Moshe Klempner | Priority Financial Solutions

GE and Israel Long-Term-Care Insurance

Moshe Klempner — Sun, 15 Sep 2019 11:23:32 +0000

Long term care insurance = Siudi Insurance = ביטוח סיעודי

For decades, GE was regarded as a highly successful conglomerate with a wide range of profitable businesses, however since the financial crisis of 2008 its fortunes have turned and the company has had many setbacks. The most recent was in August, when the publication of a “whistle blower” report (1) argued that GE’s long-term care insurance reserves are woefully underfunded by $29bn. Long-term care(“LTC”) insurers collect premiums from policyholders protecting against the spiraling cost of nursing home or home care, and in return promise to pay these claims at a date long into the future. In effect, GE collected premiums over their lifetime, reported them as profits, but failed to build reserves sufficient to meet the future claims from these policies. The ability of GE to meet its obligations to these policy holders is now being questioned as the future liability is immense.

Changes in mortality and life expectancy, Alzheimer’s and lower incidence of lapse – that is policy holders cancelling their policies – have impacted GE and other LTC insurers’ financial health. Interestingly, according to US experience, the trends of geographic distances between family members and proportion of women in the workforce has negatively impacted the availability of informal, family-based support, thereby increasing the need for formal LTC (2). In sum, the risks of these LTC policies are much greater than originally thought and in many cases have bankrupted otherwise successful insurance companies.

Another integral part of actuarial assumption for long-term care policies is interest rates. Over the past year, interest rates have plummeted globally, and the effect of this on insurance company reserves needs attention. Lower interest rates are damaging for insurance companies as the LTC reserves earn less interest. The interest rate assumptions built into the calculation of premium and future returns on reserves can trigger a need for significant increase in reserves for LTC policies as in the case of GE. According to industry data, approximately 86% of GE’s LTC claims are ahead of them and the accompanying losses are growing at an exponential and un-survivable rate. But also lower interest rates should trigger an increase in premiums.

With this preamble, in Israel with its young, growing population and increasing life expectancy, long-term-care nursing policies offering coverage for life with fixed premiums are surprisingly still being marketed. Israeli insurance companies are highly regulated, and there are reserves for future claims, such that current policyholders need not be overly concerned. However the future ability to take out LTC insurance should not be taken for granted.

In Israel, at present these policies are widely marketed, but at some point, “for life” with “fixed premium” LTC policies might be a thing of the past. In fact, one insurer has already started to “cap” their payout after year 5. Interest rates in Israel have dropped sharply, while headline inflation numbers are low despite the growing economy meaning that Israeli insurer reserves will also be challenged to invest the premiums collected. Further, in Israel the regulator has introduced new rules that will result in insurers paying out more claims by changing the medical evaluation procedures. In short, in Israel private LTC insurance fixed premiums will most likely continue to go higher and at some point the industry might switch to variable rate policies to protect themselves and current policy holders. For clarification, Kupat Holim LTC insurance policy premiums are not fixed, and are expected to rise by 80% over the next decade according to industry estimates (3).

Therefore, the take-away is to buy a long-term care insurance policy with fixed premiums from a financially strong and stable company. The company must have assets in the billions; a proven track record in underwriting long-term care insurance; consistently high financial ratings from the leading rating agencies. Aside from the financial strength, the residual policy values should be examined relative to premiums as well as the firm’s record for paying claims and customer service. The premiums paid should be viewed as a savings plan and less as an insurance, whereby you are pre-paying for a future expense in installments.

For this, professional advice and service is needed and we are more than happy to assist.

References
(1) “General Electric, A Bigger Fraud than Enron” Harry Markopolis
(2) “An Overview of the U.S. LTC Insurance Market (Past and Present):The Economic Need for LTC Insurance, the History of
LTC Regulation & Taxation and the Development of LTC Product Design Features”
(3) “Lower rejected LTC claims, higher premiums” The Marker 24/12/18

Potential years of life lost

Moshe Klempner — Mon, 03 Dec 2018 20:23:17 +0000

Potential Years of Life Lost (PYLL) is an intriguing indicator that I came across while browsing OECD’s (Organisation for Economic Co-operation and Development) latest health care data (my weekends are exciting!). This indicator is a summary measure of premature mortality, providing an explicit way of weighting deaths occurring at younger ages, which may be preventable. The calculation of PYLL involves summing up deaths occurring at each age and multiplying this with the number of remaining years to live up to a selected age limit. Interestingly, in Israel this figure is 2,398 years lost per 100 000 inhabitants which is very low (in contrast, in the US this figure is 4,721 years).

The original intent of this statistic is to provide another way to evaluate and assess a country’s medical system. This figure is examined along with an entire slew of medical data and international comparisons highlighting a country’s absolute and relative standings on areas such as number of healthcare spending, hospital beds, MRIs, pharmaceuticals etc. In Israel we fare very well on most parameters resulting in the favorable PYLL and top ranking of average life expectancy (80.7 vs. the declining 76.1 in US).

As a financial planner I found this notion of “potential years of life lost” intriguing, as this term is what regularly encapsulates many of my meetings with clients. The decisions and choices made by clients on a daily basis have potential impact on their PYLL. In a sense, my job is to reduce PYLL by ensuring that life cycle decisions regarding savings, investments and insurances are optimal such that the PYLL is minimized whereever possible.

A person’s PYLL can be addressed in a number of ways:

The first and most important PYLL is retirement age – perhaps the most central question for people approaching middle age – “when can I retire?” The official answer for national savings entitlement in Israel is 67 for men and 62-64 for women at present (which I model age 67, as Bruce Springsteen said “blind faith in your government will get you killed” or my version, “leave you to die poor.” At the macro level, these ages are based on life expectancy, contributions to national insurance and government budgets, however for the individual this can be quantified based on current income/expenses and forecasted pension. The question is usually how much higher will expected pension be if I work X years more, which may be different than desired retirement age. Given the generous contributions to pension by employers in Israel, each additional year of income and pension contribution has a dramatic effect on future retirement scenarios. Further, by choice or circumstance, many will retire earlier than the statutory age of 67 and for a high-tech employee this might be as early as age 55.

However, there is also a PYLL in qualitative terms. From a living life fully and “each day as if it’s your last” perspective, the more years a person works might be potential years of life lost depending on the actual mental or physical strain of employment choice, the opportunity cost of time spent in leisure or family activities.

The second axis for PYLL might be medical and the importance of maintaining good health. On this front, having comprehensive private medical insurance which supplements the public system improves your PYLL. The Israeli public health system is chronically underfunded in many areas, most acutely in advanced medicine and surgery alternatives. For catastrophic situations necessitating expensive cancer drugs, overseas treatments or transplants, private medical insurance can be life-saving. However, even for less critical needs, private medical insurance can save time and discomfort. For example, Israel has a shortage of MRI and CT resources (5.2 units per 1M population vs 37.6 in US) resulting in long wait-times and the access via private system can reduce PYLL to the public system. Similarly, private medical insurance contains coverages for maintaining health and preventative procedures including diagnostic testing, and additional consultations with specialists which may not be done if insured only using the public system.

The third axis for PYLL can be applied to investment and savings as potential for returns are lost. Often investment years and potential are lost due to large amounts of cash sitting on the sidelines earning zero interest. Sometimes asset allocation is faulty or potential investment opportunities are missed due to lack of attention or knowledge. Similarly, much can be done to protect assets from the tax regimes and further increase the long-term potential years that investments and savings can last.

Navigating these axes and extending the potential years for both clients and their assets is the core of financial planning with a client. This is a long-term process, necessitating regular monitoring and adapting of investments and insurances to your financial situation as life events unfold, markets move and regulations change, learning and understanding where and how to improve your situation.

Israel Retirement Funds’ Returns Equity Allocations

Moshe Klempner — Mon, 23 Apr 2018 18:58:53 +0000

At this time of year insurance companies, pension funds, provident and sabbatical funds are sending their annual statements for calendar 2017. The statements provide a summary of contributions made during the year, tax documents and data regarding fees and returns. The 2017 calendar year returns for the industry have been stellar with averages ranging from 6.9%-8.8% before fees, with some funds even reporting double- digit returns

The strong returns can be attributed to strong bond performance, as well as equity markets underpinned by global economic growth. However, an interesting observation is that these returns were achieved despite a relatively low exposure to equities. Israeli institutions, in contrast to their global peers, in terms of portfolio asset allocation, are underweight equities. As can be seen from the diagram below, pension fund exposure to equities has hovered in the 20-30% range over the past decade. This is despite the huge influx of capital, with the industry more than doubling its assets during this period.

Israeli Pension Funds (New) Asset Allocation 2007-2016

Furthermore, this low level of equity exposure is even more surprising given the global bull market run from 2009, meaning that fund managers have not been drawn into the market to chase returns.

It is worth pointing out that the composition of the Israeli public portfolio historically has been conservative, perhaps in response to the perceived risk or volatility of the Middle East, or more likely due to the overall wealth. Amazingly, the Israel public portfolio totaled over $1 trillion at end of 2017 or $117k/capita. This strong balance sheet reflects the emerging wealth of Israel as a result of the economic boom and is also what has been attributed to supporting the shekel against other currencies.

This top-down figure includes the pension funds, cited above, but again shows that equity exposure is only 23% of the total. In a global context one could say that there is almost a risk aversion to equities and an ignoring of equity long-term performance and outperformance relative to bonds, based on historical data.

In contrast, in the US, equities have a higher weighting in both public and institutional portfolios. For example, corporate pension funds have an allocation to equities at 44% (WillisTowersWatson 2016), nearly double that of Israel.

Arguably, the equity culture is nowhere more pronounced than in the US, where both clients and managers agree and understand that equities are probably the best investment over the long term. This investment mantra is well supported by the long- term nominal return for the US equity market of 10.1% versus 5.4% for bonds (Vanguard).

As investment managers for clients who are often straddling both worlds, this difference in approaches is most marked when comparing a client’s portfolio of both US and Israel pension products. Indeed, we have seen many clients with US 401k or IRA products with 100% equity allocations, even some who are in their 80s and well into retirement. Furthermore, this often might be simply a few low-cost equity index funds. In contrast, the Israeli retirement product will typically have a much lower level of equity exposure, ~25%, and a more complex portfolio of private and public assets.

US/Israel differences aside, there is a more general question to be raised now, given current equity market valuations, bond yields and interest rate: What will be the expected returns for retirement products overall, and equity markets in particular, and how best to navigate? For the retirement investor the equity exposure is important, but is typically balanced by bonds and other assets and the time horizon is longer, so valuation or timing is less important, but is nonetheless a factor.

For the equity market, there is no shortage of graphs and articles indicating markets are closer to the higher end of historical valuation ranges. These levels of valuation are usually correspondent with modest long-term projections. Below is a long-termhistorical chart showing the popular Shiller CAPE Price-Earnings Ratio with different valuation ranges over time:

In general, retirement funds target a 5% annual real return over the long term. Investment giant Vanguard asked the question, “how often were retirement funds successful in meeting a 5% annual return over the long term?” They answered this question by analyzing the rolling 10-year real returns for a balanced portfolio of 60% equity/40% bonds historically. The graph below shows that nearly half the time the funds were unsuccessful in meeting this target. Interestingly, from the year 2000, this target was barely achieved; the last data point shows an 8.2% annual return for the customized period 2010-2017 period. Moreover, their analysis projects a median 2.8% annual return over the next 10 years, based on current valuation metrics for a 60/40 portfolio.

Source: Vanguard

For the Israel retirement fund investor, the absolute and relative low exposure to equities might result in lower volatility of returns. Yet, implicitly, there appears to be a structural aversion to equities, which is not necessarily related to equity market valuation or performance. Due to the compression in bond yields over the past decade, this effect on overall performance may have been muted, as bond market returns gave back the “missing” equity market returns. Going forward, there is less room for capital appreciation based on bond yields and interest rate levels, such that the overall equity exposures will play a more crucial role in performance.

Therefore, the choice of retirement product and type of coverage is paramount. For a decision of this magnitude, professional advice by a licensed insurance agent is essential.

THE INFORMATION ON THIS SITE IS NOT INTENDED AS AND DOES NOT CONSTITUTE INVESTMENT, INSURANCE, LEGAL OR TAX ADVICE, NOR IS AN OFFER TO SELL ANY SECURITY, INVESTMENT PRODUCT, INSURANCE TO ANY PERSON OR A SOLICITATION OF ANY PERSON OF TO PURCHASE ANY SECURITY, INVESTMENT PRODUCT OR INSURANCE.

Israel Investment Fund Performance Returns

Moshe Klempner — Sun, 11 Jun 2017 10:59:19 +0000

Investment returns are a funny thing. As the warnings on financial products typically state, “past performance does not guarantee future performance,” yet past returns are by far the main factor clients look at when selecting an investment product. For no other financial product does this hold more true than mutual funds. Mutual funds are priced with daily performance open for the whole world to see and ask, “What has my mutual fund done for me lately?” In fact, when I was managing a popular mutual fund, I was being called by wealth management advisors regarding the estimated return of the fund on an intra-day basis, i.e. 12:00, noon, i.e. if the market was 0.5%, I was asked how much was the fund up, now. This focus on returns is misguided.

Mutual fund companies are complicated organizations, as are the people working inside them. Mutual fund companies are primarily marketing organizations focused on gathering assets by promoting investment returns, which are then underwritten by the investment management team. As a result, there is pressure on mutual fund managers to perform with hyper focus on the return game, while at the same time needing to devote considerable time to marketing activities. This dichotomous tension results, in the best case, of valuable time wasted by investment managers on marketing activities; and in the worst case, in the launch of “fad” mutual funds from driving using the rear-view mirror.

The second aspect is the choice of mutual fund companies, the correct product within the myriad of choice, and lastly to be managed by the right manager.

The wrong investment house might be in the process of being silently acquired by another company, leaving staff more concerned in updating their CVs than servicing clients. The wrong investment house might have a tendency to cremate their funds that blew up, never to be seen or heard from again. Or perhaps to silently reclassify their poorly performing investment funds into easier peer performance categories in order to whitewash them. Or more commonly, they might be radio stations that always seem to be playing the newest song in town.

The wrong product is more nuanced. Investors want the highest level on investment management and this is simply the firm with the best investment ideas and the managers who know how to execute on these ideas on risk/reward constraint. It is very difficult for an outsider to choose the right product from the large product menu that most firms offer. All too often, the investor chooses badly, and watches haplessly other funds within the same firm that provided better returns.

Mutual fund managers are severely limited by regulation and internal compliance from trading on their own account. However, the best investment advice from a mutual fund manager is the answer to this question, “Which fund from your fund family would you invest in?” The answer to this question is worth money in the bank. Why? Because the mutual fund manager – due to compliance – might invest his own personal money in mutual funds as the least regulatory problematic option and which funds does he know the best? The fund he manages, as well as those of his colleagues – this is legal inside information at its best. He knows which investment teams are struggling, which funds might have toxic assets or even hidden assets, which sector is most promising on investment merit and not marketing hype.

The last point is size. Smaller funds have an advantage over larger funds. It is far easier to navigate a small boat than an ocean liner. When managing large funds, the investment choices are initially screened for liquidity. No matter how compelling the situation is, if it would be impossible to accumulate a decent position, it is rejected. The cost of building up a position without moving the price is also a factor on the entry, but even more so on the exit side if there is a need to sell due to change in investment or unforeseen redemptions. Here is the key takeaway – I would even request this be referenced in my name –

“Within a mutual fund family, a smaller mutual fund will usually outperform the larger mutual fund when operating under roughly similar objectives.”

This is important for a number of reasons. Typically, the small fund will be serviced by the same research team as the large fund. When new investment ideas are produced, the small fund might piggyback on the larger fund’s buying power, thereby providing an almost implied “put” option to its holding. The smaller fund will typically have a lower management fee in order to entice investors and will also have an advantage in being able to accumulate positions more easily without incurring frictional trading costs. Further, often there are funds which are similar but might have different names or classes, and only a forensic analysis of holdings will yield the golden nirvana of the best investment management of the firm in the lowest cost wrapper.

Lastly, smaller funds outperform, but when they become big funds, they find it more difficult. This holds especially true in Israel, where the top performing funds have beaten the larger funds, and based on their stellar returns have now become the “big boys.” These firms are now awash with new funds, with their back offices flooded with capital flowing in as their funds take top position on 1, 3 and 5 year performance tables. The fund flow has catapulted these firms’ assets and the ability to rely on past performance is diminished, because the new fund is growing by leaps and bounds every day and the manager’s main job is to deploy these assets as quickly as possible, as his portfolio becomes diluted by the new cash. Likewise, his time is now even more stretched by marketing activities as the demand to present to banks and advisers is greater than ever. This is a far cry from the situation a few years ago and as such the product is unalterably changed. Whether the firms manage this growth is not the mutual fund investor’s problem, he is not a shareholder participating in the growth of the mutual fund firm. But qualitatively the firm and product have changed, and for top-performance ranked mutual funds, the warning “past performance does not guarantee future returns” resonates even more strongly.

The information on this site is not intended as and does not constitute investment advice or legal or tax advice or an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities or investment products.

What is Tikun 190 and Why you should be interested – public

Moshe Klempner — Mon, 01 May 2017 16:21:26 +0000

What is Tikun 190 and Why you Should be Interested

What is Tikun 190?

Over the past decade the Israeli Government has been encouraging citizens to ensure they have long-term savings for retirements. A classic example would be a doctor who is working in a public hospital who contributed to his pension plan based only on his paltry government salary, while in his private practice he earns a multiple of this figure but neglected to put aside funds for retirement income.

This strategic goal has reshaped the investment landscape with new laws, new financial products and constant tax rule updates and changes. The most current ruling titled “Tikun 190” is an opportunity for huge tax savings, efficient estate planning and maximum investment flexibility and returns.

In short, “Tikun 90” allows an Israeli citizen to contribute significant amount of funds into a provident fund or kupat gemel. Funds invested in these provident funds are locked until retirement age, which is at the young age of 60, and earlier than the official retirement ages of 64 for women and 67 for men.
A provident fund is a long-term savings vehicle that does not pay tax on interest, dividends, or capital gains. In other words, all investments inside the fund are tax-free (aside from certain foreign withholding taxes). Of course, there is a catch; in order to withdraw funds tax-free, they must be paid as an annuity, i.e. a monthly payout for life.

But, in contrast to the typical provident fund (for which tax relief was given at time of deposit) this annuity will be paid tax free as it is coming from after-tax funds. In other words, if the account holder has a monthly pension of 20,000/month at retirement, which according to current tax laws is liable for taxes, the additional annuity monthly payment generated by the Tikun 90 kupat gemel will be paid out tax free!

Now, what about paying out a lump sum? According to current rules, a lump sum may be withdrawn provided that the account holder can demonstrate a minimum monthly pension of approximately NIS 5,000/month, which is deemed to be the minimum living pension; then he will be entitled to withdraw the funds as a lump sum, but with payment of 15% nominal tax on cumulative capital gain – versus the current capital gains rate of 25%.

Lastly, and perhaps most importantly, if the account holder passes away, the beneficiaries can reap as well certain tax benefits.

As such, for people who are nearing retirement, in their 50s and 60s this might be an opportunity to allow tax free investing for the short-to-medium term, with the ability to withdraw funds in an efficient manner.

What happens to your pension when you change jobs

Moshe Klempner — Mon, 01 May 2017 16:19:23 +0000

Most people will change jobs a number of times over the course of their working life, with some even changing their profession as well. Aside from the challenges in navigating your career, there is a further challenge in handling your retirement accounts with each change.

The Israeli pension system is designed for an employee who is on the “40-year plan”, staying with the same employer for the full course of their working career. Unfortunately, this system clashes with the reality of the ever-changing global environment which results in wholesale shifts in industries and diminishing job security for most employees outside of the public sector. This is further exacerbated by the necessity of opening a “new” policy with each new employer and regulatory changes, such that, one can easily accumulate 10s of plans/policies by retirement.

When changing jobs, the first factor to be aware of is the cessation of payments to your pension plan. The pension plan is comprised of 3 components: retirement savings, life insurance and disability insurance. The retirement components will remain as savings for future retirement, however as contributions have stopped the projected annuity payment at retirement will be impacted by the length of non-payment period. Fortunately, the insurance components will remain in effect for 5 months after your termination date. This insurance is vitally important, and even when unemployed you want to maintain coverage for you and your family. The premiums for this policy will be paid from within the policy for the first 5 months. Following this period you will be offered the opportunity to extend this coverage for an additional 24 months. The premium for this coverage can come from the savings in pension or paid via direct debit.

When you are starting your new job, you are legally allowed to choose the pension product, i.e. keep your existing policies. However, your new employer will need to sign off on your choice of pension and direct all contributions to your pension as instructed. All contributions from your new employer will be shown separate from the contributions of previous employers, albeit in the same pension plan. There are various issues regarding tax planning, severance pay and pension plan options that are outside the scope of this article and require professional advice from a licensed agent.

Retirement plans savings options

Moshe Klempner — Mon, 01 May 2017 16:19:07 +0000

Whichever retirement plan type you are invested in – pension fund, provident fund or manager’s insurance- there are options regarding the level of risk ranging from conservative to aggressive you can choose.

The level of risk is typically defined as the percentage invested in equities. Investment in equities is risky, and according to the studies there is a direct link between risk and return such that the greater the risk taken on the higher the return. Traditionally the equity allocation depends on the age of the saver with younger savers choosing higher equity allocations and lowering as retirement age approaches.

It is important to understand that the higher average returns for equity market investing is only true for the very long term. Below are the historic returns for 3 common asset allocations (Source Vanguard).

	1926-2014	2000-2014
80% Bonds/20% Equity	6.7%	5.7%
40% Bonds/60% Equity	8.7%	5.4%
20% Bonds/80% Equity	9.5%	5.1%

The second column of the table shows bedrock of asset allocation, equity investment over the very long term 1926-2014, albeit risky, provides for a higher average annual return. However when examining the 15-year period from 2000-2014, we see the opposite is true!

In practice, in Israel most savings are invested at medium risk in a “one size fits all” strategy in effect the average for all ages. This means that this strategy is good for the average but does not really fit anyone at the individual level. The effects of this was most pronounced in 2008, when many savers approaching retirement saw their lifetime retirement savings drop by 10% or more.

Selecting the best options for a retirement portfolio is important and the average is not good for everyone. Equity market investment is volatile and the personal circumstances of the saver including age, financial profile, and risk tolerance need to be taken into account. But more importantly understanding the true picture of the asset allocation behind the “average” and whether it is appropriate for the individual saver is vital.

Options for Saving and Investing

Moshe Klempner — Mon, 01 May 2017 16:17:31 +0000

Options for Saving and Investing

There are many ways to save and invest money in Israel, in the article below we will outline a few of the most popular.

Bank Deposits and Bank Savings Plans (תוכניות חסכון)

This is the classical way for saving money due to the very low risk and protection of principal. The rates offered vary by the size of the deposit and time length chosen to lock in the funds. Further some of the smaller banks offer more competitive rates than the larger banks. The disadvantages of this type of investment include lack of liquidity, low rates of interest, taxation, lack of choice and flexibility in terms of investment options and terms.

Managed Investment Accounts

A managed investment account is suitable for clients who want the security of funds remaining in their own name in their own bank account along with the transparency of knowing exactly where their money is being invested. The type of investments held can be custom tailored to personal circumstances and risk profile and can be altered at any given time in consultation with the investment manager. Fees for managed investment accounts compete favorably with mutual funds but typically there is a minimum account size. Investment managers are regulated by the Israel Securities Authority and have various compliance and internal controls ensuring client’s interests are protected.

Insurance Company Savings Policy (פוליסות חיסכון פיננסי)

Insurance company savings policies offer a wide range of investment options and flexibility to savers of all sizes and types. Typically a lump sum is invested along with monthly contributions into a savings policy that is invested according to the preference of the policyholder following consultation with the insurance agent. A core advantage of these policies is that tax is only paid at the redemption of policy allowing deferral of taxes yet policies can be redeemed at any time. Investment options are wide while account minimum is low.

Bituach Minhalim made easy

Moshe Klempner — Mon, 01 May 2017 16:17:12 +0000

Manager’s Insurance (Bituach Minhalim)

One of the confusing retirement products in Israel is the popular Managers Insurance or Bituach Minhalim. This is retirement savings policy that typically includes life insurance and disability insurance. The amounts contributed are a function of monthly salary and this premium is allocated between retirement savings and insurances depending on client needs. Unfortunately, the policy details and statements are confusing and professional advice from a licensed agent is necessary. However, the essential takeaway is that the policy combines retirement savings, life and disability insurance specific to the clients requirements.

The most interesting thing about Bituach Minhalim, and this is unique to Israel, is the fixed annuity payout ratio, in Hebrew this is called the “mikadem.”. The mikadem is in effect the divisor used for calculating the monthly payment at retirement age. The mikadem figure is how much funds are needed to buy 1,000 shekels a month for life. A mikadem of 200, means it would cost 200,000 shekels to buy an annuity that would pay me 1,000 shekels a month for life. To illustrate, if I saved 1,000,000 shekels at retirement in a policy with a mikadem of 200, then I would receive 5,000 shekels a month annuity for life. This is in stark contrast to a pension fund which has no guarantee of monthly annuity, rather there is aprojection of expected pension payment but this is subject to the overall pension fund performance including actuarial risk.

What makes this product so newsworthy is that the older policies were using mortality tables with lower expected lifespans, in effect mispricing the risk or futusre payout, and rendering these policies to be valuable. Further, life expectancy has been on the rise, approximately one additional year each decade, making these policies even more desirable. Fearing a insurance company solvency crisis, as the liability for these older polices can be staggering, the Insurance Commissioner prohibited the marketing of these policies with a fixed mikadem. Incidentally, these policies have very high management fee, often explained away as the cost of the mikadem. To clarify these older policies are no longer available, only existing policy holders are allowed to contribute.

If you have an old bituach minhalim policy it is vital to consult with a licensed insurance agent to properly understand its terms and condtions and what to do regarding contributions. In addition, the Insurance commissioner has recently enacted provision to allow moving policies from one company to another, in an attempt to foster competition and lower the extortionate fees on some policies.

In any event, the article above is to provide general picture, always consult with a professional agent.

Age adjusted retirement plans

Moshe Klempner — Mon, 01 May 2017 16:16:53 +0000

Pension Reform – Age adjusted retirement plans

The majority of retirement plan assets across all product categories, pensions, manager’s insurance and provident funds are invested in the general or clali investment option. This typically has a balanced one-size-fits-all investment allocation, with the equity weighting ranging from 25-40%. However, the needs of a 25-year old worker just beginning his career are vastly different than the 60-year old worker with retirement only a few years away. As a result, the Insurance Commissioner proclaimed that from 2016, all retirement plans will have investment options based on age:

Under 50 years old

Between 50-60 years old

Over 60 years old

Automatic age selection

These new categories replace the general or clali investment option. However the other investment options available such as fixed income only or equity only. Interestingly, this might make it more difficult to compare returns between insurance companies or investment houses, as the long historical track records of this option comes to a screeching halt at 2016.