Tuesday, July 25, 2017

Came across an interesting, old, and misleading, and breathlessly outraged article on ynet regarding Bituah Menahalim: www.ynet.co.il/articles/0,7340,L-3730813,00.html

Bituah Menahalim pays out a monthly benefit ("kitsba") for the lifetime of the "insured" ie. retiree, which is calculated by dividing the accumulated amount ("keren") by a factor called "mekadem hamara" that is either fixed (in old policies) or dynamic (in new policies).

The author takes a hypothetical case of someone with 1,000,000 NIS saved in Bituah menahalim and then receives 5K NIS per year under a dynamic mekadem.  The author then argues that if you view the kitsba as an interest payment, then effectively the insurance company is paying you interest on your money but keeping the principal for itself.  Shock horror etc.

The author acknowledges that in the current financial environment the kitsba (5%is somewhat higher than what you can realistically earn without risk but does not account for this in the calculations.  So in reality the insurance company is paying you e.g. 3% earnings and 2% of the principal in a given year.  So someone who collects for 20 years might end up receiving 50% of the principal.

Nevertheless, this still makes Bituah Menahalim sound like a raw deal compared to e.g. the American model where you draw on your 401K/IRA however you wish.

I took a look at what an American annuity costs at some random site ( https://www.immediateannuities.com/information/annuity-rates-step-1.html ).  For 100000 USD, the monthly benefit (including payment to a spouse as in Bituah Menahalim) is 5712 USD/year. which is marginally better than the example used by the ynet author.   But if you have a Bituah Menahalim policy with a fixed mekadem, you will do significantly better than that.

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