Policies made to measure

For the ultra-rich, there’s the luxury of tailor-made insurance plans

By LORNA TAN

SINGAPORE: Very wealthy people, not surprisingly perhaps, are in the market for insurance policies that pay out mega sums.

But until fairly recently, the market in Singapore was so limited that these people often had to go abroad to arrange such policies.

Times are changing as this high-end market grows larger. Insurers here, eager to tap into the burgeoning very wealthy population, have launched ‘jumbo’ or ‘universal’ policies to cater to their needs. These plans provide very large death benefits, above S$653,000 (RM1.5mil) and as much as S$25mil (RM60mil) or even more per policy.

Some plans, such as the AIA Platinum Legacy policies, actually have no upper limit on the sum assured and these jumbo cases will be assessed on a case-by-case basis.

Needless to say, you need to have deep pockets to buy a universal plan. But high net worth individuals (HNWIs), to use the industry jargon for these very well-heeled types, also enjoy the flexibility of deciding the amount and frequency of additional premiums after paying the minimum initial premium, subject to certain conditions.

For example, Prudential’s PruUniversal Vantage’s premium is paid on a lump sum basis.

Prior to 2005, such high-end products were available only through offshore providers, and clients were flown to Hong Kong for underwriting. In 2005, United States insurer Transamerica Occidental Life Insurance Company set up an office here.

As the market for such plans took shape, more insurers have jumped on the bandwagon. Said Walter De Oude, chief executive of HSBC Insurance (Singapore): “Given the rising affluence in Asia, there is certainly a demand for solutions to help HNWIs protect and distribute their wealth.

“Our high net worth business for HSBC Jade Select Universal has more than doubled in the past year,” he said.

HSBC Jade Select Universal was launched early last year and is the only one in the region that has a multi-currency option and multiple tenures for interest rate guarantees, he added.

Currently, there are seven insurers offering universal life products. Of the seven, three –Canadian insurer Manulife, local insurer Great Eastern and British insurer Prudential Assurance – launched their universal plans this year.

Universal life plans are a variant of traditional whole life and endowment plans, where policies accumulate a cash value. But there are several factors that distinguish them from plain vanilla policies.

For instance, the premiums and death benefits of universal plans are flexible. The period of coverage can also be altered to meet desired financial goals from the policy’s cash value accumulation.

This differs from a traditional life plan that serves to provide specifically a death benefit (whole life plan) or a maturity benefit (endowment plan) and does not offer such flexibility, said Tang Yin Fong, wealth management firm Providend’s risk management senior specialist.

Universal life plans also differ from traditional products, whose cash value is dependent on the investment performance of the insurer’s life fund. Instead, the cash values of universal life products are dependent on so-called ‘interest-crediting rates’ declared by the firm. Most of these plans come with a minimum guaranteed interest rate.

For instance, for AIA Platinum Legacy plans, the crediting rates for the plans vary but there is a minimum guaranteed rate of three per cent, said Paul Hughes, chief marketing officer at AIA Singapore.

The downside to such policies is that the death benefit or sum assured may not be guaranteed. This means that the policy could lapse if the crediting interest rate falls to its bare minimum. The premium may be insufficient to cover the monthly deduction for charges, such as mortality costs, if the policyholder fails to top it up.

To prevent this from happening, some insurers offer a no-lapse guarantee benefit, which guarantees cover even if the cash value of the universal life plan drops to zero, subject to certain conditions.

Patrick Lim, associate director at financial advice firm PromiseLand Independent, also cautioned policyholders to note that the policy may lapse if the minimum premium requirement is not met, subject to certain conditions.

The commissions for such policies are quite substantial, usually 10% of the single premium.

Plans for estate planning

Financial experts say that universal life plans are most appropriate for estate planning. This includes accommodating the wishes of the well-heeled to preserve their wealth so as to leave behind a meaningful legacy for future generations or charities.

Said Albert Lam, investment director at IPP Financial Advisers: “One key advantage is that a universal life policy is not an off-the-shelf product. It can be tailor-made to suit the needs of customers.”

He gave the example of a grandparent, aged 60, who purchased a universal life policy for S$400,000 (RM900,000) on the life of his son, aged 30. The sum assured was S$2mil (RM4.7mil) and it was meant to provide protection to his grandchild upon the death of his parent.

If the parent did not pass away, the policy provides the flexibility of paying out a pre-agreed percentage of the premium on an annual basis when the grandchild reaches 18 or 21 years of age for the next decade or so. This can be used to fund the grandchild’s university education or supplement his salary in the initial years of employment.

Other uses of universal life plans include retirement planning, where one’s wealth may be enhanced through the plan’s benefits. Such plans are also used as collateral for banking facilities, and to fund business succession planning where key personnel are insured.

Given the huge premiums required to kick-start a universal life plan and to keep it in force, the target market for such products is primarily the mass affluent and HNWIs.

“These people would be looking for a life policy that is more flexible and has the potential to accumulate larger cash benefits,” said Lim. It appears that such products are more suitable for older investors, who are around 50 or older.