I was asked by a client to analyse this product together with the accompanying premium financing. This is my analysis.
This product is a USD denominated Universal life. Upon single premium of USD187,158, the sum assured is USD1,500,000. The policy has some cash value based on a minimum crediting rate of 3%. The product is often marketed together with premium financing in which the bank finances majority of the premium. There are two ideas behind this: If the product is used as an investment, only a small investment amount is paid by the client while the majority financed by the bank. If the product is used as an insurance, it is used as an estate creation tool. Let’s look at both.
Is the HSBC Insurance Jade Global Select Universal life a good investment?
The bank is financing 70% of the single premium. This is a classic leveraged investment in which the investor only pays for a small cash outlay. However, like all other financing methods, the investor is required to pay off the debt and interest. 70% of $187,158 single premium is financed by the bank. According to the illustration given by the bank, they are charging 1 month USD SIBOR + 1% which is currently 1.36%. According to the HSBC Insurance illustration, the crediting rate has a minimum of 3% with the first year guaranteed to be 5%. The risks of such investments are:
- Interest rate spread between loan and the crediting rate. USD dollar interest now is at rock bottom low due to the 2008 financial crisis. Hence, the USD dollar interest of 1.36% (1 month SIBOR+1%) is unrealistic. Over the next decade, I expect the interest to increase to a much higher value. If the loan interest is greater than the crediting rate of the life insurance policy, the investor will be paying more interest than earning it.
- Moving forward, MAS could only guarantee $500,000 in sum assured per insurer and $100,000 in surrender value per insurer. This means any values above these limits are subjected to the insurer’s own credit risk. Effectively, what the investor is buying is a bond. The question is whether the crediting rate reasonable after considering the credit standing of the company.
- Due to the leveraged nature of the investment, the potential for gain and lose is magnified significantly.
Let’s look at the Reurn-On-Investment (ROI) in absolute percentages. For simplicity ROI = profit of investment / total capital invested.
Scenario #1: Financing rate remains 1.36%pa permanently. Crediting rate 3% permanently.
Initial cash outlay = $56,158. Cash value on Day 1 = $146,046. Debt = $131,000. ROI = (146046-131000)/56158 – 1 = -73.21%! Horrible. Day 1 ROI is terrible!
At the end of 10th year, accumulated cash outlay (inclusive of P+I) = $117,999.22. Cash value = 177304. Debt = $83,869.17. ROI = -20.82%
At the end of 20th year, ROI = -7.09%. Disaster! After 20 years still negative return!
Scenario #2: Financing rate remains 5%pa permanently. Crediting rate 5% permanently. Common sense tells us since the borrowing rate and interest rate is the same, there should not be any losses or gains.
At end of year 10, accumulated cash outlay = $148,055.55. Cash value = 232322. Debt = $96,841.06. ROI = -8.49%. What the ****.
At end of year 20, accumulated cash outlay = $239,953.11. Cash value = 354878. Debt = 40,580.97. ROI = 30.98%. Remember that this is absolute return. So it looks like one need to wait for 20 years to see some gain.
Based on the above analysis, this is a sour lemon.
Is the HSBC Insurance Jade Global Select Universal life a good insurance?
If one would to view this as insurance, it wouldn’t appeal to those who are looking for temporary coverage like a plan vanilla term insurance. A temporarily term would cost at most a couple of thousands of dollars a year. You wouldn’t need such a large capital outlay anyway (yes, even that 30% of the single premium is still very large). Obviously it is targeted at high networth who wish to create an estate through such an insurance that cover for life. The question is whether should such an individual want to finance the premium or not. Based scenario #1, the accumulative capital outlay over 25 years loan tenor is $210,761.05 while scenario #2 is $285,901.89. Why pay so much interest? Might as well just pay the entire premium of $187,158 cash upfront!
So why did the bank want to sell such a product? Probably due to two reasons:
- The total distribution cost is 13.75% of the single premium or in this case $25,731 in commissions. Good for seller, bad for buyers.
- The bank earns interest from the financing.
Conclusions: Stay away from product sellers and educate yourself.For those who want a copy of the excel sheet calculation, you can email me for it.
Update 25 April 2016: Due to popular request, I've written a more comprehensive article on Universal Life and a free (online) calculator to determine whether your Universal Life is worth the purchase. Click this link: Tips in selecting a Universal Life
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