What you need to know about variable universal life insurance
VARIABLE Universal Life, or VUL for short, is an investment-linked life insurance product. It is above all an insurance with an investment bonus. It is one of the bestsellers of most insurance companies because of its two-in-one feature: protection and investment.
VUL should be offered as insurance for income and health protection, education fund, inheritance tax settlement and many more. The investment component of VUL is like mutual funds. The money is invested according to the choice of funds of the insured and it is managed by professional fund managers. There is a wide selection of funds available, including money market, bonds, balanced funds, equities, the Philippine index, global funds and more. Depending on the choice and performance of the Fund, the investment component of LCV may grow over the long term. With this, it is a good investment vehicle to supplement your retirement funding. There are two types of LCV. The first one is, as the name suggests, Single Pay VUL, requires you to pay only once, but you have to shell out a large amount of money. In this insurance policy, the money is fully invested in the fund you choose with no upfront charges to allow your money to grow faster.
Since the money is fully invested, the insurance component of this policy is generally low. This is typically 125% of the one-time premium paid or the current value of the fund, whichever is greater.
To illustrate, if the single premium is 250,000 P, the insured’s coverage is 312,500 P. This means that in the event of the death of the insured, the beneficiary is guaranteed to receive at least 312,500 P. ¬ In the context of Single Pay VUL, additional services, more commonly known as endorsements, are not offered. This means that the insured can only claim the death benefit and returns on investment.
In addition, this policy is endowed with guaranteed insurability which does not require a good state of health at the time of subscription. The other is the regular LCV salary. This insurance policy requires a longer premium payment period. There are regular wage UL policies that are payable for 5 to 20 years or for life, and the payment schedules are more flexible. Premiums can be as low as P1,000 paid on a monthly, quarterly, semi-annual or annual basis. Insurance coverage is considerably high for regular paying LCVs due to the upfront costs. Typically, coverage is at least 500 percent of the total premiums paid. For example, the annual premium is P 24,000 and the payment period is 10 years. Your insurance coverage will be P 24,000 x 10 years x 500% = P 1,200,000 Due to the upfront costs, the growth of the investment is delayed, especially from the 1st to the 4th year of the policy. Insurance companies have different product designs and prices on their LCVs. Some ULV policies have fund values even in the 1st and 2nd year of the policy when fees are at their maximum, while some ULVs have zero fund values at the start. It is very important to ask your financial advisor for the fees to manage the expectations regarding the growth of the investment.
Regular-paid LCVs may have additional benefits or endorsements such as Hospital Income Compensation, Critical Illness Benefit, Accident, Disability and Dismemberment Benefit, and many more . These benefits are not free and as such have corresponding fees and charges. Due to the high insurance coverage of regular-paid LCVs, it is essential to present a good state of health when applying. A poor medical history may be a reason for denying the request. In some cases, it may be approved, but insurers will increase premium rates to compensate for the higher risk. Therefore, it is always best to get an insurance policy while you are young and healthy.
How do you know which LCV is right for you? Which LCV product is right for you will depend on your financial needs and ability to pay.
Single Pay VUL is a good option if you have a good amount (normally from P200,000) to invest and your goal is to have it fully invested as you already have sufficient insurance coverage.
Regular Pay VUL is more suitable if you need high insurance protection for your family and are comfortable with your invested money for the long term. The financial pyramid has three levels: the foundation is protection, the next is the accumulation of wealth and the last is the transfer of wealth.
By following this pyramid, it is recommended to start with Regular Pay VUL as it provides sufficient insurance protection for your family. If budget allows, combine it with a one-time payment LCV to give you a better return on your investment.
Arnold Umipig is a registered financial planner with RFP Philippines. To learn more about personal financial planning, attend the 93rd Bidding Program in January 2022. To inquire, send an email [email protected] or SMS to 09176248110.