What is a Variable Universal Life Insurance (VUL) – Part 1

One of the fastest-selling life insurance products in the Philippines is the Variable Universal Life Insurance or VUL. Introduced in the Philippines about 12 years ago, the VUL life insurance product gives Filipino investors another alternative where to grow their money. Despite its popularity, many Filipinos still do not fully grasp how a VUL product works. Below are the common questions about VUL and a short explanation for better understanding.

 

What is a variable universal life insurance product?

A variable universal life insurance product is a non-traditional life insurance plan with an investment component. The benefits of the plan is directly-linked to the performance of the units of the investment funds the policyowner choose. Every time the policy owner pays the premium, a portion of the amount paid is used to buy units in the chosen investment funds. The most common investment funds of most VUL products in the Philippines are bond fund, balanced fund, and equity fund.

 

How is a VUL different from a traditional life insurance? 

In a traditional life insurance plan, the premiums and payment period are fixed and it is the insurance company who decides where to invest the premiums paid by policyowners. The cash values and death benefits are guaranteed. Some traditional insurance plans earn through dividends and endowment benefits.

In a variable universal life insurance plan, the premiums are flexible and may be varied. Death benefits may be increased by increasing the levels of premiums paid. Fund/cash values depend on the performance of the investment fund chosen. A policyowner may increase the life insurance coverage and investment by making additional premium payments called excess premiums.

Typically, VUL plans are cheaper than traditional life insurance plans with the same face amount or life insurance coverage.

 

Are there different types of VUL products?

Most insurance companies in the Philippines offers two types of VUL plans: the regular pay and the single pay. Regular pay life insurance plans requires policyholders to pay a required premium amount in regular intervals over a specified period. Single pay plans on the other hand, requires a policyholder to make one, large premium payment.

If a client’s purpose of buying a life insurance plan is for maximum insurance coverage, regular pay VUL plans is the right product. But if the client’s purpose is for investment diversification with life insurance as a secondary benefit, then a single pay may be the better option.

Most insurance companies offer peso and dollar-denominated VUL plans.

 

What is an excess premium? 

An excess premium is additional premium payments on top of the regular premium required to sustain the life insurance policy. Excess premiums are used to buy additional units from the policyowner’s chosen investment fund.

For example, a 35-year old client bought a VUL plan with a 1 million face amount. Required regular quarterly premium is P6,000. Suppose on the second quarter, client decides to pay P10,000.

Premium paid                    P10,000.00

less Regular premium        P  6,000.00

Excess premium               P  4,000.00

The excess premium of P4,000 will be used to buy additional investment units. By making excess premiums, one also increase the fund benefits of the plan. Excess premium payments can be a one-time payment or can be billed regularly together with the regular premium, pre-computed at the inception of the plan.

 

What is a fund value?

Fund value is the monetary valuation of the performance of the VUL policy. It is computed by multiplying the number of existing units owned by the policyholder, with the prevailing unit price of the day of the chosen investment fund. Example:

Upon inception of the policy, policyowner paid initial premium of P100,000. Less administrative and premium charges of 5%, allocated amount is P95,000. Unit Price for the day is P1.00/unit. This means that the policyowner now owns 95,000 units. Six months after, policyowner checks his fund value. Unit price on that day is now P1.75. Fund value of the policy would be 95,000 units multiplied by P1.75/unit is P166,250. 

 

*More on frequently asked questions on VUL on my next post.

 

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