A universal life policy is now being marketed by a few large insurance companies in Singapore. It was initially marketed only to high net worth people, but it is now sold to the broader market.

**KEY FEATURES**

1. The policyholder invests a lump sum, say $200,000

2. The bank lends 4 times of the invested sum, e.g. $800,000, at an interest rate of 1.5% per annum/ This rate is subject to change.

3. The total sum of $1 million is invested in the policy. The insurer pays interest on the account policy at a rate that may be changed from time to time. The insurer guarantees a minimum rate of 1.5% p.a. During the initial 3 months, the rate is fixed at 3% p.a.

4. There is a fee of 1.5% of the invested sum that will be deducted from the account during the each of the first five years. This is used to cover the expenses of the insurance company, including commission payable to the agent.

5. The policyholder is allowed to buy insurance for up to 2 times of the investment, say $2 million, and pays the risk premium rate based on the current age and sum insured.

**KEY RISKS**

Here are the risks of this policy:

1. It is risky to invest with borrowed money. The borrowing of 4 times of the invested sum is a high leverage.

2. The borrowed sum is subject to floating interest rate. It may be 1.5% p.a. now, but the cost of the borrowing can increase sharply when interest rate increases in the future. The normal level of interest rate could be 6%, so the cost of the borrowing could increase 4 times!

3. There is risk in the investment made under the policy. If it is invested in equities or long term bonds, the value of the investment could drop by more than 20% in a bad market, wiping out the total amount that has been invested.

4. If the investment is risk free and enjoys an interest rate paid by the insurance fund, the interest rate may fall in the future. The insurance company may guarantee an attractive interest rate for an initial period to entice the customers to buy the policy. After this period, the interest rate declared could be quite low.

5. The charge of 1.5% for each of the first 5 years total 7.5%. This is taken away from the invested sum, including the amount borrowed from the bank. It will take several years for the investment gain to cover this high charge.

**ADVICE TO CONSUMERS**

Consumers should be aware of the risks of this type of policy. They have to get full details of the policy and seek independent advice. They cannot rely on the advice of the agent (who recommends the policy to them) as the agent has a serious conflict of interest and stands to earn a large commission through the sale of the policy.

The consumer should also be aware that the commission of $50,000 plus other expenses come from the $200,000 that has been invested. If so much of the investment disappears at the start, how long will it take the consumer to earn back the commission?

Tan Kin Lian

A universal life policy is now being marketed by a few large insurance companies in Singapore. It was initially marketed only to high net worth people, but it is now sold to the broader market.

**KEY FEATURES**

1. The policyholder invests a lump sum, say $200,000

2. The bank lends 4 times of the invested sum, e.g. $800,000, at an interest rate of 1.5% per annum/ This rate is subject to change.

3. The total sum of $1 million is invested in the policy. The insurer pays interest on the account policy at a rate that may be changed from time to time. The insurer guarantees a minimum rate of 1.5% p.a. During the initial 3 months, the rate is fixed at 3% p.a.

4. There is a fee of 1.5% of the invested sum that will be deducted from the account during the each of the first five years. This is used to cover the expenses of the insurance company, including commission payable to the agent.

5. The policyholder is allowed to buy insurance for up to 2 times of the investment, say $2 million, and pays the risk premium rate based on the current age and sum insured.

**KEY RISKS**

Here are the risks of this policy:

1. It is risky to invest with borrowed money. The borrowing of 4 times of the invested sum is a high leverage.

2. The borrowed sum is subject to floating interest rate. It may be 1.5% p.a. now, but the cost of the borrowing can increase sharply when interest rate increases in the future. The normal level of interest rate could be 6%, so the cost of the borrowing could increase 4 times!

3. There is risk in the investment made under the policy. If it is invested in equities or long term bonds, the value of the investment could drop by more than 20% in a bad market, wiping out the total amount that has been invested.

4. If the investment is risk free and enjoys an interest rate paid by the insurance fund, the interest rate may fall in the future. The insurance company may guarantee an attractive interest rate for an initial period to entice the customers to buy the policy. After this period, the interest rate declared could be quite low.

5. The charge of 1.5% for each of the first 5 years total 7.5%. This is taken away from the invested sum, including the amount borrowed from the bank. It will take several years for the investment gain to cover this high charge.

**ADVICE TO CONSUMERS**

Consumers should be aware of the risks of this type of policy. They have to get full details of the policy and seek independent advice. They cannot rely on the advice of the agent (who recommends the policy to them) as the agent has a serious conflict of interest and stands to earn a large commission through the sale of the policy.

The consumer should also be aware that the commission of $50,000 plus other expenses come from the $200,000 that has been invested. If so much of the investment disappears at the start, how long will it take the consumer to earn back the commission?

Tan Kin Lian