An overview of life insurance in Hong Kong
Life insurance is one of the pillars of a sound financial plan. It is designed to give you the peace of mind that your dependants will be adequately looked after if you are no longer there to provide for their needs.
There are three types of life insurance policies available in the Hong Kong market. All three work on the same principle, with the beneficiary receiving payment upon the death of the life assured, however, there are some differences.
1. Guaranteed policies
Guaranteed policies pay a fixed value upon the death of the life assured. Usually, the premiums are fixed and they can either be for a specified term or whole of life. There are no investment instruments held within the policy and therefore no investment risk. This also means that there is no cash value upon the end of a term policy and policyholders may end up paying premiums without ever needing to make a claim.
2. With-profit policies
With-profit policies offer a cash value at the end of the term with the value linked to the performance of the insurance provider. Most of the time the returns are smoothed (a technical term for holding back profit from good years to boost bad years), and if the insurance company performs well, a bonus is applied. Policyholders get a return linked to the stock market but with less risk than investing in shares.
3. Investment-linked policies
Investment-linked policies combine life insurance with an investment component and provide a cash value at the end of the term. Simply put, they are investment policies within a life insurance product and usually offer flexibility to policyholders who can make withdrawals when they wish to do so (subject to policy conditions and possible charges). The value of the policy is linked directly to the performance of the underlying investment.
A deeper dive into investment-linked insurance policies in Hong Kong
Hong Kong residents in the late 1980s and ’90s drove the demand for these policies as they sought higher returns from their insurance premiums. As with any investment, there are benefits and drawbacks to these products.
The benefits of investment-linked insurance policies
1. Flexibility
Flexibility was a huge driver of the growth in popularity of investment-linked insurance policies. Policyholders can take premium holidays, to increase or decrease premiums, and to make early withdrawals of the principal amount.
2. Tax efficiency
Hong Kong tax residents do not pay capital gains tax or income tax on the withdrawal of any gains made.
There is no requirement for expats returning to their home countries to surrender a policy of this type before moving back, however, they may be subject to tax in their respective countries.
3. Cash value
The ability to build up a cash value within a life protection policy was a major driver of the rise in popularity of these products in the first instance.
4.Wide investment parameters
Policyholders can choose from a wide range of investment products including mutual funds and shares.
5. Estate planning advantages
If the life insured dies, the sum assured, which is usually 105% of the value of the policy, is paid to the beneficiary immediately, without the administration delay caused by probate.
Individuals who are UK domiciled may be able to write an investment-linked insurance policy into trust, which means that it will fall outside of their estate for inheritance tax purposes after seven years.
The drawbacks of investment-linked insurance policies
1. Investment risk
The value of the insurance is linked to the performance of the underlying investment, and, as with any investment, this can reduce as well as increase.
2. Charging structures
In the past, many expat clients have been sold these products without a clear explanation as to the initial, ongoing, and early surrender charges. Some of these bonds allow for initial charges of up 8%. While this figure may be justified if the work undertaken by the financial adviser has been of great benefit to the client, there have been complaints and negative reviews of unscrupulous advisers hiding the charges. The market has thankfully moved on and charges have become more transparent. Past negative reviews have helped consumers ask the right questions when it comes to what they are being charged.
Should I take out an investment-linked insurance policy?
It is essential to assess whether a policy of this nature fits within the context of your overall financial plan. If it will benefit you over the long term and the charges are disclosed clearly and transparently, there is no reason why you should not add this type of product to your financial portfolio.
If you are thinking of purchasing an investment-linked insurance policy, make sure you seek professional advice from a respected and trustworthy adviser. Do not be afraid to ask all your questions and ensure that you are satisfied with the answers, particularly concerning remuneration and ongoing charges. If anything seems off, seek a second opinion.
I have helped clients in Hong Kong find the right life insurance products to protect them and their loved ones. If you would like me to do the same for you, please feel free to get in touch at luis.jimenez@infinitysolutions.com
Financial Consultant
I believe in providing clients a detailed financial plan, in the form of a cash flow, in order for them to make an informed decision when it comes to their investments and protection objectives.
