What is Universal Life Insurance?
Universal Life Insurance, ULI, is an investment-linked insurance structure providing both protection and investment/cash value. These policies typically carry high levels of death benefit and are generally used to cover significant liabilities or to provide substantial inheritance gifts to your loved ones.
Investment returns are based on the rates declared periodically by your insurer (known as “crediting rate”) and can be changed at the insurer’s discretion. However, the insurer cannot decrease it beyond the minimum crediting rate which can be set at 0%.
Universal life insurance policies are different from typical whole life insurance policies. Unlike most life insurance policies, after the inception of universal life insurance policies, you have the option of adjusting the sum assured and the cash value of your policy.
How does ULI work?
Unlike PPLI (see the previous article for more information), the insurer determines the underlying investments made within a Universal Life structure. This means that the policy owner has no control over the rate of return provided. Although there are contracts with guarantees of no-lapse, broadly speaking the insurer provides a return to the policy contract which they are able to vary depending on the investment management within the insurer. As referenced above, this could theoretically be set at 0% which would have a significant bearing on the cash value of the policy.
ULI is a product that is sold widely in Singapore, Hong Kong and throughout Asia. In fact, 95% of all high-death benefit insurance in Asia is structure as ULI.
Private Banks and Relationship Managers tend to be big fans of ULI. One of the key reasons for this comes down to premium-financing, whereby the bank provides a loan for a substantial portion of your premium. For the Banks, this means that they reduce the loss of assets under management, whilst creating a new revenue stream from the interest-rate attached to the loan. ULI contracts typically pay high rates of commission (from 9-16%) which is split between the Bank and the Insurance Brokers.
Premium financing may be a good option for asset rich-cash poor clients that are looking to secure high levels of protection without having a large cash expense. However, as with any debt, there are significant risks that should be evaluated before taking this option.
On death, ULI works similarly to other insurance contracts by paying out a lump-sum of cash to the beneficiaries. The amount due to be paid out may vary, depending on whether any cash value has already been withdrawn or whether a loan has been taken from the policy.
What are the Advantages of ULI?
There are two primary benefits to utilising a Universal Life structure:
• Secure high death benefits
• Ability to withdraw cash value or take a loan
1. High Death Benefits
For the vast majority of people, insurance protection is calculated based on the potential for loss of income or the cover of known liabilities. Broadly speaking, term-insurance provides the flexibility and cash-flow management of premiums to provide the best outcomes. For some individuals or families however, the level of cover needed might stretch into 8 figures and generally pricing out cash expenditure and regular premiums. For these cases, being able to secure a high death benefit from the insurer whilst having the option to lend against assets for the premium may prove to the be the optimal outcome.
2. Ability to Withdraw/Loan
Generally, insurance contracts either don’t have a cash value or, as in the case with Whole-of-Life contracts, those cash values can impact the level of cover provided. With some ULI contracts, it is possible to take some of the cash value early, only impacting the cover at the point of death. They could also permit a loan which would then be repaid in the future or deducted from the death benefit. This can provide some flexibility when looking at estate equalisation; perhaps your eldest needs some money today for their business whilst the balance will provide the same value gift to your remaining dependents.
Summary
ULI is an well-used wealth planning tool that has the potential to provide individuals with optimal financial outcomes. The policies provide insurance cover that is broadly cheaper than Whole-of-Life contracts, and more expensive than term-insurance. It carries an investment return and a cash value, but not one that you can control as with PPLI.
In the next article, we look at Variable Universal Life (VUL) and how this compares with ULI for clients.
Reach out if you would like to discuss your options in more detail.