Dissecting Zurich International Life
Zurich International Life is an investment/insurance company with a large number of South East Asian based expatriate customers.
Zurich International‘s successful sales team often markets products (like variable annuities) which couple people’s investment accounts with an insurance component. In financially academic circles, it’s generally accepted that such products are expensive and inefficient, but their high commissions make them popular among salespeople who market them successfully to clients.
Let’s dissect one of their more common account types: their International Wealth Account.
First of all, we should look at the “insurance” they offer their clients. It could be considered a luring sales carrot… if it’s misinterpreted. Here it is, pasted directly from their website:
Life cover benefit
Your life insurance plan will be written on the basis of one or more lives insured (up to a maximum of five) on a last-death basis. The amount payable on death of the last life insured will be 101% of the plan’s cash-in value.
Yes, there is an “insured” guarantee of 101% of the plan’s “cash-in value” but what does that mean exactly?
Let’s assume that you had invested $300,000 over a period of 20 years. The life insurance component ensures that when you die, your beneficiary will receive a guarantee of 1% more than what you invested in the insurance plan. Beware of the language that’s used in the brochure. If you loaned me $5, and I gave you that $5 back, I would have repaid you 100% of what I borrowed.
I called the company at the local Singapore number. Here’s the dialogue I had with the third company representative I spoke to (the first two I spoke to could read the Life cover benefit from a pamphlet, but couldn’t explain it)Andrew: How much is the investor insured for? Zurich: They’re insured for 101% of the cash-in value of their account. Andrew: So if I die, for example, my wife would receive the value of my account, plus an additional 101% of the account’s value? Zurich: No, your wife would either receive the account value or 1% more than what you actually invested. Andrew: Oh…..thank you.
Does that sound good to you???
The insurance policy, as I mentioned in my introduction, isn’t much of a policy at all. But salespeople do like to point out the benefits of having an investment firm with assets invested on the Isle of Man—a well-known Channel Isle tax haven.
Here’s the explanation, pasted from their website:
Zurich International Life is an insurance company registered in the Isle of Man that does not pay capital gains tax or income tax on investments held on behalf of its investors. There may, however, be a small element of withholding tax applied to investments in certain countries. In reality these will be minimal.
The attraction of no capital gains taxes on investments based on the Isle of Man becomes a mute point if you’re living in Singapore (as a non American). If you’re investing in Singapore, you won’t have to pay any capital gains taxes on your investments—whether you invest in the European, Canadian, U.S. or Asian markets. Singapore doesn’t charge capital gains on stock and bond market investments.
When opening a Zurich International Wealth account, you must initially deposit at least $100,000SGD, $100,000 AUD, 60,000 Euros, 500,000 HKD or $60,000 USD.
Then there’s an initial fee to open the account, but you can choose one of two payment options.
Zurich would charge 7% of your account’s value (or a minimum of $7000 SGD on a $100,000 SGD account)
Zurich would charge you smaller sums annually for the first five years: 2% the first year, another 2% the second year, and then 1% for each of the remaining 3 years. At first glance, this might seem like a better deal. After all, 2+2+1+1+1 also equals 7. And instead of paying 7% up front, you could defer the payment over 5 years. That’s what they want you to think. And that’s the option the company probably prefers that you take.
If the account actually made money (or if you added money to it) you would be better off paying the 7% fee up front. The second option may look better, but it’s generally there to entice people who don’t do the math.
For example, assume that a $100,000 account averaged 5% per year for 5 years.
Here’s what your account fees would amount to if you added nothing to your account.
- Year 1: $2,100
- Year 2: $2,181
- Year 3: $1,113
- Year 4: $1,122
- Year 5: $1,166
Without adding a penny to the account, the investor taking option 2 (paying establishment fees annually for five years) would pay $7,682 to Zurich.
If they added monthly contributions to their investments—as most people do– they would pay significantly more, of course, because their fees would be determined based on a percentage of their account size. If someone added an additional $200,000 to their account over 5 years, they would pay exponentially for that.
Five year establishment fee charges could exceed $20,000….or more.
Yearly management charge
Unfortunately, the fees don’t stop there. According to the website, there’s also a yearly management charge of 0.5% for accounts below $374,999 SGD. This fee percentage lowers as the account rises in value, but the actual dollar amount reaped by Zurich (at their customers’ expense) actually increases.
Here’s an example. Assume that you have an account of $300,000. Your annual management fee will be 0.5% each year, or $1,500 per year.
If your account’s value was $2 million, you would pay 0.2% in yearly management fees, amounting to $4000 per year. Paying 0.2% annually–rather than 0.5% annually– sounds like you’re getting a better deal as your account value grows. But Zurich will still reap more money in fees from a $2 million account than they will from a $300,000 account. And here’s the kicker: it isn’t any tougher to manage a $2 million account.
Yearly Plan Charge
Take a deep breath now my friends; there’s also a yearly plan charge, which I pasted below, right off the website:
Currency Yearly plan charge
- SGD 250
- AUD 250
- JPY 20,000
- HKD 1,200
- GBP 100
- EUR 150
- CHF 250
- USD 150
Investment Advisor Fee
And just when you thought the fees would stop, I have to tell you that we’re just getting warmed up. According to the website, if you appoint an investment advisor, you will have to pay an additional 1% of what you invest (going straight to the advisor) or a fixed percentage of your assets, up to 1% per year.
Let’s see how this could pan out.
If you took the first option, and invested $50,000 per year, you would pay $500 annually to your advisor.
If you took the second option, and an advisor took 1% of your account’s value every year, your investments would only make a fraction of what you deserve. Have a look at how much less you would make if you were paying a 1% annual fee.
$500,000 making 7% per year for 30 years = $3,806,127
$500,000 making 6% per year (after the 1% advisor’s fee) for 30 years = $2,871,745
It’s nearly a one million dollar difference.
Cash In Charges
Interestingly, if you wish to withdraw money before a 5 year period has elapsed, there’s a “cash-in charge” as well. With this particular plan, that fee is 8.5% the first year, and drops in subsequent years to 6%, 4%, 2% and 1% of the value. Some people have paid much higher “cash in” charges with Zurich, so if you have a story to tell, please feel free to add your comment at the end of this post.
There are also product charges which won’t appear on your investment statements, but they’re expense ratio charges based on the unit trusts you own within your account.
These funds are based on the Isle of Man, and according to an Oxford University Press publication written by Ajay Khorana, Henri Servaes and Peter Tufano, the Channel Isle fund expense ratios are among some of the highest in the world.
The lowest charge on the equity funds that I could find on the Zurich site was 1.5% per year.
Add an additional 0.5% to 1.0% for an equity trading cost (not shown in prospectuses, but a cost of trading equities within a fund) and Zurich’s cheapest equity fund would cost anywhere between 2% and 2.5% per year.
Imagine the following scenario:
You invest $100,000 and lose 7% up front to establishing charges.
That gives you $93,000 as an initial investment.
Assume that a combination of stocks and global equities average 8% annually.
The investor in this plan would likely reap the following return:
8% minus 0.5% yearly management fee, minus 1% for the investment advisor fee, minus 2% for yearly fund expenses (including internal trading costs) = 4.5% annual return.
Oh, let’s not forget the additional yearly plan charge of $250 SGD.
Granted, you could negotiate (perhaps) a lower investment advisory charge.
But on the flipside, if you aren’t careful, you could also end up paying substantially more establishing charge fees if you don’t pay your fees all at once.
Overall, it’s quite likely that an investor in such an arrangement would be giving up 3.5% per year in fees.
Doing the math:
An investor in low cost index funds (or ETFs) would pay roughly 0.2% per year in total annual fees—possibly less.
If the stock and bond markets dished out 8% per year, the hypothetical index investor would make 7.8% while the Zurich investor (based on probabilities) would make something like 5.5% per annum.
Assume that the investor is 30 years old, and they live until they’re 85.
Assume also, that at age 30, they have $100,000 in their portfolio that will grow, but they won’t touch this particular $100,000 after they retire. Perhaps they want to give it to charity upon their deaths, or bequeath it to their children.
$100,000 minus $7000 (establishment fee) making 5.5% annually for 55 years = $1.76 million
$100,000 making 7.8% annually for 55 years = $6.22 million
If Zurich offers additional perks worth $4.46 million (that I’m not aware of) please enlighten me.