an annual income stream of $1. With IncomePlus, it costs $20 (5% of $20 is $1). So it would leave, let’s say, $7.50 to invest in bonds. With an after tax return of 3%, it would take about 33 years to get your $20 back.

However, with you income needs taken care of, you can probably afford to take more risk in your investment portfolio. If you come up with a bond/stock mixed portfolio that can return 5% after taxes, you’d have your money back in just 20 years. If you really don’t need the money and bet on a 10% return in the next 10 years (as MJ pointed out that Bogle has predicted) and assume you can net 8% after taxes, you get your money back in under 13 years.

Taking a do-it-yourself approach allows you the flexibility to tailor the plan to your own needs.

Iwonder: Although an annuity will pay a higher rate, if you die after 5 years, your beneficiary gets nothing. With IP, you have a death benefit.