Overfunded Universal Life as alternative asset class

[seafairy]

Recently introduced by a banker to the possibility of "overfunding" a universal life policy (i.e pay more premium than is required for a sum assured) and treating the policy cash value as an asset class in a conservative investor's portfolio.

Some numbers for illustration:
US$2m sum assured payable upon death
US$0.5m single premium (comprising US$0.4m premium financing from bank and US$0.1m cash outlay)
Breaks even in 4-5 years
Yield after 10 years 4-6% pa
Borrowing cost 1.5% pa

Was thinking the yield looks not too shabby - even better than some IG bonds - but have to consider forex risk, longer holding period and potential increase in borrowing costs in future.

This sounds like a very attractive proposition for someone who wishes to leave a legacy to his kids (immediate $1.6m addition to his estate with just $0.1m cash outlay).

However, for people without kids (with no desire to leave any legacy) and whose only intention is wealth accumulation, is this suitable as an alternative asset class?

Any others out there without kids using this as a wealth accumulation tool?

Any thoughts and views would be very much appreciated. Thanks so much!!!

 

[w1rbelw1nd]

What's with the borrowing cost? Die die must borrow from them?
And also the yield, is it a projected yield or guaranteed??

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[Shiny Things]

Recently introduced by a banker to the possibility of "overfunding" a universal life policy (i.e pay more premium than is required for a sum assured) and treating the policy cash value as an asset class in a conservative investor's portfolio.

Some numbers for illustration:
US$2m sum assured payable upon death
US$0.5m single premium (comprising US$0.4m premium financing from bank and US$0.1m cash outlay)
Breaks even in 4-5 years
Yield after 10 years 4-6% pa
Borrowing cost 1.5% pa

Was thinking the yield looks not too shabby - even better than some IG bonds - but have to consider forex risk, longer holding period and potential

You've left out one hugely important thing: you're making a huge punt on longevity risk. This is not "an instant addition to your estate", it's an addition to your estate when you die. That could be fifty or sixty years down the road - if it's closer than that, then you're going to have to pay a hell of a lot more than $500k for $2mio of life insurance.

Also why the hell is it in USD?

However, for people without kids (with no desire to leave any legacy) and whose only intention is wealth accumulation, is this suitable as an alternative asset class?

No, this is a silly investment. Four to five years to break-even, or you could buy a 60-40 equity-bond mix and you break even immediately, and you'll make a lot more in the long term.

And you're locking up $100k in a low-yielding asset class for at least five years.

And if you need to smash the piggy bank before the break-even date, you need to repay the loan as well as the early-termination fees on the life insurance policy, so you could end up losing a hell of a lot of money.

Any thoughts and views would be very much appreciated. Thanks so much!!!

This sounds like a bank salesman who's trying to get paid twice. He's going to get paid commission on the whole-life policy (five times as much as he'd get without the loan), and he gets paid commission on the loan volume as well.

This is a really dumb idea.

 

[seafairy]

What's with the borrowing cost? Die die must borrow from them?
And also the yield, is it a projected yield or guaranteed??

Without premium financing, the proposition is not attractive at all. Having US$0.5m locked up for more than 10 years is not something I would consider. Can do a lot of other things with that money. If only US$0.1m, then quite palatable.

The yield of 4-6% after 10+ years is based on the current crediting rate of 4%. The minimum crediting rate is 2%. Insurer decides the crediting rate, subject to the 2% floor. Was told past 10 years, crediting rate was between 3-5%.

 

[seafairy]

You've left out one hugely important thing: you're making a huge punt on longevity risk. This is not "an instant addition to your estate", it's an addition to your estate when you die. That could be fifty or sixty years down the road - if it's closer than that, then you're going to have to pay a hell of a lot more than $500k for $2mio of life insurance.

True, agreed. A lot more than $500k premium will be paid if one lives a very long life (given the borrowing cost), but ultimately the death benefit amount of $2m will always be much greater than the total premiums paid, even taking into account the borrowing cost. In any event, not interested in the death benefit - as that is only relevant to someone who wants to leave behind something for their kids or dependents. My sole purpose is to build and preserve wealth and nest egg.

Also why the hell is it in USD?

Almost all the Universal Life products in the market are in USD. An SGD equivalent would be ideal, but that's quite rare I was given to understand. Few years back, HSBC Insurance came up with a SGD Universal Life product, but the minimum crediting rate was only 1% (i.e. not so attractive in building cash value, although forex risk is eliminated).

And you're locking up $100k in a low-yielding asset class for at least five years.

Yield for IG bonds is only 3-4%, and also lock up funds for 5-10 years or more. But I guess the thing going for bonds is that we can sell in the secondary market, but for the UL policy we can't.

Which is why I'm tying to weigh the pros and cons, and seeking views, to decide if this UL policy is really as good as what the banker says. I have learnt over the years to take what a banker says with a pinch of salt and to do our own research.

I googled quite a bit on UL, but a lot of the articles on the internet are written for US residents, and may not be applicable in the Singapore context. I also read in the local news that this type of UL policies is very popular among private banking customers. I can understand why, for those with kids who want to leave behind a legacy upon their death. But am struggling to understand why and whether anyone without kids would buy a UL policy. Any private bankers here or private banking customers who can share their experience?

Thanks!!!

 

[Shiny Things]

True, agreed. A lot more than $500k premium will be paid if one lives a very long life (given the borrowing cost), but ultimately the death benefit amount of $2m will always be much greater than the total premiums paid,

But it probably won't be greater than what you could have earned if you took that money and invested it instead. That's the thing you need to compare it to.

And don't forget, it's not going to be $2mio, either, because you have to repay the loan at some point. So it's only going to be $1.6mio.

Yield for IG bonds is only 3-4%, and also lock up funds for 5-10 years or more. But I guess the thing going for bonds is that we can sell in the secondary market, but for the UL policy we can't.

And if you buy IG bonds, you're not paying like 5x the normal commission rate. Your salesman's going to be ripping tens of thousands of dollars of commission out of you on this trade, and he's locking you into an investment that you absolutely cannot break (because if you do, you'll have to pay the early redemption penalty on the full half a million dollars).

I can understand why, for those with kids who want to leave behind a legacy upon their death.

Even for people who want to leave behind "a legacy", this isn't a great way to do it. You're paying a bunch of interest and fees for money that you won't even live to see. Just invest your money instead.

But am struggling to understand why and whether anyone without kids would buy a UL policy.

There's simply no good reason to do that. If you don't have kids, and you live in Singapore so you don't have any weird tax concerns, there's literally no good reason to pull this stunt.

 

[seafairy]

Many thanks, ST.

Hmmm..... The proposition is starting to look less attractive as the week progresses.

Does anybody wonder why Universal Life products are selling like hot cakes amongst private banking clients? These UHNW clients are often highly educated and sophisticated, and not likely to jump into something purely based on some marketing spiel by bankers trying to meet their KPIs. Surely they must be seeing something that the rest of us aren't?

 

[Shiny Things]

Does anybody wonder why Universal Life products are selling like hot cakes amongst private banking clients? These UHNW clients are often highly educated and sophisticated, and not likely to jump into something purely based on some marketing spiel by bankers trying to meet their KPIs. Surely they must be seeing something that the rest of us aren't?

I have no idea. There are no tax benefits around life insurance in Singapore (unless you're trying to hide money from the US IRS?), the returns are mediocre, and the fees are stratospheric.

But I'll tell you this: just because someone is rich doesn't necessarily mean they're good at managing their money. If you're a fuerdai brat who inherited a bunch of money, or you're a CEO who doesn't want to do it yourself, you might just nod and smile when the nice lady at the bank pushes the paper across the table.

If you're in 60,70s... Don't you think this is a sure win thing?

Uh, no, because if you're 60 or 70 you're going to pay a lot more than $500k for $2mio of whole-life coverage. It'll be more like $1.4 million for that much coverage at age 60.

When you're in 60s,70s, with that money you also don't have much energy to use it.

Are you kidding? When you're 60 or 70, you're probably retired and you're living off your savings (and ideally having a few nice long holidays). That's exactly when you need to be able to tap your investments.

 

[Majestic12]

Not sure if anyone realises that the death benefit insurers pay out does not include the premiums paid and the cash that has grown over the years.

I.E. One million death benefit - upon death cash value is $500k. Insurer only has to pay out $500k technically.

 

[penyekz]

I think got to remember this is first and foremost an insurance policy. You are insured for $1m or $2m USD. If you were to get a term policy, the cost would be quite a bit more compared to the premium financing installments.

On top of that, term policy got not much cash value so pay for insurance and if you don't die after say 10, 20 years, you loose that money.

With UL, there is a cash value and after breakeven, and you want to withdraw, can still do so with no loss of money.

Of cos if want to invest then don't bother with this.... Its good for insurance and better compared to term policies.

 

[Majestic12]

The above I think should be a reducing term insurance.

It is not.

 

[provisure]

Mod:Unsolicited Content (Commercial solicitation / Ads / Referrals / Spam)

seems complicated

my personal opinion on complex insurance instruments is that cost of distribution is usually high

UL probably good as a protection tool rather than investment tool

 

[makav31i]

Mod:Unsolicited Content (Commercial solicitation / Ads / Referrals / Spam)

Why not just copy and paste answer instead of making people click on external links for answer?Advertising for the website?

Just checked your last 4 post in 2016...Clearly you are advertising that website..Calling for mods to take action...

 

[sashti90]

If you have $5m assets and you may be using say $2m for the remainder of your life, you will be leaving behind $3m for your estate.

However, if you put in $1m in Universal Life plans and spend the same $2m for living expenses, you will be leaving behind at least $5-7m for your estate. This is because UL plans typically pay out 3-5 times of the premium upon death. So the $1m you invest in a UL plan will payout $3-5m upon your death. Of course, there is also some cash value but UL is definitely not a good investment compared to other tools that the PBs offer.

Bottom line, UL is a great estate planning tool but should not be used for savings/investments.

The main reason for a sudden rise in ULs bought up is probably coz a few PBs are offering credit facilities at low rates 1+% for HNW clients to purchase UL plans and other investments.

Many thanks, ST.

Hmmm..... The proposition is starting to look less attractive as the week progresses.

Does anybody wonder why Universal Life products are selling like hot cakes amongst private banking clients? These UHNW clients are often highly educated and sophisticated, and not likely to jump into something purely based on some marketing spiel by bankers trying to meet their KPIs. Surely they must be seeing something that the rest of us aren't?

 

[MikeDirnt78]

If you have $5m assets and you may be using say $2m for the remainder of your life, you will be leaving behind $3m for your estate.

However, if you put in $1m in Universal Life plans and spend the same $2m for living expenses, you will be leaving behind at least $5-7m for your estate. This is because UL plans typically pay out 3-5 times of the premium upon death.

This is something which I don't really understand.

Policyholder pays $1M.

Payout is 3-5 times upon death.

Everyone is expected to die. So payout is almost guaranteed.

Insurer takes in 1M but expected to payout 3-5M few years down the road.

Is this some kind of a Ponzi scheme? How can insurers sustain?

 

[Shiny Things]

This is because UL plans typically pay out 3-5 times of the premium upon death.

Oh, come on. This is not true. It's going to depend entirely on how old you are when you sign up to the plan; if I'm 75 and I sign up for a universal-life plan they're not going to give me 3-5x the premium when I die, because I'm probably going to fall off the perch in a few years.

If you've got the age of the applicant, the payout amount, and some actuarial tables, you could pretty easily back out the implied interest rate, and I guarantee you it's going to be miserable.

 

[soneat]

IMHO, UL product is not a good product.

I have seen a "UL" type of BI. Sum Assured S$200,000, premium payable around S$130,000, based on age 38.

In the "best" case (i.e. insurer pays out as per BI), the total sum assured is around S$500,000 at around 83 years old (average death age of SGP male).

Since for UL, since it has typically 80% cash value from day 1, usually the agent/banker will say....just need to pay 20% (e.g. S$26K) upfront, then for the balance S$104K, can take a loan by using the UL needs to be used as a collateral. So they will tell u....at 2% i/r, its just S$2k+ a year to maintain the policy....so "smart" and "rich" people will buy UL because they can leverage. LOL...

 

[soneat]

IMHO, UL product is not a good product.

I have seen a "UL" type of BI. Sum Assured S$200,000, premium payable around S$130,000, based on age 38.

In the "best" case (i.e. insurer pays out as per BI), the total sum assured is around S$500,000 at around 83 years old (average death age of SGP male).

Since for UL, since it has typically 80% cash value from day 1, usually the agent/banker will say....just need to pay 20% (e.g. S$26K) upfront, then for the balance S$104K, can take a loan by using the UL needs to be used as a collateral. So they will tell u....at 2% i/r, its just S$2k+ a year to maintain the policy....so "smart" and "rich" people will buy UL because they can leverage. LOL...

There's simply too many flaws in UL.
1. The projected protection value may reduce as the non-guaranteed portion is at the insurer's mercy. Some UL policy's are tagged to crediting rate and some tagged to par funds. Those tag to crediting rate....avoid.

For those based on crediting rate, the "guaranteed protection value" can drop to ZERO at old age (e.g. after 80s)

For those based on par plans, still not that bad.

2. Second, there's a much easier to way to achieve a large sum coverage. Buy Term to 100 and invest the rest. E.g. A Term to 100 for SA 500k would have cost about S$2200 and can be covered by a REITS portfolio of S$30k. And by buying a simple Level Term insurance till 100 yo, it is a guaranteed covered of the same amount till age 100. Of course some will argue what if the person live beyond 100....that's a separate story though....

 

[soneat]

Actually last time there's a TM Legacy VIP plan from TM which is a bit like UL (in the sense its single premium with 80% surrender value right from day 1) but its based on its par funds. The protection value (both guaranteed and non-guaranteed) is also pretty decent. There's also a 2.5x MDB for whole life. Too bad....I didn't buy back then....product has been withdrawn.

 

[sashti90]

There is a certain max entry age.. of course this varies from insurer to insurer...

This is something which I don't really understand.

Policyholder pays $1M.

Payout is 3-5 times upon death.

Everyone is expected to die. So payout is almost guaranteed.

Insurer takes in 1M but expected to payout 3-5M few years down the road.

Is this some kind of a Ponzi scheme? How can insurers sustain?