Regarded as one of the best methods of legacy and retirement planning, UL provides sizable guaranteed returns coupled with liquidity.
Universal Life Insuranceis a highly complex and flexible product, such that many financial advisors are unfamiliar with it. Resulting in vast misinformation and misselling.
Let me shed light on the top 4 most common questions I receive on Universal Life Insurance solutions:
- Basic understanding of universal life insurance
- How does it help preserve and manage one’s assets?
- Premium financing and how does it work?
- Downsides to universal life insurance
1. Basic Understanding of Universal Life Insurance
Universal life insurance was created to kill two birds with one stone – it does a pretty good job with that.
Universal Life Insurance, popular amongst high net-worth individuals owing to the flexibility of both whole life and term insurance, allows an individual to
- Accumulate wealth similar to whole life insurance
- Adjust premium similar to term life insurance
- Plan premium payments with flexibility
- Leverage on higher cash values growth rates
Traditional Universal Life Insurance can be explained very simply
Step 1: You contribute a premium and earn the “crediting rate” from the insurer
Step 2: Premium, administration and insurance risk charges are charged to your UL plan
Step 3: You may make partial withdrawals to fund retirement needs, or take a policy loan for use during an emergency
Step 4: Your family receives a large lump sum should death or terminal illness occur
2. How does it help preserve and manage one’s assets?
Put simply, universal life can grow your wealth while preserving legacy for several reasons
Gift for your children: As they will get the insurance payout eventually, you may spend the policy value worry free.
Money works harder for you: The base crediting rate of 4.35% offered by insurers such as AIA are higher than the banks.
Partial withdrawal flexibility: You may spend (partially withdraw) or save more (top ups) during the policy term.
Diversified Portfolio: Traditional UL products tend to be invested in bonds, protecting your assets from the volatility of the stock market while growing your portfolio.
Legacy Planning: The flexibility to change the life assured allows you to pass your wealth on, while enhancing your assets strategically so your next generations may benefit even more.
3. Premium financing and how does it work?
The most savvy property investors and the wealthiest in the world would understand the principles of financial leveraging
Likewise, you may technically borrow money to purchase a UL insurance product through “premium financing”. Let me explain.
Think of an arrangement similar to a mortgage loan on a property. The UL insurance policy is collateralized to a bank of your choice:
- 30% of the premium is paid as down payment
- You continue financing / servicing the remaining 70% premium loan with interest
If you see the need for substantial amount of insurance coverage without that much cash right now, or if you’re a savvy investor who sees the potential in higher returns in other instruments.
4. Downsides to Universal Life Insurance (when premium financing)
Premium financing strategies are typically arranged on a variable interest basis where the bank charges you the “Board Rate” + Libor Rate). Premium financing may be an effective strategy in a low-interest rate environment. But should there be spikes in Libor rates as seen in 2000 and 2006, premium financing might be less than optimal.
Libor rates as of 24 June 2019 stand at 2.18%, amounting to approximately 4% loan interest when premium financing. The typical Universal Life product in the market gives you 4% returns (crediting rate), making it difficult to cover the interest after factoring in charges.
Premium Financing affects legacy planning
Previously, we mentioned covered financial leveraging for UL similar to property mortgage loans. Unlike property investments which may be passed to a heir with a new loan, your universal life insurance payouts would be used to settle outstanding loans with the bank, leaving the rest for your beneficiaries.
As a result, your family might receive much less than what was initially planned for them with your financial advisor.
Premium financing may be risky affair for small business owners who are already heavily leveraged. As the policy is assigned to the bank, there is no credit protection. The insurance proceeds would be used to settle business loans and debts before going to your beneficiaries.
If you have sizable savings hoping to bequest a legacy for your family and children.
Premium financing and tax deduction
Universal life insurance and the ability to do premium financing are often promoted by advisors for being akin to property investments. Savvy property investors who seek bank loans to purchase investment properties may be eligible for tax deductions in Singapore. Whereas premium financing loan interests are generally not tax deductible. Should premium financing be used by a high net worth individual, the tax expense may quickly add up to a five-figure sum.
The complexities associated with Universal Life insurance products plagues it with misinformation amongst clients and advisors alike, it is important to choose the right adviser in this regard. Should you wish to start legacy planning, go with the most reputable and best insurers who would be around for decades to come.
We hope this article helped you to better understand Universal Life insurance. Millennial Finance’s process begins with reviewing your financial circumstances, concerns and goals before recommending a suitable plan for you. Contact us today to schedule an appointment.
Something about this article that was not clear or do you have a question pertaining to Universal Life insurance? Let us know below or drop us a message.