04 Feb 2021
For a 26 years old, moderate risk taker, would the Great Eastern Prestige life rewards (PLR) 3 (from the 5th year onwards, I would have a guaranteed sum of $6k per year) be a good investment?
Hi, some background of myself: 26 years old, moderate risk taker, annual income around $50k. I would assume that I have a long investment horizon of 30-40 years even.
A close insurance friend of mine encouraged me to buy Great Eastern Prestige life rewards (PLR) 3 with a lump sum of $60k. She said from the 5th year onwards, i would have a guaranteed sum of $6k per year. I was wondering if this is good for someone like me who has moderate risk to take?
(Lengthy answer coming up, but stick with me, I believe you will gain from this)
I'm sorry. I think that there is something wrong with the numbers here.
You are being told that with a lump sum of $60K, you will get a guaranteed sum of $6K a year starting in your 5th year.
Guaranteed. For life. At least, according to the details of the plan as listed here
That's a guaranteed yield of 10% for life. That triggered red flags for me in an instant.
Let that 10% figure sink in. Not forgetting that it's supposedly guaranteed, according to your friend.
Now let me take you through the example listed on their webpage (https://www.greateasternlife.com/content/dam/gr...)
In that example, Kelvin puts $300K in and get a monthly payout of $914/mth starting from the 5th year. Note that this monthly payout amount consists of guaranteed monthly income and non-guaranteed cash bonus. The non-guaranteed monthly cash bonus is illustrated based on the assumption that the illustrated investment rate of return is 4.75% p.a..
$914/mth x 12 = $10968. Let's round this to $11K.
(For the 3.75% scenario, $629/mth x 12 = $7548. This number will come in handy later, I promise)
Kelvin is having a non-guaranteed yield of $11K/$300K or 3.67% p.a. I don't know what the guaranteed number is, but it's definitely lower than that.
I think at this point it's quite clear that there's no way you can get a guaranteed yield of 10% p.a. Kelvin needed a $300K single premium to get $11K/yr non guaranteed and you are being told you can get $6K/yr guaranteed on $60K?? And it's the same plan we are talking about here.
So how did your close friend come up with the figure? (I might be wrong, but I think that's a low chance)
The answer is simple. Leverage. Premium financing.
This is a single premium plan, with a 80% day 1 cash value that is guaranteed. It is likely that the true premium is in the region of say, $300K, with a day 1 surrender value of $240K. You can put in $60K and the bank will lend you another $240K to pay the remaining premium.
From a $300K premium, the example of Kelvin shows that you can get $11K a year non guaranteed income, and if the 3.25% scenario gives $7.5K/yr, then it is likely that the guaranteed figure would be lower than that (i.e. possibly $6K/yr). This is before you pay whatever interest you owe to OCBC for borrowing the $240K. So your nett return is going to be lower. And for the first 4 years, you will have a negative cashflow.
But what will you get yourself into? In a premium financing scenario, you have to pay interest on that $240K that you borrowed from OCBC bank to finance the premium. Interest rates are low now but if they rise, your interest repayments will increase and lower the net cash flow from the plan. And if investment returns are not 4.75%, your returns will be eaten into as well.
Interest you owe is guaranteed. The payout of the plan isn't fully guaranteed. Remember that.
Premium financing has pros and cons. I have seen it work for clients. I have also seen clients get trapped by it. You need to understand what you are getting yourself into, and in my view be prepared to 'unwind' the financing if needed. This means being prepared to pay up the $240K you borrowed if things go south. Do you have that capability?
(In the end, I could be wrong, but I really don't think so.)
There isn't a 10% yield within 5 years on the market from such lifetime income plans unless you use leverage, and then again, I highly doubt it will be be guaranteed either. Please be cautious about this as leverage is a double edge sword.
I hope you will see this in time.
If you have excess cash, this 60k perpetuity plan can provide some excess cash for you after 5years for life. But from what i know and heard, most plans like this eg mylifeincome only give around 3 to 4% returns pa so the projected 6k might be too unrealistic.
If you have to save this 60k to purchase this plan then i suggest go for other forms of investments which can provide a higher roi over time. Usually the ranking goes, bank,fds,ssb,endowments,annuities,bonds and stocks.
PLR is considered a life annuity plan, and considering your age of 26, when most of your l...
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