Life Insurance Component

At its core, every VUL policy guarantees a death benefit. This means that if the policyholder passes away, the beneficiaries will receive a predetermined sum of money. The amount usually depends on the premiums paid, the chosen coverage, and the fund value.

Scenario: Carlos' Family Protection

Carlos, a father of two, decides to purchase a VUL policy to ensure his family's financial security should anything happen to him. He chooses a policy with a death benefit of PHP 2 million.

Unfortunately, Carlos met with an accident and passed away two years after buying the policy. His beneficiaries, which are his wife and two children, receive the guaranteed death benefit of PHP 2 million. This amount can help cover immediate expenses, such as funeral costs, and can also support his family's living expenses in his absence.

Key Takeaway: The life insurance component of a VUL provides a safety net. Regardless of the investment component's performance, beneficiaries are guaranteed to receive the predetermined death benefit.

Investment Component

The unique feature of VUL is its investment portion. A part of the premium goes into investment funds chosen by the policyholder. These funds can be conservative (like bond funds) or more aggressive (like equity funds), giving the policyholder an opportunity for capital appreciation.

Scenario 1: Liza's Conservative Approach

Liza is nearing retirement and wants a place to park some of her savings where it can grow, but she doesn't want to take on too much risk. When she purchases a VUL policy, she allocates 70% of the investment component to bond funds (which are typically more stable) and 30% to a balanced fund that contains both stocks and bonds.

Over the years, Liza's conservative approach has provided her with steady growth. The bond funds offer regular interest payouts, and the balanced fund, while fluctuating with the market, doesn't see extreme volatility.

Scenario 2: Paolo's Aggressive Strategy

Paolo, a young professional in his late 20s, wants to capitalize on the potential of the stock market. He opts for a VUL policy and decides to invest 80% of the investment component in equity funds, which primarily invest in stocks, and 20% in a balanced fund.

Initially, Paolo saw significant growth in his fund value due to a bullish stock market. However, a few years later, a market downturn reduced his fund value. But given his long-term perspective and the cyclical nature of markets, Paolo remains optimistic that the market will rebound and his funds will recover and potentially grow further.

Key Takeaway: The investment component of VUL allows policyholders to tailor their investments based on their risk appetite and financial goals. Whether conservative or aggressive, there's potential for capital appreciation, but it's crucial to remember that investments can go up and down based on market conditions.

Flexibility

You can adjust the premium amount, switch funds, or withdraw part of your investment.

Liquidity

Allows partial withdrawals from the accumulated fund value, subject to charges.

Growth Potential

The investment component offers potential earnings based on market performance.

Lifetime Coverage

As long as premiums are paid, the life insurance coverage continues.

Premium Payments and Allocation:

VUL products are flexible in terms of premium payments. Policyholders can often:

• Top-up
  
  Pay more than the regular premium to boost the investment component.
  
• Skip Payments
  
  Some VULs allow you to miss payments without lapsing the policy, as long as the fund value can cover the charges.
  
• Adjust Premiums
  
  Depending on the policy, you might be able to adjust your premiums over time.
  
• Protection
  
  Provides financial security for beneficiaries upon the policyholder's demise.
  
• Savings
  
  Encourages disciplined saving through regular premium payments.
  
• Investment Opportunities
  
  Exposure to various investment instruments that can grow your money.
  
• Tax Advantages
  
  Earnings from the investment component are typically tax-free until withdrawal.

  In the Philippines, VUL products have favorable tax treatment. The death benefits are usually tax-free for the beneficiaries. Furthermore, earnings from the investment component aren't taxed until withdrawal, and even then, they might qualify for preferential rates.

Switch Funds

If you're not satisfied with the performance of one fund, you can transfer your money to another fund within the same insurance company, often without fees (up to a certain number of switches per year).

Diversify

Spread the investment across different funds to manage risks.

Risks and Returns

While VUL products offer potential returns, they're also subject to market risks. The value of the investment component can go up or down based on market performance. It's crucial to align the chosen funds with your risk tolerance.

Determine your financial goals

Are you aiming for long-term growth, capital preservation, or a mix of both?

Assess your risk tolerance

Are you conservative, aggressive, or somewhere in between?

Consult with a financial advisor

They can guide you in selecting the most suitable VUL product for your needs.

• Sun Life of Canada (Philippines), Inc.
• Philippine Axa Life Insurance Corporation
• BPI-Philam Life Assurance Corporation
• Manulife Philippines

Understanding the charges is essential as they can impact the returns. Common charges include:

• • Premium Allocation Charge: Deducted from each premium payment.
  • Policy Administration Fee: Monthly charge for policy maintenance.
  • Management Fee: For managing the investment funds.
  • Surrender Charge: If you withdraw a portion or all of your investment before a specified period.
  • Mortality Charge: For the life insurance coverage.

Premium Allocation Charge:

Description: This is a fee deducted from each premium payment when it's made. It covers initial costs that the insurance company incurs, such as underwriting, commission to agents, and other administrative expenses.

Example: Let's say you pay a premium of PHP 10,000, and the premium allocation charge is 5%. The insurance company will deduct PHP 500 (5% of 10,000) from your premium. The remaining PHP 9,500 will then be split between the insurance and investment components of your VUL policy.

Policy Administration Fee:

Description: This fee covers the ongoing expenses related to the maintenance and administration of the policy. This can include record-keeping, customer service, periodic statements, and other administrative tasks.

Example: If the policy administration fee is PHP 50 per month, over a year, you'd be paying PHP 600 for the maintenance of your VUL policy.

Management Fee:

Description: This fee is charged for managing the investment funds associated with the VUL. It goes towards compensating the fund managers, research, transactions, and other related costs of managing the investment portfolio.

Example: If you have PHP 100,000 invested in a fund with a 1.5% annual management fee, you'll pay PHP 1,500 over the year for the management of that fund.

Surrender Charge:

Description: If you decide to withdraw a portion or all of your investment from the VUL policy before a certain period (often specified in the policy terms), a surrender charge is applied. This fee compensates the insurance company for early termination costs.

Example: Suppose you have a fund value of PHP 200,000 and decide to withdraw PHP 50,000 in the third year. If the policy has a 10% surrender charge for withdrawals in the third year, you'll incur a charge of PHP 5,000 (10% of 50,000) on that withdrawal.

Mortality Charge:

Description: This charge compensates the insurance company for the life insurance risk they take on. It's based on the probability of the policyholder passing away while the policy is active. The charge varies depending on factors like age, health, and the amount of life insurance coverage.

Example: If the annual mortality charge for a PHP 1 million coverage for someone of your age and health profile is PHP 2,000, this amount will be deducted annually from the fund value or premiums to cover the life insurance risk.

Scenario: Jane's VUL Policy

Understanding these charges is essential for any potential VUL policyholder. They can significantly impact the policy's net value and returns. It's always advisable to read the policy terms thoroughly and discuss these charges with a financial advisor to ensure clarity and make informed decisions.

Performance

Check the historical performance of the investment funds.

• Scenario: Mark's Fund Choices

  
  Mark is considering two VUL products. Fund A has shown consistent returns of 5-6% annually for the past five years. Fund B, more aggressive, had returns ranging from 2% to 12% in the same period.

  Mark, being risk-averse, might prefer the consistency of Fund A, even if it has a slightly lower return. However, a risk-taker might be drawn to Fund B, hoping to capitalize on years it performs exceptionally well.

  Key Takeaway: Past performance doesn't guarantee future results, but it provides a glimpse into the fund's management and how it reacts to market conditions.

Guarantees

While VUL offers the potential for growth, returns are not guaranteed.

• Scenario: Luis' Expectations

  
  Luis hears about VUL from a friend who enjoyed a 10% return on his investment the previous year. Enthusiastic, Luis expects the same return. He invests in a similar fund, but due to market downturns, his fund only grows by 2% that year.

  Luis learns the hard way that returns in VUL are non-guaranteed. They depend on market performance, and while there's potential for growth, there's also the risk of earning less than expected or even losing capital.

  Key Takeaway: Always approach VUL with realistic expectations. It's essential to understand that while there's potential for attractive returns, the investment component's value can fluctuate based on market conditions.