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Understanding universal life insurance policies
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6 min. read

Find out how universal life insurance policies work and what you should be mindful of if you are considering whether to buy one.

Key takeaways
  • Universal life insurance policies are traditionally marketed as a tool for leaving a substantial inheritance to your loved ones. You should prioritise your basic protection needs ahead of leaving behind an inheritance.
  • You should assess if you can afford to pay a very high one-time premium upfront (e.g. US$200,000 in exchange for a large sum assured of US$500,000).
  • You may be offered a loan to pay the premium. Think very carefully before taking it up as you face a higher risk of losing your life insurance coverage prematurely if you cannot repay the loan.
  • You may need to pay additional premiums after the upfront payment to prevent your policy from lapsing.
  • There are also other types of universal life insurance policies which focus on wealth accumulation, thus offering lower protection benefits with a lower premium outlay.

How do universal life insurance policies work?

Universal life insurance policies are bundled products, meaning you get insurance protection and an investment return.

Investment returns are based on the rates declared periodically by your insurer (known as “crediting rate”) and can be changed at the insurer’s discretion. However, the insurer cannot decrease it beyond the minimum crediting rate which can be set at 0%.

Universal life insurance policies are different from typical whole life insurance policies. Unlike most life insurance policies, after the inception of universal life insurance policies, you have the option of adjusting the sum assured and the cash value of your policy.

Note

Sum assured is what your insurer pays your beneficiaries when you die. Your insurer can choose whether to cover you for a higher sum assured based on additional risk assessment.

Cash value, also known as surrender value, is what you will get back if you cancel your policy. You may pay more premiums at any time to increase the cash value of the policy.

What are the key features?

Universal life policies are typically marketed as a tool for leaving a substantial inheritance to your loved ones after your death. In return, your insurer collects a large upfront lump-sum premium that can run into seven figures. These are known as protection-oriented universal life policies.

You should only consider buying a universal life policy if you have the means to pay the premium without borrowing. This is to avoid losing insurance coverage.

Your financial adviser may ask if you would like to take a loan from a financial institution to pay for the large sum of premiums – known as premium financing. Think twice before taking this up.

Note

Do you have the means to repay your premium financing loan consistently (both principal and interest), including when interest rates rise?

If you take up premium financing but fail to make your loan repayments, you may lose your insurance coverage as the financial institution who lent the money (“lending FI”) can surrender your policy to the insurance company to get back what you owe to them.

Another scenario to be mindful of is that your lending FI may ask you to fork out a lump sum to pay off the loan in full or partially. This could happen if the lending FI deems you or your insurer to be less credit-worthy. This could also happen when the investment returns of your policy decline such that the cash value of your policy becomes lower than your loan amount. Can you find the money at short notice?

The bottomline: If you lose your insurance coverage as a result, how big of an impact will it be for you or your loved ones?

Consider these points very carefully before you take up premium financing.

There are also other types of universal life insurance policies which focus on wealth accumulation thus offering lower protection benefits with lower premium outlay. These are known as savings-oriented universal life policies.

What you should be aware of before buying

Fees

You will have to pay fees at various points after buying a universal life insurance policy.

These include:

  • Premium charge – Your insurer may deduct a percentage from your premium payment for its expenses, such as distribution and administration costs for offering the product.
  • Insurance charge – Some insurers charge a recurring fee for insurance coverage, and the amount usually increases with your age.
  • Administration charge – You may have to pay administrative costs to your insurer.

Tip

Insurance and administration charges are typically deducted from your policy’s cash value on a monthly or annual basis.

Check your policy contract for the frequency and amount of deduction.

  • Partial withdrawal charge – Your insurer may charge a fee if you withdraw part of the amount you have accumulated in the cash value of your policy. The sum assured of your policy may also be reduced as a result.
  • Surrender charge – If you withdraw everything in the cash value of your policy, you are effectively terminating the policy and insurance coverage ends. Your insurer may also charge a fee for that.

Tip

Your insurer can revise the charges but will need to notify you. Check with your insurer on the notice period that will be given.

For details on how various charges affect the cash value of your policy, refer to the policy illustration provided to you when you purchase the policy.

Possible lapse

There is the possibility that the cash value of your policy gets lower and lower. For instance, the investment returns turn out to be much lower than expected while fees add up.

When the cash value gets to zero, your policy lapses, unless you pay additional premiums.

You should refer to your policy illustration for possible lapse scenarios and review the cash value of your policy regularly. Insurers will typically make available periodic statements updating you of the cash value of your policy and notify you when your policy is about to lapse.

Policy Term

Some universal life policies can be terminated by the insurer, after a notice period. In such a case, you will get back the accumulated cash value in your policy.

As described in the “Key Features” section, there are two main types of universal life insurance policies.

  Protection-oriented Savings-oriented 
Insurance protection  Higher sum assured  Lower sum assured 
Premiums Higher premiums Lower premiums
Policy term Whole of life (i.e. the insurer will renew the policy as long as you pay the premiums)
  • Whole of life; or
  • Limited period (i.e. the insurer can choose not to renew the policy, after giving notice)

Tip

If all you need is protection coverage, buy term insurance.

Learn more about assessing your needs here.

Where to find key information

Information to be checked Where to find it
Fees and charges (including frequency of payment and notice period for insurer to revise the fees and charges) Policy Contract
Policy term and renewability Policy Cover Page
Possible lapse scenario and how various fees and charges are likely to affected theprojected cashvalue ofyour policy Policy Illustration
Policy's cash value Statement from the issuer
(Where applicable) Terms and conditions of premium financing Premium financing agreement

What is the difference between a universal life insurance policy and other life insurance policies?

The table compares the investment components of universal life insurance policies against other life insurance policies with cash value, such as participating whole life and endowment policies and investment-linked policies (“ILPs”): 

  Universal life insurance policies  Participating Policies  ILPs 
Investment Mandate

The insurer decides the investment objective and investment strategy  for the fund, taking into account the insurer’s overall liabilities.

The investment objective and investment strategy are usually not disclosed to the policyholders.

The insurer decides the investment objective and investment strategy for the fund, taking into account the insurer’s overall liabilities.

You can find the investment strategy including the broad investment mix in the product summary. 

Each sub-fund will have its own investment objective that is disclosed upfront.

Policyholders can track the sub-funds’ performance via the daily publication of unit prices on the insurer’s website. Policyholders are also notified if significant changes are made to the sub-fund(s)’ investment strategy. 
Share of returns Premiums go into the insurer’s non-participating fund. This means policyholders are not entitled to a share of the insurer’s profits. Instead, policyholders earn an investment return at a crediting rate declared by the insurer. Premiums go into the insurer’s participating fund. This means policyholders are entitled to a share of the insurer’s profits in the participating fund.  Premiums are invested in one or more sub-funds of policyholders’ choice, where the returns are based on the sub-fund’s performance.
Forms of Returns Crediting rate (can be changed, but subject to a guaranteed minimum crediting rate which may be 0%)

Guaranteed bonuses (fixed)

Non-guaranteed bonuses (variable)

ILP sub-fund unit value (variable) 
Investment Risk The insurer and policyholders share the investment risks.

The insurer bears the investment risks associated with the delivery of the guaranteed minimum crediting rate.

Policyholders are subject to the remaining investment risks – non-guaranteed crediting rates could be reduced if investment returns turn out poorer than expected.

The insurer and policyholders share the investment risks. The insurer bears the investment risks associated with the delivery of the guaranteed product features, e.g. minimum surrender values, insurance coverage.

Policyholders are subject to the remaining investment risks – non-guaranteed bonuses could be reduced if investment returns turn out poorer than expected.

 

Policyholders bear the investment risk entirely.

 

 

Last updated on 03 Feb 2023