Consumers are increasingly drawn to financial products that offer flexibility, growth potential and protection. Indexed universal life ( IUL ) insurance addresses these needs and has emerged as a popular financial product for individuals seeking life insurance protection and the potential for cash value growth. 

IUL is a type of permanent life insurance product that combines death benefit with a cash value component. Unlike traditional whole life or universal life insurance policies, the cash value in IUL is tied to the performance of a specific stock market index, such as the S&P 500. However, the policyholders do not directly invest in any financial markets.

Instead, the insurer credits interest to the cash value of the IUL product based on the performance of the financial index/indices selected by the customer, subject to certain cap and floor interest rates. IUL, therefore, provides potential to grow cash value as well as traditional insurance protection. This is particularly attractive for high-net-worth individuals who are experienced investors. They can use the IUL as insurance protection as well as for growing their wealth.

IUL works by offering one or more index options. The insurer then determines the interest to credit to the policy’s cash value, based on the index’s performance over a specific period, usually about one year. For example, if the S&P 500 rises by 10% and the policy cap is 8%, the cash value is credited with 8% interest. The insurer may offer several indices to be linked to the IUL policy so the client can earn interest based on the performance of the selected indices. 

Professional investor clients have been demanding a variety of products. Although specific data for Asia is limited, the rapid growth of IUL insurance in the US suggests that there is the potential for similar trends in Asia. According to reports, new premiums for IUL insurance in the US reached a record-high of US$3.8 billion in 2024, marking a 4% increase from the previous year. Additionally, policy count grew by 10% year over year.

While Hong Kong is a mature financial market and offers a variety of insurance products, IUL insurance was not offered because of the strict regulations involved. IUL insurance is a Class C ( linked long-term ) insurance product and is strictly regulated by various guidelines issued by the Hong Kong Insurance Authority ( HKIA ), including GL15 ( Guideline on Underwriting Class C Business ) and GL26 ( Guideline on Sale of Investment-Linked Assurance Scheme ). Class C insurance products require the approval of HKIA and the marketing materials require authorization from the Securities and Futures Commission. 

Given the increase in demand and with the view to promoting Hong Kong as a financial hub for high-net-worth business, the HKIA has recently relaxed the rules for IUL where it is offered to professional investors ( PI ).  

A joint circular was issued by HKIA and the Hong Kong Monetary Authority in March clarifying the regulatory framework for IUL products as defined under the Securities and Futures Ordinance Cap. 571 ( SFO ).

The relaxed requirements will ease the sales procedure so that it is easier for insurers to offer IUL to professional investors in Hong Kong. This will then encourage insurers to offer IUL and diversify the range of insurance products in the Hong Kong market.

Where an IUL product is sold to a professional investor, the new requirements include the following:

• A financial needs analysis ( FNA ) and a risk profile questionnaire ( RPQ ) is not required. The insurer must have controls and processes to ascertain whether a customer satisfies the definition of PI before introducing the product to the customer and take steps to ascertain the investment knowledge and experience of a PI customer who is an individual.
• Insurance intermediaries will need to ensure that the IUL product meets the customer’s needs and objectives and there are no concerns about affordability.
• For any change in policy owner, the insurer must ascertain that the new owner satisfies the definition of professional investor in the SFO, and the IUL product is suitable for the new owner.
• The requirement to perform FNA and RPQ for top-up investment is not applicable but the customer must continue to be qualified as a PI.
• A key facts statement is not required. Other requirements on disclosure of information still apply. An important facts statement ( IFS ) is still required. A template IFS with the applicant’s declarations is set out in the appendix to the annex. A copy can be accessed here.

Given the complexity of IUL products, the circular is useful in clarifying how the insurance regulations and HKIA guidelines apply to IUL products – and in particular, enabling a more streamlined process when dealing with professional investors.

This gives clarity and efficiency to insurers, insurance intermediaries and customers. It is a welcome step in driving the demand for IUL products in Hong Kong, as well as promoting Hong Kong as an insurance hub and wealth management centre.

Jenny Yu is an insurance partner and Ken K. Y. Lam is an associate at law firm Johnson Stokes & Master.