Saturday, October 22, 2005

Annuities misunderstood

On the Tuesday just past, a local free tabloid published an article on annuities. When I saw the headlines, I was pleasantly surprised. I thought that annuities are finally getting the publicity they more than deserve. Looking at the broader picture, I was hoping retirees would react positively to the article, go read up on it and ultimately, get themselves annuitised. But careful reading of the article quickly led to dismay.

Why dismay? Because the article stated that annuities are INVESTMENT (my own bold) products, NOT (my own bold again) insurance products. Now I most certainly know for sure this is not true, and even more so, I do not wish for the general public to understand annuities the wrong way. Knowing Singaporeans, the next thing you might see is a whole bunch of people buying annuities as an investment vehicle, not to protect themselves. So I wrote to the author of the article:

From: Acey Deucey
To: Author's name
Sent: 18 October 2005 09:55
Subject: Annuities

Hi "author's surname",

I am writing with regards to your article titled "Title of article" in today's edition (18th October 2005) of "Name of free tabloid".

I would like to point out an inaccuracy in the second paragraph where annuities are defined to be NOT insurance products. That is not true in general. Let me explain.

When we talk about life insurance, we normally refer to the endowment, whole-life and term assurances. These cover the contingency of death. And because annuities do not cover the contingency of death, it may be wrongly construed to not fall under the umbrella of insurance.

However, annuities DO fall under the category of life insurance. The contingency it covers is not death but longevity; It protects the policyholder from living longer than expected such that his/her savings runs out before death.

Indeed, the insurance element of the annuity product should be viewed as the (much) more important component than its investment counterpart. Purchasers of annuities buy them primarily to provide the assurance of a regular income from retirement till death (exception to this being the temporary annuity which is not popular, as your own research has shown as well), not to earn superior returns on their money. Of course, if superior returns earned on their premiums can increase the annuity payments, that would be most welcome. But this will be of secondary importance.

The focus of your article had been on the investment element of annuities. Annuities have a much larger role to play than just being an investment, especially so in this era of aging populations and the so-called "sandwich" generation.

Maybe because I am a 無名小卒. Maybe because the author did not have the time to research and understand the annuity product properly. But I got a reply that goes roughly like this (I have to paraphrase):

"It is disputable as to whether annuities can be defined as insurance products. The guidebook of "name of big bank" says it is such. Thus, we can debate on this for the entire day, depending on the viewpoint taken.

LIA will probably issue a statement on this with a different perspective. My half page article did not have the space to tackle all the possible perspectives."

And the president of LIA did write to them to correct their error. To my relief. This was published on Thursday under their letters/forum section. I will just paraphrase the most important sentence here:

"Annuities are MOST DEFINITELY insurance products."

Now this post is not to vent any anger (there isn't any) nor to soothe my ego (I very thick-skinned one). I just want readers to understand what annuities are and why all of you should eventually get them (Yes, I am also an advocate of annuities. And yeah, I know I advocate a lot of things :P). Lastly, read what everyone writes with a pinch of salt, including that from yours truly.

160 days to go.


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