Photo taken in Nov 2017, Spain, Valencia – City of Arts and Sciences
I met this client on Sep 2017, Aged 64, Single, semi-retired. He had shown me a Universal Life Policy which his Bank Relationship Manager (RM) recommended him to buy 4 years ago. However, I am against buying Universal Life because of its high mortality charges during older age which would eat into the cash value of the policy.
Since my client has already bought it, I am thinking, just advise him to keep it then. But to my horror, my client told me that besides the Universal Life Policy, he still has a $802,000 loan to serve and $350,000 Unit Trust investment which comes as a package deal which his RM sold to him.
He explained, 4 years ago, his RM saw his $350,000 in his bank account and recommended him to use his $350,000 to invest into dividend paying Unit Trust. Secondly, using this investment to pledge, my client was able to take a 50% loan of $185,000 to pay for the initial 30% of premium for a Universal Life with coverage of about $1 million (my client is single?).
Thirdly, my client must pledge the Universal Life Policy to secure another $617,000 from the bank to pay for the balance 70% of the Universal Life premium. The Total loan my client is exposed to is $802,000. The loan interest is said to be of a special promotion rate of 2.25% p.a.
The idea is to use the dividend pay-out from the Unit Trust (at about $19,250/year) to serve the interest of $18,450 per year for the $802,000 loan. In this arrangement, there will not be any principal repayment and my client would never have the change to reduce his loan exposure over time.
With a total of 3.29 times leverage against my client’s initial investment of $350,000, my client is running a big risk of having his initial $350,000 being wiped out if there is an economic downturn.
Last year the bank sold off their Wealth Division to another Bank and now my client’s Universal Life Policy, Unit Trust Investment and Loan are being transferred to this new bank, but his RM is being asked to go.
To make the matter worse, the new bank now charges a higher interest rate at 3.25% for my client’s $802,000 loan and to make the matter worse, his Unit Trust value has also decreased by about 20%.
My client has discussed about exiting these investments totally with the new RM that has been assigned to him (from the new bank). The RM checked and told him that the Exit Fee for the Universal Life is about $60,000 and the total amount he can get back after factoring all the fees and losses is only less than $200,000 out of the initial investment amount of $350,000.
My client’s first RM has amplified his initial investment amount with high leverage so that he can sell more products to my client and maximise the fees he can earn from him. For this package, the banks earn from the Universal Life, the loan interest and the Unit Trust upfront fees. This RM pays no attention to my client needs and the risk he is taking through his recommendation.