PruLink Assurance Account (PAA)
First Drafted on: 1 January 2005, Revised on: 15 July 2005
The information compiled in this article are in accordance to my best knowledge, you should verify them before relying upon them.
PruLink Assurance Account, PAA for short, is one of the most flexible and, i would say, capable products among the investment-linked whole life category. Prudential is well-known for pioneering this fabulous financial product in Singapore since 1992.
When ILP wholelife was first introduced, not only the consumers but also the rest of the companies are skeptical about ILP whole life even to the extent of going against it. However, as time goes by, the companies realized that the ignorance of the consumer market in general open an avenue for them to transfer the risk of traditional policy to investment-linked policy and meanwhile offering a so call "cheaper" whole life.
After 13 years, the being of "cheapness" is, at last, contested by a Finance Correspondent Ms Lorna Tan on Straits Times 12 February 2005. In this article titled Insurance Time Bomb Set To Explode, ILP whole life policy was badly condemned on a single aspect without taking in account many good sides of ILP whole life, especially PAA, which outsmarts many others in a few features that day to day consumers are incapable of comparing.
This account is powerful because it is a good substitute for term life insurance. Moreover, it is a wild card that can give you the coverage you need at different stages of your life. Before you exercise the various options in PAA to create a highly versatile financial plan, it is crucial that you understand how PAA works.
1. Certificate 2. Mechanics 3. Charges 4. Options 5. Strength 6. Weakness 7. Servicing 8. End Note
1. CERTIFICATE OF ASSURANCE
FIGURE 1.1 --- Sample Certicate of Assurance for PruLink Assurance Account issued by Prudential
Let's examine the above assurance certificate in FOUR areas:
Let's examine the above assurance certificate in FOUR areas:
1. Guaranteed Benefits (Sum Assured)
2. Regular Investment Contribution
3. Investment Details (Allocations)
4. Life Assurance Contract Version
2. PLAN MECHANICS
PruLink Assurance Account (PAA) is a regular (monthly, quarterly, half-yearly or yearly) CASH unit-linked investment account that offers the flexibility of varying the investment contribution and protection sum assured.
At the top right-hand corner of the assurance certificate, the "Maximum Sum Assured = $163,200" indicates that at the SAME amount of deposit, the basic sum assured can be increased up to the stated limit. The effect of increasing the sum assured while keeping the deposit unchanged reduces the eventual return of the investment.
FIGURE 2.1 --- The Difference between Unit-Linked Investment Account and PruLink Assurance Account
The above diagram shows the difference between a normal unit-linked investment account and PAA, which has an additional Assurance Charge component. This charge is taken away from your account to provide the equivalent level of protection. For example, if you have chosen a large sum assured, a corresponding amount of Assurance Charge will be deducted from your account which effectively reduces the level of investment and hence the return.
In forward pricing unit-linked investment such as PAA, 100% of the fund invested is used to buying units of your selected funds at the offer prices. Charges are deducted from the account via the selling of an equivalent value of existing units at the bid prices. Similarly, the total value of the entire investment at anytime is reflected by the total worth of the respective funds.
FIGURE 2.2 --- Daily Bid and Offer Fund Prices for PruLink Funds (Source: www.prudential.com.sg)
Daily fund prices can be found in The Straits Times, The Business Times, Lianhe Zaobao, Teletext, Prudential Homepage and Online PruAccess Account.
The difference between the bid and offer prices gives rise to the Investment Charge (represented SOLELY by bid-offer spread in PAA). All charges are deducted from your account through the selling of units at the bid prices, i.e. all monthly contribution is first invested and charges are recovered through selling of units.
As ILP whole life, PAA will ONLY terminate (sum assured will cease) upon 3 circumstances:
3. ACCRUED CHARGES
Statements of Account are issued and mailed to you on the policy anniversary. In order to comprehend the account statement better, you need to first understand how charges arise at various circumstances for various reasons.
i. Administration Charge
This is a $5 policy fee levied on the account every month (i am still in the process of verifying this because it did not appear in my statement of account on the monthly basis). Up to $10 per month, it is adjusted by the percentage increase in the Consumer Price Index within 10 years of the cover start date of the policy. You will you be given a written notice on any amendment.
ii. Investment Charge
Initial Investment Charge - This is a 5% charge (bid-offer spread). This charge is reflected as the difference between the offer price and bid price of the fund. The offer and bid prices are the buying and selling prices respectively. PruLink Funds are valued, and charges are deducted, on a forward pricing basis.
Continuing Investment Charge - This is a range from 0.5% to 1.5% per annum charge depending on the selected fund. This charge is deducted on a pro-rata basis at each unit pricing date throughout the year. You will you be given a written notice on any amendment.
Feeder Fund Charge - This includes the trustee's fee, registrar fee, custodian fee and other which are incurred by underlying funds. Please refer to the section on Fees under the respective schedules in the Fund Information Booklet for details.
Once again, the offer and bid prices of the funds are NET OF or INCLUSIVE OF all investment charges. Complete fund information are published in
iii. Assurance Charge
This is the mortality charge or premium required to sustain the erected sum assured (for Death/TPD and Critical Illness respectively). Factors affecting the amount of assurance charge are age, sex, smoker or non-smoker and health condition at policy inception. You will you be given a written notice on any amendment.
iv. Other 1-Time Charge
Regular Savings Option Initial Adminstration Charge is $50; Top Up Charge is$50 plus 0.5% of the top-up amount.
FIGURE 3.1 --- Movement of Mortality Charges for Death/TPD (Source: PAA's Benefit of Illustration)
FIGURE 3.2 --- Movement of Mortality Charges for Critical Illness (Source: PAA's Benefit of Illustration)
Unlike traditional whole life and endowment, PAA is very much more transparent on the transactions taken place. Every single dollar are accounted for in the statement of account either as cash-inflow or cash-outflow, even up to the monthly level. However, there are still areas under my scrutiny...
FIGURE 3.3 --- Sample PAA Statement of Account received upon Opening of Account
The following are some details we can identified from the above statement of account RECEIVED AT INCEPTION:
Since PAA has a mininum deposit of $100 a month or $1,200 a year, we can deduce the mode of deposit is on monthly basis. Given Regular Saving Option (RSO) incurred a $50 one-time charge, the balance is the Adminstration and Assurance Charge.
FIGURE 3.4 --- Sample PAA Statement of Account received upon Account Anniversary
The following are some details we can identified from the above statement of account RECEIVED AT ANNIVERSARY:
Don't you dare to ask you how come Investment Charge is not reflected in the above statement !!
4. CONTROL OPTIONS
i. Vary Life Cover
The basic life cover is Death/TPD Benefit only.
The sum assured may be reduced at anytime but not more than once in any policy year. Minimum reduction is $10,000. Any reduction made does not decrease the regular deposit but will instead, increase the level of investment.
The sum assured may be increased subject to underwriting at anytime before age 65. Minimum increase is $10,000. The sum assured may be increased without increase in deposit.
Additional life cover with Critical Illness Benefit can also be included anytime subject to underwriting. This benefit is represented by a unit-deducting rider known as Crisis Cover Provider in PAA.
A processing fee of $30 is currently charged for an increase in sum assured or addition of Crisis Cover Provider if there is no corresponding increase in premiums. The limit for Crisis Cover Provider is twice the amount of basic Death/TPD Benefit.
FIGURE 4.1 --- Sample Confirmation Letter received upon Varying of Sum Assured
ii. Vary Regular Deposit
The regular deposit may be reduced to a minimum of $1,200 a year or more depending on the chosen sum assured. The regular deposit may also be increased at the next due date. Any increment made does not increase the sum assured but will instead increase the level of investment.
An alternative way to increase the regular deposit is to include the Regular Saving Option (RSO) rider. This feature has a very important advantage (mentioned above) and a PRACTICAL application, which is for me to know and for you to find out ;)
iii. Fund Top-up
The minimum top-up is $2,000 and it carries a top-up charge of $50 plus 0.5% of the top-up amount.
iv. Fund Withdrawal
The minimum withdrawal is $1,000 and it is allowed provided the value of the remaining units is not less than $1,000. Given this information, do you know how much you should have inside the account before making any withdrawal?
v. Fund Switch
Units can be switched into other fund(s) of your preference. The minimum fund switch is $1,000 or the entire unit balance. Fund switching is carried out at bid-to-bid level (hence, it does not incur additional Investment Charge) and Prudential does not impose any switching fee on the operation.
FIGURE 4.2 --- Sample Confirmation Letter received upon Fund Switching
FIGURE 4.3 --- Sample Statement of Account received upon Fund Switching
5. STRENGTH IN PAA
i. Cost Effective Substitute for Term Life Insurance
Unlike level premium system used in traditional policies, investment-linked whole life follows a natural premium system. The outcome can be seen in FIGURE 3.1 and FIGURE 3.2, i.e. the mortality charges is very low when one is young.
CASE STUDY ONE: Age 35 Male Non-Smoker
30 Years Term Policy (Death/TPD/Critical Illness)
PruLink Assurance Account (Death/TPD + Critical Illness)
Since PAA has a minimum deposit of $100 a month, regardless of inception age, the balance off the mortality charges remain invested for future earning. Hence, with Prudential, most PAA break even around 12 years depending on fund performance. Unlike PAA, traditional plans only breakeven around 20 years (Do you know what this means to you?).
ii. Coverage continues without Penalty when Deposit stops
iii. Double Claim upon Death after Diagnosis of Critical Illness
iv. Liquidity and Potentially High Return with PAA
Over 400 billions of assets under management worldwide, investing with Prudential means you have access to the expertise of professional fund managers. There are a total of ten unitized funds and a cash fund to choose from. Fund information is extensive for making sound and informed decision.
By investing systematically on a regular basis, dollar cost averaging helps in not having to time the market but instead reaping from the ups and downs of the unit prices. Since "paying" for protection has often been a common and regular practice, you are inevitably riding on the upside of dollar cost averaging.
FIGURE 5.1 --- Plot from MorganStanley showing the Price Movement of the Past Century
On the 11th year onwards, Prudential is giving an additional 5% allocation for every regular investment you made.
If due to adverse market experience, or especially during the initial years of PAA, the unit balance is not sufficient to withstand the assurance charges, Prudential will guarantees the sum assured and keeps the account going at zero net value. This free benefit is termed Sum Assured Guarantee (SAG) which expires at age 65. SAG is forfeited if ever the regular deposit has not been made or withdrawal from the account is more than top-up. Terms and conditions apply for reinstating SAG.
6. WEAKNESS IN PAA
i. Partial Investment Allocation in the First 3 Years
First 3 years' allocation is 15%, 50% and 50% respectively. Additional increment in regular deposit will also go through the same treatment. This explains why PAA takes a long time to break even compared to normal investment account. The reason for not having a 100% allocation is the same reason why bonuses in traditional policies is declared only on third year onwards.
ii. High Assurance Charges especially for the Aged
Just a guideline: When the charges deducted from your account is more than what you are putting in every year, you should know the net value of your account has actually started to shrink.
7. POLICY SERVICING
i. Number One
ii. Number Two
FIGURE 7.1 --- Screen Capture from Online PruAccess Account showing the Latest Values
8. END NOTE
Financial products are sold for profit but bought with purpose. Sometimes, the strategy employed, as a whole, in your financial plan can be more important than the individual policy you have. It is the art of winning a chess game.
i have reframed from giving any advise on how to use PAA in structuring a plan and i leave it to you :)
You are the judge and executioner of your financial plan. Every single dollar you commit to life insurance, it places a limit on the next. Enjoy!
FIGURE 8.1 --- Flow Chart demonstrating the Working Basics of PAA