Ultimate guide on variable universal life/VUL insurance policies

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A variable universal life (VUL) is a type of life insurance with a built-in savings. In its basic form, it is a life insurance so it pays off when the insured person dies. At the same time, a part of what you’re paying goes to some sort of income-earning financial instrument.

There are many different VULs in the Philippines as there are companies that offer them. In this article, a few of the details is covered in the hope that it helps you make a decision.

What is a VUL?

A VUL is actually a kind of permanent life insurance in the sense that unlike term insurance (such as AXA’s FlexiProtect), it does not expire. It covers a lifespan and does not need to be renewed.

Another kind of permanent life insurance is the whole life policy such as AXA’s Assure. Actually, VUL and whole life policy/Assure are almost the same because they both mature. Once the person insured hits a certain age, the policy stops. They also both have a savings component. Whole life policy/Assure has guaranteed cash value which grows over time. It can be released by surrendering the plan (terms apply). Policyholders can also borrow money against their cash value.

VUL on the other hand earns through the non-guaranteed returns of investment fund. Because there is no way to predict the returns, your saving varies almost daily. This savings component from VUL, which is called account value, is derived from a portion of the premium. That is, not everything that you pay goes to paying insurance and fees. A part of it is put into a fund of your choice.

Death benefits and living benefits

In short, VUL has death benefits and living benefits. The death benefit, which is the sum insured, may be paid out when the person insured dies on the condition that the policy is deemed valid.

The living benefit is the account value from the savings component. In most cases, insurers would compare between the sum insured and account value when deciding how much to give out in case of unexpected death. Usually, the amount of the benefit is whichever is higher between the two. So, there’s a possible situation where your beneficiaries can receive more than the original coverage that you signed up for. Some companies even allow partial withdrawal of your account value – subject to terms, of course. How cool is that!

A part of your premium makes up your account value. It is also allocated to a fund that you would be allowed to invest in. Insurance companies have several investment options for you to choose from.

Top-ups

Top-ups are a way to increase your account value. You can actually pay more than your premium. Whatever extra you’ve added would be put into the investment funds, allowing you the chance to grow your money more quickly. Terms may apply.

What is premium holiday?

A premium holiday is an option for policyholders to stop paying the premium. Some insurers would allow you to apply for it especially when your account value can sustain the fees and the insurance.

You may ask, how is that possible?

Remember that the living benefit/account value increases as you continue paying for your plan. And at the same time, your savings is not idle. It is earning by being invested in a fund. So, there might be a point where both the size of the account value and the returns may be more than or just enough to pay for your policy without you having to contribute anymore. This is what makes it possible to apply for a premium holiday.

Again, the scenario above is a possibility. Actual returns vary, and it is best to talk to your advisor.

What are the advantages of VUL?

There are many benefits in purchasing a VUL, including:

  • Convenience. Investment and insurance are rolled into one account.
  • Account management. You only have to deal with one company to manage the account.
  • Passive income. Because a part of your premium is put into savings, you may enjoy the potential to earn.
  • Partial withdrawal. You may opt to partially withdraw in times that you may need extra funds.
  • Financial goals. It gives the ability to plan for financial goals while staying insured at the same time. It can be used for education, retirement, leisure, or big purchases such as a house or car.
  • Potentially higher death benefit. The computed final benefit to be given in case of death depends on whichever is higher between sum insured and saving. When the living benefit is higher, then that is what is going to be released to your beneficiaries.
  • Top-up. If you want to increase your savings, you’re allowed to contribute more than your premium.
  • Premium holiday. There’s a choice to suspend payments when desired level of returns and account value is reached.

What are the disadvantages of VUL?

You may also need to know some of the limits of VUL such as:

  • Fees. Insurers may assess fees in managing both insurance and investments.
  • Variable returns. Returns are not guaranteed.
  • Longer premium payment. When returns are lower, there might be a need to continue paying the premium to insure validity of the insurance.

What is the investment fund of VUL?

What makes VUL distinct is the potential to grow your money while getting insurance cover. The growth of your savings depend on the returns of your chosen investment fund. If it performs well, then your account value gets better returns.

But how does your savings grow?

Your savings are put into managed funds. They are then invested into different assets that earn interest, dividends, or whose value appreciates. For example, AXA Philippines has several investment funds that you can choose from. Assets that earn interest are certificates of deposits, bonds, and other debt instruments. Or, these funds are invested in corporate stocks that earn through dividends (part of the earnings of companies that they give to stockholders) and through the increase of the stock price.

How do you know which fund to put your money to?

Your insurer would have options for you to choose from. To assist in making your decision, you need to know your risk profile. A risk profile is a measure of how much risk you’re willing to take based on many factors such as length of time you’re willing to let your savings grow, your need for cash, availability of emergency fund, etc.

Basically, there are three different funds: equity funds, fixed income funds, and balanced funds.

Equity funds

These are funds whose assets are stocks of companies that are listed in a stocks exchange. For example, the Wealth Equity Fund holds a portfolio of blue chip companies (SM, Ayala, BDO) and shares of other promising companies that are publicly traded in the Philippine Stocks Exchange. They are the most aggressive. That is, they may have the highest potential to earn but also has the highest risk.

Fixed income funds

These are funds invested in relatively less risky securities such as those found in money markets. Other holdings may include deposits, corporate bonds, treasury notes, etc. They are relatively safe bets, low on risk, and also low on potential upside for earnings.

Balanced funds

Balanced funds are a combination of equities and fixed income securities. They are made for people who may be in the middle of risk profile. They may prefer the relatively safer fixed income funds but at the same time they want to enjoy the potential of higher returns.