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Universal life policies find strong demand in Asia (Amended)
UNIVERSAL life (UL) policies - jumbo life plans catering to the high net worth market - are expected to generate double digit growth of as much as 20 per cent a year or more in the coming years.
Demand is underpinned by strong wealth creation in Asia and a growing interest in instruments to facilitate wealth transfer to the younger generations. UL policies are typically positioned as an instrument for legacy planning.
Manulife chief executive Naveed Irshad said: "You're seeing a shift in wealth towards Asia... There is more awareness of this solution in legacy planning. I expect growth to continue for the foreseeable future.''
Broad industry estimates put UL annual growth in the region of around 20 per cent. Manulife's growth "is a bit higher than average'', said Mr Irshad. For the firm, the average sum assured taken up by a private client is around US$7 million, compared to about US$2 million for a priority bank client.
Manulife's bancassurance partnership with DBS and strong sales through the financial advisers' channel have significantly expanded its new business market share in 2016. It ranked number two in terms of new annual weighted premiums for the year, compared to sixth in 2015.
UL policies, which are sold to mass affluent and private banking clients, are understood to be a major pillar of Manulife's growth trajectory.
Transamerica Life Bermuda, which has managed UL portfolios since 1981, is gearing up to launch a more competitive and "streamlined'' product in April. Marc Lieberman, Transamerica president and chief executive, said improvements to the product will not compromise the firm's ability to deliver its promises to clients. "The market may get very competitive but if that means that for us to match the products we diminish our return on capital then we step aside. We are in this for the long term.''
A survey by Transamerica and Asian Private Banker last year found that only 5-10 per cent of private bank clients have purchased UL, suggesting that there is much room for growth. Over the next 24 months, 56 per cent of private bankers expect UL policies to show the fastest increase in popularity compared to other life insurance products.
Younger high net worth clients age 31 to 50 were also more inclined to purchase UL than those age 51 and older. Younger clients are also more likely to perceive UL as not only a protection mechanism, but also a potential wealth creation and financial planning tool.
UL products are non-participating whole life plans where returns are quoted based on an annual crediting rate. At the moment the minimum credit rate varies from about 1.5 to 2 per cent. The actual non-guaranteed crediting rate is in the region of 4 per cent.
Private banks typically offer premium financing, which allows the client to pay a fraction of the premium upfront. This frees up capital and enables the client to benefit from the interest rate spread - that is, the financing rate is likely to be well below the 4 per cent non-guaranteed crediting rate. Depending on the term and size of the loan facility, US dollar interest rates for private clients are likely to be under 2 per cent.
Clients who take up premium financing will be subject to interest rate and forex risk, as well as the risk that if the collateral value - which is the policy itself - drops, the bank may call for a top-up.
Based on BIs (benefit illustrations) examined by The Business Times (sum assured of US$5 million for 45-year-old male), Manulife's UL called Heirloom does not quote the highest current or non-guaranteed rate. Its current crediting rate is 3.9 per cent, compared to Transamerica's 4.2 per cent and AIA's 4 per cent. Manulife and Transamerica quote a minimum rate of 2 per cent; AIA's is at 1.5 per cent.
Based on a lump sum premium payment, Manulife quotes a relatively higher single premium of US$1.42 million for US$5 million sum assured. Transamerica and AIA require a lump sum premium of US$1.37 million and US$1.33 million, respectively.
But Manulife is attractive in one important respect. Based on the minimum crediting rate of 2 per cent, the policy's sum assured of US$5 million is maintained until age 85 or the policy's 40th year. At age 86, the death benefit lapses unless additional premium is paid.
For Transamerica, the policy will lapse at year 35 or age 80. For AIA, it lapses at year 33 or age 78.
Clients should be made aware of the prospect of a top-up at some point based on the minimum crediting rate. Based on the current crediting rates of 3.9 to 4.2 per cent, it appears that the policies do not lapse. These rates, however, are subject to change.
Mr Irshad said the ability to maintain a death benefit for a longer term is the Manulife's main differentiating factor. "We have a stronger guarantee on insurance charges. The 2 per cent illustration shows the minimum crediting rate and maximum insurance charges, typically higher than the current charges. Insurers reserve the right to charge higher insurance rates in the future. We cap our maximum at 110 per cent of the current, giving ourselves a 10 per cent cushion. We feel pretty comfortable putting in a strong guarantee on mortality and insurance charges.
"On the minimum crediting rate we also offer higher cash values. We have lower cost of insurance charges and that will impact the cash value.''
Transamerica's new product is expected to feature an improved guaranteed cover and shorter breakeven points. It is also expected to offer enhanced underwriting or a form of "privilege pricing'' for Singapore residents.
Meanwhile, the interest rate cycle in the US is likely to have turned upwards; the Federal Reserve is widely expected to raise rates three times this year. This is positive for UL products as it enables insurers to reinvest capital at higher rates. It also raises the prospect of an upward adjustment in crediting rates at some point in the future.
Insurers, however, are cautious. Said an insurer: "It will take a lot to move the minimum crediting rate upwards. We struggle to even find instruments to give 4 per cent. We need to be very careful how the money is invested.''
For UL policies, clients undergo stringent underwriting in terms of health and financial underwriting. For the latter, insurers will need to examine insurable interest, affordability, moral hazard and source of funds.
Amendment Note: The reference Transamerica Life (Bermuda) is name used by life insurance association.