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Silver lining for jumbo life policies
UNIVERSAL life (UL) insurance plans - jumbo life policies marketed to high net worth individuals - hit a soft patch in Singapore last year, as a number of factors conspired to dampen demand.
Higher interest rates, for instance, have made premium financing less attractive. Keen competition and an uncertain economic and market outlook also played a part in slowing demand.
Says Transamerica Life (Bermuda) chief commercial officer Mike Goodall: "Demand for universal life products has continued across Asia, driven largely by the wealth protection and estate planning needs of wealthy mainland Chinese. However, the industry is not seeing the sort of growth rates we saw back in 2016 with increasing controls exerted by the Chinese government on the movement of capital outside China."
He said premium financing by private banks had been a significant growth driver but this has come under pressure since mid-2018. "We expect the Singapore market to see only very modest growth in the next year ..."
Manulife chief product officer Darren Thompson said UL sales have been growing steadily since Manulife launched its product Heritage in 2010. This was further bolstered by Manulife's partnership with DBS.
"However, we have observed UL sales slowing slightly in the past few years, which could potentially be attributed to rising borrowing rates. Hence, high net worth individuals may diversify their focus or (look into) other variants of products, such as single premium participating whole life, variable universal life or indexed universal life."
AIA Singapore notes that volatile market conditions and trade tensions between US and China also affected sales momentum. "Customers are getting more cautious and are choosing to monitor the market conditions as the situation unfolds."
UL policies are a staple in the wealth management space in Singapore. They are marketed as a tool for wealth and succession planning, or as a means to create a philanthropic bequest. For estate planning, clients can create a substantial legacy, which can be distributed according to their wishes particularly if they seek to equalise their heirs' shares of assets.
UL may also be used by businesses as key-person insurance to ensure the continuity of operations should the principal officer die.
Of course it is possible to also use term assurance for estate planning. But as term plans have no cash value, they cannot be used as collateral for premium financing. For a US$10 million sum assured, Tokio Marine's Term VIP plan will need annual premium of US$41,000 for a 45-year-old male, payable every year till age 85. However, the policy stops at age 85 unlike UL which is whole-of-life.
Based on Life Insurance Association data, new business reported by insurers under the "defined market segment (DMS)" category actually contracted by nearly 16 per cent, from S$101 million in 2017 to S$85 million last year. This segment includes insurers such as Transamerica and Zurich International, and may include products other than just UL.
DMS insurers are not allowed to conduct CPF business, and are subject to a minimum size. Despite the headwinds, Transamerica's Mr Goodall is optimistic. He said the firm's research on the HNW market showed that rising concern about succession planning was driving interest in UL policies as a planning tool. "We're starting to see the first of the next generation taking the reins from the first generation ... and they are in turn looking at what vehicles they can use to help plan their own future succession."
UL policies are typically in US dollars, and are classed as non-participating, where returns are based on a crediting rate. Those offered in Singapore have a minimum guaranteed crediting rate of between 1.5 and 2 per cent. The actual crediting rate is currently between 4 and 4.3 per cent. Among AIA, Transamerica and Manulife, AIA quotes the highest current crediting rate at 4.3 per cent.
Premium financing by private banks may be quoted based on a board rate or Libor. For some banks, it is decided based on a pool of collateral which include other securities and UL policies. In order for the leverage to make sense for UL, the effective rate should be significantly lower than the current crediting rate of roughly 4 per cent.
Yet another variant is the variable universal life (VUL) where clients can choose to park assets to fund the policy. Typically, only cash, bankable assets and publicly traded securities are allowed. Manulife has a VUL in its stable called Signature Wealth, and AXA rolled out its VUL in 2017. Since VULs are funded by the clients' own assets, there is no need for premium financing.
Sean Goh, AXA Insurance managing director, said: "VUL is a fairly new offering in Singapore, but we're observing growing interest, whether as a standalone legacy planning solution or a complementary solution to universal life and whole life plans."
In terms of required single premiums, the amounts for VUL are comparable to those for UL policies. For example, based on AXA's VUL quote for a sum assured of US$10 million and a chosen investment rate of return of 4 per cent, a 45-year-old male will need to put up an initial premium of US$2.48 million.
For a US$10 million UL policy, the required single premium for a Transamerica (Universal Life Alpha) plan is US$2.47 million. AIA's plan (Platinum Legacy) requires a single premium of US$2.38 million, and Manulife (Heirloom) requires US$2.16 million. There are of course a number of caveats. One is that at the current crediting rate of 4 to 4.3 per cent, the policy value grows nicely as the policyholder ages. But using the minimum crediting rate of 1.5 to 2 per cent, there is the risk that the death benefit drops to zero in older years, as the insurance cost eats up the policy value, unless the client tops up with additional premiums.
At the lower crediting rate, it appears that on the benefit illustrations seen by Wealth, you do not break even on premium payments at all.
Two is that using leverage - and note that for private banks, leverage is extended on the client's entire portfolio - runs the risk of a call on assets should there be a significant market downturn. This means the client may be forced to surrender the UL policy to reduce his overall debt, even though UL by itself is a stable product.
Three is that clients should be aware of UL policies' costs which are fairly substantial. These include a premium charge of 6 to 8.5 per cent for every premium payment. Other charges may include an administration charge, cost of insurance and surrender charge, which may dial downwards and drops to zero by the 15th or 18th year.
Some insurers allow a number of flexibilities. AIA, for instance, offers a change of insured option, where the life assured can be changed to ensure continuity of a business. If the policy owner is a corporate customer, an unlimited number of changes are allowed. Manulife also has a change of life insured option two years from the policy issue date, subject to some conditions. w