Guide to Universal Life Insurance in Singapore

Guest Contributor

Guest Contributor

Last updated 24 February, 2022

Universal life insurance can be a great legacy planning tool, but it’s not for everyone. Here’s all you need to know about universal life insurance in Singapore, from premium financing to how it compares to other life insurance products. 

A type of cash value life insurance, universal life insurance in Singapore is usually marketed as a legacy planning tool that helps you leave a large sum of inheritance for your loved ones.

Unlike other types of life insurance like whole life insurance or term insurance, universal life insurance is a much more complex product with several unique features.

In this guide, we’ll share what universal life insurance is, how it works, its pros and cons and how it differs from regular insurance.

What is universal life insurance and how does it work?

There are primarily two types of universal life insurance in Singapore.

The first type is protection-oriented universal life insurance and is what most people refer to when they talk about universal life insurance. It features very high upfront premiums, which in turn gives policyholders a much higher sum assured, and is commonly used for legacy planning.

The second type – savings-oriented universal life insurance – features much lower premiums and lower insurance protection. These are also often seen as flexible savings products.

In this article, we will be focusing only on the first type – protection-oriented universal life insurance.

Here’s how it works.

A bundled product that comprises two components – insurance protection and investment – universal life insurance covers you for life as long as sufficient premiums have been paid.

Under the investment component, a portion of your premiums (after paying for various fees and charges) will be invested on your behalf and the returns will contribute to your policy’s cash value over time. 

How much you receive will depend on the crediting rate, which differs depending on the insurer and policy.  

Meanwhile, the protection component includes a death benefit, which provides your family with an insurance payout upon your death. This amount, also known as the sum assured, is determined by the amount of premiums you have paid. Some policies also cover for terminal illness, in which the benefit is disbursed upon diagnosis. 

Universal life insurance and premium financing in Singapore

As mentioned earlier, universal life insurance in Singapore features really high premiums. We’re talking amounts that go up to seven figures and these are usually collected upfront as a lump sum payment.

Because of the large amounts involved, some insurers may tie up with banks to offer you a loan to pay for your universal life insurance premiums, otherwise known as premium financing.

It’s a viable option if you want to free up cash flow, but note that it comes with risks.

For starters, you could risk losing your insurance coverage. The moment you’re unable to pay the loan, your policy will be surrendered for its cash value.

If at this point, the cash value of your policy is lower than your loan amount, you would also have to fork out the shortfall in cash and often at short notice.

In other instances, the bank may also ask that you pay off your loan partially or in full in the face of rising interest rates, or if your policy’s earnings fall below expectations.

Unless this is something you are prepared to handle, premium financing might not be the best idea.

Universal life insurance vs term and whole life insurance

Compared to other regular life insurance products like term insurance and whole life insurance, universal life insurance provides more flexibility and customisation.

Unlike whole life insurance, you are free to top up your policy or make withdrawals (albeit at a fee) to adjust your policy’s cash value and sum assured. You can increase your coverage simply by adjusting your life insurance premiums.

Universal life insurance also features higher growth rates compared to whole life insurance. However, premiums are also much higher than term insurance and potentially more than whole life insurance as well.

Pros and cons of universal life insurance in Singapore

Universal life insurance has its benefits but it may not be for everyone. Here’s how it weighs.

Benefits:

  • Higher yields: Compared to whole life insurance, universal life insurance typically provides higher growth rates.
  • Flexibility: You can choose to skip or stop premium payments without penalties if there is sufficient cash value in your universal life insurance policy. You can also increase or decrease your coverage by adjusting your life insurance premiums anytime.
  • Legacy planning: You can change the life assured of your policy and transfer it to the next generation. With universal life insurance, you can also give more than what you have. For example, rather than keeping S$3 million aside for your children, you could potentially achieve the same by paying S$1 million in premiums for a sum assured of S$3 million.

Disadvantages:

  • High premiums: Starting premiums for universal life insurance in Singapore are high, and much more expensive than term insurance.
  • Complicated fee structures: Universal life insurance often comes with a list of fees and charges such as cost of insurance coverage, withdrawal or surrender charges and administrative costs. This can impact your policy’s cash value more than you know, so make sure you go through the policy illustrations properly.
  • Market risks: Exposure to market losses under the investment component of your universal life insurance could erode the cash value of your policy.
  • Potential policy lapse: Your policy will lapse once it does not have sufficient cash value to cover all the fees and charges involved.

Due to these features, universal life insurance plans are more suited to high net worth individuals who are looking for a way to grow their estate while leaving an inheritance for the next generation. You should also be able to pay for the premiums without having to rely on premium financing.

Last but not least, always make sure that your protection needs are well covered and you have a proper retirement plan before turning your focus to legacy planning.

How to buy universal life insurance in Singapore

To make the most of your legacy, purchase your universal life insurance policy from a reputable insurer that has a track record of delivering what they promise.

Some insurers that offer universal life plans include Manulife, AXA, Singlife, AIA and HSBC. These can be purchased through:

  • A bank
  • An insurance agent
  • An independent financial advisor

To ensure that you know what you’re getting yourself into, always do your research and evaluate your options carefully, or seek professional financial advice before purchasing a universal life insurance plan. 

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Cash Value Life Insurance – How Does it Work, and Who is it For?