Guide to Universal Life Insurance in Singapore

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?

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.

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. Note that the insurer has the right to alter the crediting rate at any time, but may not reduce the rate beyond the predetermined minimum, which may be set as low as 0%. 

Meanwhile, the protection component includes a death benefit, which provides your family with an insurance payout upon your death. The amount paid out would be either the sum assured, or the cash value of the policy, whichever is higher. Recall that the cash value is built up over time based on the returns generated from part of your premiums. 

Besides the death benefit, a universal life policy may also offer coverage for total and permanent disability. The insurer may also offer riders for other events, such as critical illness, personal accident, etc. at their discretion. 

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.

Before taking a bank loan to fund your universal life policy, be sure that you have the financial resources to cope with these potential scenarios. Otherwise, it might be more prudent to wait until you have the funds, or look into other forms of life insurance policies, such as whole life or term life.

Universal life insurance vs term and whole life insurance

The table above lays out the key differences between universal life insurance, whole life insurance and term life insurance.

As shown, universal life insurance is more flexible than whole life or term life policies, as you have the freedom to alter your premiums and death benefits. 

Meanwhile, whole life policies have fixed premiums and death benefit, while term life policies may come with fixed premiums (level-term policies) or be offered on a yearly renewable basis, in which case premiums will increase with age upon renewal. 

Universal life policies generate a cash value over time, which you can take out for other purposes while still living. This is the same as whole life insurance. However, because the returns are not fixed for universal life policies, your cash value may be fluid, which renders your policy a less reliable source of future funding. 

Lastly, universal life policies may be at risk of becoming underfunded and lapse, due to the fluid returns rate, and removal of too much of the cash value. You may be required to top up your policy to prevent your policy from lapsing. 

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.

Looking for an affordable Integrated Shield Plan (IP)? Singlife Shield Starter covers you up to S$20,000 per year for hospitalisation and day surgeries — great for young adults who want basic coverage. For more coverage, add on the rider, Singlife Health Plus Starter, at just S$1 and your co-payment will be reduced to just 5%!

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.

For who is universal life insurance best suited?

Due to its unique 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. 

Ideally, policyholders should fund their policies without resorting to a bank loan, especially given the potential for interest rate fluctuations.

Be aware that the crediting rate is not guaranteed, which means your returns may be poorer than expected. You also have to bear the investment risk of the policy, and may be required to make top-ups, or alter your sums assured, to ride out market volatility.

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

Looking for a term life insurance plan? Get S$1 million coverage for just S$1.49 a day!

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. 

Read these next:
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5 Best Term Insurance Plans In Singapore (2022)
Term Insurance vs Life Insurance – Which One is Right for You?
Cash Value Life Insurance – How Does it Work, and Who is it For?