“Dear Wilfred, there have been a surged in number of insurers offering ‘3G’ plans which seems attractive. My agent has been asking me to buy. What do you think? - J”

Dear J,

The “3G” type of insurance policies which goes something like that: Father buy on life of son. As long as the son lives, the father receives X% of sum assured (called dividends/coupons) every year starting from Y years after the policy was bought. When the father dies, the coupons continues and be given to the son. When the son dies, the policy pays the death benefit in one lump sum giving heirs of this person a lump sum benefit. It is “3G” because the original policyholder, the life assured and the life assured’s heirs get to benefit from this insurance policy.

This is the insurance industry’s “financial engineering.” If you do an internal rate of return (IRR) calculation, you could find that the IRR cannot exceed the projected rate of return of the par fund. Naturally this is expected since profits must always come from somewhere.  The problem is that insurance companies’ own investments in their par funds have been known to be very bad and this is evidenced by them cutting bonuses. When times are good, they do not increase your bonuses rate. When times are bad, they cut their bonuses (like in year 2008). When they do restore their bonuses, they shut it loud from the rooftop but actually they were merely restoring what they had cut previously. For products described above, only a small amount of the coupons are guaranteed. A significant proportion of the coupons are not guaranteed. Realistically, you could end up getting less than the projected coupons.

Obviously the above inter-generation product is only meant for the very rich since the premium is huge in order to have a meaningful coupon payments. I would like to offer you an alternative view point if you are rich. Perhaps you can create a legacy to give a perpetual income to a charity of your choice. This is normally done by creating a Trust with the sole intention of using the income of the trust to give it to charity. The risk of the investments in the trust can be determined by you in the onset such as conservative, balance or aggressive. You can also specify that dividends of the shares or coupons of the bonds be used for charity purpose only. This is really legacy planning and not those weird inter-generational type of insurance that offers poor return. Financial advisers do not tell their rich clients this way of doing because no commission is earned for giving such advice but commissions are earned for selling weird insurance.