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Universal Life: Look Before You Leap
Education | 15 April 2011
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By: jason.liew
Articles (66) Profile

The High Net Worth Individuals (HNWI) in Singapore used to have to look overseas for estate planning and insurance solutions. Not anymore! AIA, Great Eastern, Aviva, and most recently Prudential have included Universal Life plans in their arsenal to meet the needs of the rich.

Universal Life plans have been around for more than 20 years. In recent years, there has been exponential growth in Universal Life sales by private banks and brokers to their offshore clients throughout the region. And now, according to AIA, the fever has reached the shores of Singapore.

A Universal Life product has the best of traditional and unit link forms and brings out a good blend of protection orientation, investment risk, underlying guarantees and flexibilities. The investment risk is not borne completely by the customer but shared with the insurer. This works well with customers of moderate risk profiles. Also, there is a minimum guaranteed interest crediting rate that is applicable throughout the term of the policy. The interest rate may change year to year but most insurers try to maintain a consistency in the credited interest rate. And finally, Universal Life offers enormous flexibility to customers: How much to pay towards protection and towards long-term savings is entirely up to the policy-holder.

Universal Life insurance policies are well suited for policyholders’ changing financial needs over time. The death benefit, savings element and premiums can be reviewed and altered as the policyholder’s circumstances change. Before marriage, the focus is on future savings and life insurance. But as one grows older, priorities change and needs such as investment planning, planning for child-related education expenses and retirement planning take precedence. Finally, on retirement, the cash value can be used for annuities, cash flow planning and on-going investment.

Other than its tax benefits (for those living in countries with capital gains tax) and minimum guaranteed ‘payout’ that is roughly equivalent to 10-year US Treasury, Universal Life is unique in three other areas: huge sum assured and consequent huge cash value, a feature that allows the withdrawal of cash value plus the option of ‘no default’ even if the cash value is drawn down to zero, and the allowance of a change in the individual being insured.

“(Universal Life) is tailored exclusively for the HNWI who would normally have a minimum of USD 5 million in assets and wish to have the security of wealth preservation, legacy enhancement, and timely liquidation for wealth distribution,” says Annette King, President and Chief Executive Officer of Manulife.

The question is: Why would anyone with USD 5 million in assets want to have his funds tied up in a low interest bearing financial instrument that is not even risk-free? Furthermore, the HFN Hedge Fund Aggregate Index has reported a +10.77 percent performance for the year of 2010 with about 3,166 hedge fund products (in the US) reporting while the S&P Total Return Index has turned in a performance of +15.19 percent. Rather than purchasing any form of insurance, HNWI will be better off accumulating wealth and planning legacy enhancement with the market.

Estate Planning
While Universal Life does not fare very well in wealth accumulation, it does score very high marks in estate planning.

Estate planning is the process of accumulating and disposing of wealth before death. Its objective is the maximization of wealth for the individual; it’s most important goal to ensure that the greatest amount of estate passes on to beneficiaries while paying the least amount of taxes. And one of the beauties of estate planning is in gifting.

Gifting is simply one of the many convenient ways to leave a legacy that remembers the individual for his/ heraccomplishments instead of courtroom battles. Universal Life allows the name of the assured to be changed and this means the entire protection plan can be gifted to the children. Although the 5-year claw-back rule may not apply anymore due to the new estate duty ruling (estate duty is no longer applicable to deaths after 15 February, 2008. For more information, please refer to www.iras.gov.sg), it does mean that insurability is no longer an issue. This is important as critical illnesses are a feature of Universal Life. At this point, it is important to remind readers that whenever contemplating gifting, or establishing anestate plan, it’s best to meet with a financial professional and a qualified estate planning attorney.

Food For Thought…
There are some disadvantages to these types of plans that should be considered before one opens a policy. According to Universal Life Insurance.net, an online life insurance portal in the US, “A universal plan comes with less guarantees than whole-life and the cash value growth is more limited. Plus, there is no room for flexibility when it comes to the investment options… Policyholders must be aware of additional costs. If there are any missed premium payments, there can be issues funding the policy. If certain items are added, like a ‘no lapse guarantee’, there can be additional costs added to the premiums. If the death benefit is decreased, the policyholder may be subjected to more charges.”

This form of insurance has also come under intense fire from the authorities in India and law-makers in the US. The Insurance Regulatory and Development Authority (India) has announced an overnight ban on all universal life insurance plans while it is an offense to sell the product as an investment in the US.

Although withdrawal of cash value is a source of emergency funding required in a sound financial plan, it does open itself to abuses from ‘innovative’ financial advisors. When sufficient cash value is built, it can be withdrawn to be invested in some higher-yielding financial instruments while the ‘no lapse’ option is exercised. This way, the entire cash value can be withdrawn and the policy-holder still stays insured. The return on this case value must, naturally, be higher than the cost for exercising the ‘no lapse’ option and the cost of using (withdrawing) the cash value. Maybe this is why this product is frown upon in the US.

A derivative of Universal Life is the Variable Universal Life which is taking the US by storm. “Variable universal life combines mutual funds and life insurance. Pitched as a great tax benefit if both are bought together but due to the huge sales commissions and continuing costs, it turns out to be a bad deal for the consumer,” says Charles Myrick, President/CEO of American Consultants Inc., an insurance agency in the US.

As Singapore lags the US in product innovation, this product will probably be introduced here in a couple of years. When it does appear, remember you have heard about it here…first!

Great Eastern Hldgs  21.680 -0.06 -0.28%   
Business: Unit of OCBC. Turnover comprised of gross premiums, invs, interest and rental income, fees & other income as well as gain/loss on sale of invs.

Insight: May-19, 1Q19 gross premiums rose 6.5% partly due t... Read More
Prudential PLC  -- -- --   
Business: Co provides a range of retail financial products and services, and asset management services.

Insight: Mar-17, FY16 net profit decreased by 25.5% despite... Read More


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