The Four-Way Test for VULs
Confused which variable unit-linked insurance product to invest in? Follow these simple steps
By Rienzie P Biolena, RFP®
Life insurance and investments are like oil and water—they don’t mix well together. Well, at least that is what most personal finance gurus would say. There’s some truth to that. Term insurance in particular is designed for protection—in case you die unexpectedly, your beneficiary will receive an amount that your insurer agrees to pay in the contract.
But life insurance in general has long since evolved into all sorts of variants: whole, universal, variable, endowment, etc. Many of these have a savings component, which builds up over the years. The problem is the returns are nothing to jump at.
But now, that’s changing. Enter variable unit-linked insurance, or VUL. Simply put, it is an investment and life insurance product in one. The difference between a VUL and other forms of life insurance is that part of the premiums is invested in pooled funds which, in time, are expected to grow in value. Hence, the policyholder who is protected with insurance also has an automatic investment fund. A unique feature is that the owner can withdraw from the fund whenever needed.
There is a fixed guaranteed amount of coverage, but the real draw is that there’s a non-guaranteed variable upside. In case of death, benefits received are either the amount of coverage or the market value of the investment, whichever is higher.
Sounds good? There is a growing number of VUL products in the market offered by established insurance companies such as AXA, Ayala Life, Insular Life, Philamlife, Pru Life, and Sun Life. Before getting one, however, you must be clear on your financial goals and needs. This Four-Way Test for VULs—a series of guide questions—can be useful for you:
1. What nature of protection do I need? First assess the nature of your insurance needs. If you have a family dependent on your income, then factor in the coverage the income that will be lost due to your death as well as the future needs of your family. Furthermore, some VULs differ in emphasis on which part of the premium payment is allotted for protection or investment. Consequently, one policy that emphasizes protection coverage has a lower projected return than that of one that emphasizes investment returns.
2. How much can I allot for my premiums? Check the premium payments if they fit your budget. Aside from the regular insurance coverage, you can also opt to upgrade with riders for extra coverage and benefits (such as critical illness benefits, hospitalization, benefits, etc.) for a minimal additional amount on top of the regular premiums.
Payments come in three variants: single-pay, term, or lifetime, with the last two having the option to be paid for in a monthly, quarterly, semi-annual, or annual basis.
In a single pay variant, a lump-sum premium is paid, coverage of which is usually 125% of the premium payment. Single premium minimum prices differ: P50,000 for PruLife’s PIA Peso and Philam’s Money Tree, P100,000 for Philam’s AIG Bounty and Ayala Life’s Express Unit Link, P200,000 for AXA Honey Pot, and P1,000,000 for PruLife’s Pru Millionaire.
Dollar-denominated linked funds usually start their minimum at $2,000. These include Insular Life’s Dollar Wealth Builder and Philam’s AIG Bounty and Money Tree. Ayala Life offers a minimum of $5,000 for its Express Unit Link Product; PruLife’s PIA Dollar, on the other hand, starts at $1,000.
The term payment variant specifies the number of years for premium payments. Term payment usually starts at five years to as long as 15 years. PruLife’s Exact Plus, Premier 15 Plus, and Capital Secured Plus, and Philam’s Asset Builder and AIG Bounty are among the products that offer term payments. Term payment can be as low as P33,000 per annum for PruLife’s Capital Secured Plus. Dollar products can get as low as $40 monthly for PruLife’s PruLink Exact Plus to $2,000 a year for Philam’s AIG Bounty.
Lifetime payments have premium outlays for the duration of the policy holder’s life. Peso products range from a minimum of about P12,500 p.a. for PruLife’s PAA Peso to P25,000 for Philam’s Abundance; while dollar products are offered as low as $240 p.a. with PruLife’s PAA Dollar.
Aside from these options, VUL policyholders may also apply for a premium holiday. Here, the policy owner can suspend payments of regular premium and top-ups, as long as the account value of the policy is sufficient to cover the policy charges due during the premium holiday applied for.
3. What is my attitude towards risk? The other half of VULs involves investments. And when investments are involved, risks are involved. A useful rule of thumb is the concept of risk-reward trade-off —the higher the return, the higher the risk.
At the onset of the policy, the insurance agent shall disclose the array of products to which the investment can be linked with. Options include usually a money market fund, bond fund, balanced fund, and equity fund. Most VULs allow you to choose at least two funds. AXA and Insular Wealth Builder offer up to three.
But linking funds does not mean that the investor is tied to them throughout the term. A novelty feature of VULs is that the investor can shift across and change allocation among funds. For instance, a policy holder that has a bond fund at the onset can shift 50% of his units later on to an equity fund. The number of free switches, however, has limits, with excess switches subject to fees and charges. SunLife and AXA, for instance, offer four free switches; AyalaLife, two; and PruLife and Philamlife, one.
There are also products in which the company predetermines the linked fund like PruLife’s Capital Secured Plus and, to some extent, SunLife’s FlexiLink MyFuture Funds. Allocation for these products is solely determined by the company, which by their judgment can give the best yields and protect potential gains from sharp market volatility.
4. What is my liquidity requirement? VULs provide liquidity through withdrawals of outstanding units so policyholders can cash in on their unrealized gains. Some companies, however, subject these withdrawals to specific charges or fees, with back-end charges typically ranging between 1% and 5% of the withdrawn amount.
As a general rule, VUL investors may withdraw from their funds anytime. Withdrawals, however, are subject to a minimum maintaining balance sufficient to contribute to insurance premium payments. Philamlife has a minimum maintaining balance as low as P5,000 for its Money Tree product while PruLife has a low maintaining balance of P20,000 for its PIA Peso.
Moreover, partial withdrawals depend on each company and per product. Other products also feature a premium payment lock-in with no withdrawals allowed within a specified number of years. For instance, Philam’s Asset Builder has a lock-in period of 15 years, but with an off-setting benefit of providing as much as 25 times insurance coverage for the face amount of the policy. Ayala Life’s Express Unit Link, on the other hand, has a minimal holding period of 180 days.
Although VULs provide for cash requirements, policyholders should also be aware that full withdrawals shall have the effect of nullifying the insurance policy. As such, they must be cautious that it should not be a main source of liquidity requirements.
The Two Sides of VULs
There are two components of variable unit-linked insurance products – insurance and investments. Here’s what you need to know:
Policyholders get to choose which particular fund from a limited selection to invest in, identified at the onset of the policy. Contributions are sourced in part from the regular premiums paid or from extra contributions called top-ups. The percentage invested typically range between 15% and 100%, depending on the insurance company and product.
This amount is then used to buy units in pooled funds, at the price called Net Asset Value per Unit (NAVPU) at the time of purchase. Release of NAVs varies from company to company. PruLife, AXA, and Philamlife, for instance, release NAVs weekly, while Ayala Life and SunLife do it daily. While a weekly quotation of NAV may provide for some protection against price volatility, it may also keep the potential investor to take on a daily, tactical position on price changes.
The investments are also subject to various fees and charges. Basic to these are front-load charges, back-end charges, and management fees. A front-load fee is a charge against the face amount of the investment, usually pegged at 5%. For instance, a P100,000 investment, will only end up with P95,000 available for investment. Moreover, a company may charge a back-end fee for withdrawals, which is deducted from the amount withdrawn. Management fees, on the other hand, are deducted for the administration of the pooled funds. It is best to check the fees involved for each company and product in order to get a clear picture of the total costs.
It is also important to look up the return on investment for each fund since the death benefit is linked to the performance of the underlying funds. While past performance is not a guarantee for future results, you should still consider a consistent track record.
While VULs are often marketed as investment vehicles, don’t forget that they remain an insurance product. If you’re the insured and you die a week after getting the policy, your beneficiary will receive the death benefit. It may be morbid but that kind of return on investment is unbeatable.
What you ought to be hoping for obviously is to live longer than that. A VUL provides death benefits based on the coverage or the market value of the underlying investment, whichever is higher. This gives the benefit of riding the market in order to further increase protection, without sacrificing the sum assured. Being an insurance product, the policy may also include riders—extra benefits in the form of hospitalization, critical care or illness benefits with an additional, usually minimal, increase in premium payments.
To sum, VULs provide the flexibility and liquidity of an investment, coupled with the protection of an insurance policy. Each prospective policyholder has unique needs and goals and must therefore match the product accordingly. It is strongly recommended that you visit an insurance agent to know the latest products and features. Or consult a professional, unbiased financial planner to assist you to plan for your financial needs as a whole.