Vivolife (premiums payable for 10 years)

Dear Mr Tan,
My posting on theonlinecitizen gave an example of a Vivolife policy, where premium is payable for 10 yrs (not 20 yrs as mentioned by you) but the coverage is for whole life.

Here are the details you requested:
Age 30 male (non-smoker).
Premium for a $100,000 Vivolife-10 yr premium term. Premium is $4251.75 a yr.
Total premium paid for 10 yrs is $42518. The cash value continues to grow even though premium is stopped.

At age 60 (that is, after the policy is inforce for 30 yrs), the cash value is $99306. If the policyholder surrenders the policy, he gets $99,306 (capital gain of $56788). Using a financial calculator, the yield is 4%p.a. This is similar to the coupon rate of long term government bonds.

Where can you find a zero coupon bond that allows you to pay in installments (instead of upfront) and yet offers you insurance coverage, as well as the flexibility to cash out and get a FULL refund + interests?

My investment savvy clients are familiar with asset allocation and they prefer to include Vivolife in part of their bond portfolio.

They classify Vivolife as an appreciating asset and Term policy is an expense. My clients are covered with both term and whole life policies.

Catherine Choong

REPLY

Dear Catherine
I calculate the yield on this policy, kept for 30 years, to be about 3.5% p.a. (and not 4%).

Can you give the following figures from your Benefit Illustration, i.e. total premiums paid, cash value (guaranteed, non guaranteed), effect of deduction for 10, 20, and 30 years.

I understand that a large portion of the yield at the end of 30 years depends on non-gauranteed terminal bonuses. There is a high degree of uncertainty, as the terminal bonuses could be removed during bad years (and this has happened with other insurance companies). I suspect also, that the yields during the earlier durations could be negative.

If the policyholder invest the premium in an investment fund to earn a net yield of 4.5% p.a. the total amount at the end of 30 years is $132,000 (i.e. 33% higher than $99,306). As he is investing for 30 years, he can choose a higher risk profile and invest in equities. If he earns a net yield of 6%, he will get $191,000 at the end of 30 years.

The cost of providing the insurance protection has to be paid out of the savings, so the estimated return in 30 years could be lower than the gross figures of $132,000 and $191,000 by 10% to 15% (my estimate, depending on the cost of the protection).

If the policyholder choose an investment fund, there is flexibility to continue the saving beyond 10 years, instead of having to buy another high cost product. He can also discontinue saving for some years, without suffering any penalty.

In spite of my comments, I recognise that the non-savvy policyholders may find the packaging of Vivolife to be more suitable to their needs. A good adviser will present both options for the customer to choose.