Swiss Life Alpha and Alpha Plus are Variable Universal Life targeted at high networth individuals who would like to have a high amount of insurance. The insurance is to be funded by any investments of their choice. In fact, it is possible to use existing investments to fund the insurance.
Here is how the Swiss Life Alpha works:
Let’s say the death benefit (or sum assured) required is US$10,000,000. The initial premium is US$3,289,504 for a last age 50 years old male non-smoker standard life. 12% will be deducted to pay for premium and setup fee. This initial premium can be cash or transfer of existing investments such as stocks in SGX CDP, Unit Trusts with fundsupermart, bonds, etc. Any existing investments would do provided these are bankable liquid assets. Assuming an investment return of 4% per annum (from Swiss Life point of view), the cash value of the policy will be the same as the sum assured at 100 years old.
Should death occurs during the policy period, the sum assured will be paid out. The sum assured includes the value of the investments. The investments are either liquidated or transfer to the beneficiaries.
During the entire policy period, the policyholder continues to have full control over his investments because Swiss Life would give the limited power of attorney to the policyholder to make investment decisions such as sell, buy, switch, etc. However, any withdrawal and injection of new monies have to follow the insurance company’s partial surrender and top-up procedure.
If the Swiss Life Alpha and Alpha Plus are purchased from the IFA channel, the financial adviser will choose from one of the two of the available investment platform to work together with the policy. The investment platforms are FAME and Havenport. Under the FAME platform, the financial adviser advices the portfolio allocation but the policyholder makes the final decision. Under Havenport, the fund manager makes all investment decisions on a discretionary basis.
It must be noted that the investment platforms have its own charges. For FAME, typically the charges are wrap fee of 1%pa (to compensate the financial adviser to provide on-going advice), Unit Trusts upfront fee of 3% for new monies and unit trusts management fee typically is 1.5%pa.
By the way, the cost of insurance is escalating in nature similar to investment-linked policies. But what is unique is that the table of cost of insurance is fixed on onset. This is unlike traditional investment-linked policies in which the entire cost of insurance table can change.
What is the difference between Swiss Life Alpha and Alpha Plus?
|Fee structure||Alpha||Alpha Plus|
|Setup Fee charged initially %||6%||-|
|Premium Fee charged initially %||6%||4.80%|
|Policy fee %||-||1.2% pa of initial premium for 8 years|
|Ongoing Admin Fee %||0.3% of policy fund + USD 200 (year 1 – 10)|
0.2% pa of policy fund + USD 200 (year 11 onwards)
|0.2% pa of initial premium|
|Surrender Charge||None||Starting at 8.5% dial down to 0 at year 7.|
|Minimum premium size||USD 200,000||USD 1,000,000|
What is the main differences between Variable Universal Life and Traditional Universal Life?
There are four differences:
First, in a traditional Universal Life, the underlying assets are invested in bonds. On the other hand, the Swiss Life Alpha and Alpha Plus are invested in any bankable assets which are decided by the client. This includes stocks, unit trusts, bonds bond funds, etc.
Second, there is a minimum crediting rate for traditional Universal Life. But in Swiss Life Alpha and Alpha Plus, there is no such thing. The insurer does not provide any form of minimum crediting rate. The benefit illustration simply uses an “Assumed Investment Rate of Return” provided by the financial adviser. The entire risk of investments shall be borne by the client.
Third, in the traditional Universal Life the insurer decides which bonds to invest in. In the Swiss Life Alpha and Alpha Plus, the client has full control as to what assets to invest in. The insurer will not interfere in the investment decisions.
Fourth, the cost of insurance for traditional Universal Life can change. The cost of insurance for Swiss Life Alpha and Alpha Plus are fixed although still escalating.
What is the reduction in yield?
The reduction in yield is the difference between the investment returns of the underlying investments and the realized investment return. In the unit trust and ETF world, we called it expense ratio.
There is always a reduction in yield in any insurance policies because of cost of insurance, commissions and administration fees. Here is a table to illustrate the reduction in yield together with the premium cost:
|Client type||Product||Sum assured USD||Initial premium USD||Assumed Rate of Return||Reduction in Yield|
|Male non-smoker 50||Alpha||10,000,000||3,289,504||4%||1.75%|
|Male non-smoker 60||Alpha||10,000,000||4,511,397||4%||1.99%|
|Male non-smoker 50||Alpha Plus||10,000,000||3,258,443||4%||1.73%|
|Male non-smoker 60||Alpha Plus||10,000,000||4,505,671||4%||1.99%|
The reduction in yield is calculated by assuming the client dies or surrender at age 100 years old. The death benefit and surrender value at 100 is the same provided the Assumed Rate of Return is fulfilled throughout the policy period. This is because the benefit illustration is generated based on the policy endowing at 100.
For example, the Internal Rate of Return of the male non-smoker 50 for Swiss Life Alpha is (10000000/ 3289504)(1/50)-1 =2.25%. Thus, the reduction in yield is 4-2.25 = 1.75% per annum.
Note that the actual investment return required to ensure the policy does not lapse before 100 is Assumed Rate of Return (in this case 4%) + investment platform charges. Normally the platform charges are: wrap fee, platform fee, sales charge and unit trust management fee. For FAME, currently it has no platform fee.
What is my take on Swiss Life Alpha and Alpha Plus?
This product is meant for Accredited Investor only. This means it is for high networth individuals. It is a product to create a high insurance cover using existing investments instead of cash. Most people do not have a lot of cash and that is why they have to resort to premium financing to buy traditional Universal Life. With Variable Universal Life, it is no longer necessary to borrow.
However, I have never met any high networth individuals who really need such a high insurance cover. Yes, there are individuals who want high coverage but there are differences between a need and a want. What is meant by needs and what is meant by ‘want’?
The following are wants:
- To provide a perpetual income for children, grandchildren, great-grandchildren and their mistresses.
- To increase my networth on death so that my children will be very very rich.
- To ensure each of my mistresses will have 3000 shoes when I die in case these shoes get eaten by termites.
The following are needs:
- To ensure dependents will not be financially ruin on the demise of the sole breadwinner.
- To ensure the company debts will be repaid on the demise of the top salesman.
- To ringfence one’s assets against creditors.
While these are valid needs, most high networth are invested in properties. So they have very little liquid assets to plan for anything.
Also, I feel that there are cheaper options for get high cover. For example, let’s say the employer wants to insure its top salesman should he dies so that all company debts can be repaid, a term insurance is usually much cheaper.
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