Broadly speaking, insurance is a means for risk management – with risks being anything ranging from illness to building impairment. It is thus a hedge against a potential loss. Policyholders pay a sum on a periodic basis so as to have a claim on a large payment from the insurer should the loss occur.
As such, private bankers often sell insurance to their clients. With HNWIs, insurance is often provided at greater premiums because of the larger contract sizes. Private banking insurance is also often incorporated with other investment vehicles such as trusts and offshore vehicles, as clients usually have an overarching need to preserve and accumulate wealth for future generations.
Universal Life Plans
What is a Universal Life Plan?
Specially designed with the unique needs of high-net-worth clients in mind, Universal Life Plans are a type of life insurance, where the premium payments above the cost of insurance are credited to the cash value of the plan. It is a permanent life insurance offering the low-cost protection of term life insurance as well as a savings element.
Universal Life policies are typically available in significantly larger face values than the typical insurance solutions.
Providers of Universal Life Plans
Companies that offer these exclusive products include AIA, Manulife, and Transamerica. Plan features may vary across the different providers.
How does a Universal Life Plan work?
Every month, the cash value is credited with interest, while the cost of insurance and associated fees are debited. Some plans have a “no lapse guarantee”, where the plan remains in force even though the cash value drops to zero. The premium paid into the plan thus represents this cash value which is accumulated on the basis of the current interest rate. The current interest rate will not fall below the guaranteed interest rate regardless of global economic conditions.
When the plan matures, the policy holder will receive the proceeds of the plan. In the event that the plan matures after the policyholder’s lifetime, the death benefit plus all accrued dividends, less any indebtedness, will be paid to his/ her beneficiaries.
Why use a Universal Life Plan?
Universal life plans are flexible, provide large insurance coverage and may be used as collateral for banking facilities.
Wealth preservation: Policyholders can be assured that sufficient wealth is set aside for future generations. They can ensure liquidity will be present when needed by themselves (or beneficiaries) at a particular time.
Competitive premiums: The premiums are typically far more competitively priced than those offered by retail insurance policies. Premium differences of up to 50% are not uncommon.
Interest credit: While offering life assurance, the plan continues to pay interest to the policy holder. Also, accumulated interest can be used to help pay premiums. For instance, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums.
Guarantees: While the interest credit rates vary over the life of the policy, plans generally have a minimum guaranteed level between 2%-3%. Such rates are guaranteed regardless of global economic conditions. Conversely, while the insurance cost rates may vary as expected mortality rates get updated, they are typically capped at guaranteed maximums.
Flexibility: As the policy holder’s circumstances change, the death benefit, savings element and premiums can be reviewed and altered. Policy holders have the flexibility of maintaining or changing the desired cash value amount in the plan. The frequency and duration of premium payments can be adjusted too.
Sophisticated structuring options: Universal life plans can be structured within or with trusts and offshore vehicles which are common and advantageous asset management channels for high-net-worth individuals. They may also be used as collateral for banking facilities.