Comprehensive Guide to Different Types of Universal Life and Legacy Plans in Singapore
As of 2024 in Singapore, the median age is 43, which means a bulk of the residents and citizens here are at the peak of their earning capabilities and will soon be setting aside funds for retirement and prepare for the largest transfer of wealth in Singapore history to create financial security for future generations. One effective way to achieve this is through Universal Life and Legacy Plans. These plans offer a range of features and benefits tailored to meet diverse financial goals.
This article provides a summarised overview of the three main types of Universal Life insurance and the renewed popularity of Investment-Linked Policies for legacy planning. It highlights their features, benefits, and how they work without delving too deep into technical details.
Features of Universal Life & Investment Linked Legacy Plans
We identify 6 common features of all the products which we will be discussing in this article
Currency: Currency for a universal life product is almost always denominated in USD, ILP structure on the other hand provides options for SGD and USD for the policy holders.
Cash Value: A portion of the premiums paid accumulates as cash value, which can be accessed or borrowed against during their policy term.
Cost of Insurance: Unlike term or whole life insurance, Universal Life (UL) and Investment-Linked Policies (ILP) includes a Cost of Insurance feature that can vary based on the type of plan, the insured’s smoking status, age, health, and other factors. The cost of insurance is a monthly/annual charge on the policy’s cash value and will fluctuate depending on the underlying performance of the Universal Life or Investment-Linked Policy, it is usually calculated based on cost per $1,000 sum at risk at the insured’s current age.
Investment Risks and Returns: Each Legacy Life product is tied to underlying investments like indices, bonds, equities, or funds, affecting its returns or crediting rate. Fixed Universal Life offers both guaranteed and non-guaranteed rates. Indexed Universal Life has returns with a floor and a ceiling based on asset performance such as the S&P 500. Plan’s risk varies from low to high, depending on the type and investment choices.
Insured’s Life Risk: The insured’s risk profile significantly impacts the long-term cost and premiums of Universal Life insurance. Factors such as health, smoker status, and country of residency affect the plan’s premiums and yearly cost of insurance. Legacy plans offer rates from standard to super preferred based on the insured life’s risk profile. For example, a healthy non-smoker residing in Singapore will likely qualify for the super preferred rate, paying the lowest premiums and cost of insurance.
Coverage: All legacy plans provides Death and Terminal Illness coverage benefits only
Types of Universal Life and Legacy Plans
Fixed Universal Life
What is it?
Fixed or traditional Universal Life insurance offers stable growth over time with a guaranteed crediting rate between 1% and 2% per annum. Additionally, it has a non-guaranteed crediting rate that can increase the total return to a potential of 4.5% per annum, depending on the performance of the underlying investment that consist mainly of fixed income products and a smaller portion into higher risk investments such as stocks and shares.
How it works?
With Fixed Universal Life insurance, you get a steady, guaranteed interest rate set by the insurance company. This means your cash value grows at a stable pace, making it easier to predict how your policy will perform over time. You won’t see big ups and downs like you might with other investments, which can be comforting.
However, because of this stability, you’ll need to put in more money upfront compared to other types of insurance. For instance, to reach $1,000,000 by the time you’re 100 years old with a Fixed UL policy growing at 4.5% per year, you might need to invest $185,000 starting at age 35. On the other hand, a higher growth policy such as the Index Universal life (IUL) could potentially get you to the same $1,000,000 with just $120,000 at age 35, thanks to its higher potential growth rate of 6.1% per year.
Who carries it?
Major insurers like AIA, Prudential, Great Eastern, HSBC Life and Manulife offer Fixed Universal Life policies.
Indexed Universal Life
What is it?
Indexed Universal Life (IUL), offers policy holder with coverage and opportunity for cash value accumulation determined by the performance of a chosen stock market index. Additionally, a portion of its cash value can be invested into a Fixed Universal Life type of account or known as Fixed account to provide stability alongside potential market growth. E.g., policy holder can put 25% of its cash value into Fixed account and 75% into the Index account (with performance pegged to a specific equity index like S&P 500)
How it works?
When you invest in the index account as part of the IUL, you’re taking a bit of a gamble, but it comes with potential rewards. If the stock market index goes up, your cash value can grow faster. But if the market falls, don’t worry too much—your losses are limited because of a safety net that keeps your returns from dropping below 0%.
However, there’s a catch: even if the market does really well, your gains are capped at a certain percentage, like 9%. So, if the index shoots up by 22%, you’ll only get credited with 9% growth. On the bright side, if the market crashes by 50%, you won’t lose any of your cash value.
The insurance company lets you choose how much risk you want to take. You can decide what percentage of your money goes into the safer fixed account and how much you want to put into the potentially higher-yielding indexed account. You have the flexibility to adjust this from anywhere between 0% to 100%.
Who carries it?
Insurers like Manulife, HSBC, and Transamerica, Sunlife offer Indexed Universal Life policies in Singapore.
Variable Universal Life
What is it?
Variable Universal Life (VUL) insurance combines permanent death benefit protection with investment options, allowing policyholders to invest the cash value in various sub-accounts. It is without doubt the most complex UL depending on the type of features insurer providers allows you to customise your plan with.
E.g. You may be able to increase or decrease the size of your death benefit with a VUL policy. Adjust your coverage amount within the limits set by your insurer.
How it works?
One benefits of a VUL is you can pledge your own stocks, shares, bonds, or funds to purchase it. While this may limit investment flexibility to some extent, it eliminates the necessity of selling off existing investments or allocating additional funds to buy another protection plan for legacy planning purpose
Here is how it works: part of the money you pay in premiums goes toward providing you with a life insurance benefit, just like any other life insurance policy; the other part of your cash value (Which is your pledged investments) goes into a separate account that you can further invest and diversify into various options. Policy holders get to choose where to invest their money from a range of options. These could be stocks, bonds, or other investment vehicles. Depending on how well these investments do, your cash value can grow over time. It’s like having your own little investment portfolio within your ife insurance policy, you are the asset manager.
But as with potential for higher returns comes some risk. If your investments don’t perform well, your cash value might not grow as much as you’d hoped. Plus, there are fees and charges associated with managing your investments and maintaining the policy.
So, to sum it up, VUL is like a two-in-one package: life insurance plus investment opportunities. It offers flexibility and potential for growth, but it’s important to understand that you have to manage the risks involved with approval from the insurers in certain scenario.
Who carries it?
The only regulated provider in Singapore that carries a VUL now is Swiss life
Investment-Linked Policy Legacy Plan
What is it?
An Investment-Linked Policy (ILP) combines life insurance coverage with investment in a variety of funds. The only catch in these legacy ILP proposal is that the insurers decides which fund you can invest in and provides a form of No Lapse Guaranteed during the initial period of the policy term.
How it works?
In an ILP Legacy plan, the policyholder carries all the risk for the investment funds chosen by the insurer. Unlike with IUL and VUL, where you have some say in where your money goes, with ILP Legacy, the insurer calls the shots. This means if the fund doesn’t perform well, you bear the full brunt of the losses.
On the flip side, because you’re taking on all the risk, you also get to enjoy any potential gains without limits, minus any fees and the cost of insurance.
Who carries it?
Currently only AIA offers it to retail clients and FWD only offers to client whom are classified as Accredited Investors
Conclusion
TL:DR? Basically there are various Universal Life and Legacy Plans in Singapore which cater to different financial goals and risk appetites. Whether opting for the security of a Fixed Universal Life policy, the market-linked growth potential of an Indexed Universal Life or Variable Universal Life policy, or the investment flexibility of an Investment-Linked Policy, these plans are instrumental in securing a financial legacy. By understanding the features, costs, and benefits of each type, individuals can make informed decisions that best suit their long-term financial planning needs.
Let Us Help You
Contrary to popular belief, such policy are not only catered to the high net worth, they are increasingly popular with retail consumers given the options to do regular premium without the need to take Financing. Customer looking at whole life and term life till 99/100 and do not need the optional riders embedded can potentially look into such plan to do their legacy planning at a potentially lower capital outlay. Leave your contact below and our licensed financial planner will provide you the necessary advice to navigate your Legacy Planning needs
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