As college savings, healthcare balances and/or retirement plans are becoming a critical piece in investing, the creation of another type of investing called Variable Unit Links (VULs) are becoming ubiquitous for every investor. Let us have a look.
Variable Unit Links or VULs may sound familiar to you. You might have been probably approached by a Financial Advisor and asked you to invest in it. The reality is, this is I think the most popular form of investment nowadays.
WHAT IS A VUL?
VULs are what insurance companies are selling. It is also called Variable Universal Life Insurance Contract. It is an investment vehicle that has 2-in-1 feature—life insurance and investment. Long before VUL was introduced, life insurance companies only sell premiums that has traditional death benefits.
But because someone who is insured will not totally enjoy his/her paid premium, insurance companies thought of selling one that focus more on the living benefits. This means that with VUL, it mainly gives you financial protection in case something unexpected happens but at the same time you’re having additional and protected income on the investment side.
Death benefits of VULs are guaranteed and the beneficiary can claim up to 500% of the annual premium for a regular pay and 125% if it is a single pay.
VUL investments are regulated by the Insurance Commission (IC) as stipulated in the Insurance Code.
HOW TO INVEST
The first thing you should do is to find a licensed variable life insurance agent or financial advisor registered in the Insurance Commission. They are just everywhere to be found because most financial advisors today are affiliated with life insurance companies. Applying for VUL is not applicable online so you better find an agent.
In your consultation, you should expect that your financial advisor will ask something about your goals and investment objectives. You have to be ready to answer them correctly and honestly because the result of your discussion will be the basis for making your financial quote. You also need to sign and fill-up at least three important forms since you will be applying for both insurance and investment. Other forms will be required depending on your status and as required by the company your FA is affiliated.
In terms of investing, it’s the same thing as pooled funds. You choose which investment area of the company would you like your money to be invested. If you do not know where and/or still confused, your advisor will base it in your risk profile assessment form and the area where your money will be placed depends on the result.
After filling up all the forms, you can now start paying your contributions on a regular basis. You can pay it monthly, quarterly, semi-annually, annually or just one-time pay. That will depend on you and your commitment to pay. In addition, your application will be processed and your investment will be exchanged for a policy contract. This will serve as an important document for your insurance and investment claim. Never lose this contract.
Since VUL features both life insurance and investment, you have to ask everything that you need to know to the FA. If something happens to you or your family and you/they will make a claim, the company will not just give it without a particular reason. Claiming for life insurance benefits has also its own exceptions and limitations. There are specific instances and circumstances when you or your family can make a claim or not.
As much as possible, you have to read something about life insurance and make a list of questions you want to ask before meeting your FA. If the FA cannot answer your questions, approach another one.
It’s also best to read your insurance fine print so you’ll be aware of everything about insurance. I am telling this just so you, your family, the company, and your FA will avoid conflicts in the future.
HOW WILL IT WORK
The investment side for VUL is the same as pooled funds. Each insurance company has their own fund managers who will professionally manage them. The basis of your investment is Net Asset Value Per Unit (NAVPU) and the buying and selling of units works exactly like mutual fund or UITF.
What sets VUL and pooled funds different is the added benefit of a life insurance. This makes VUL unique among other investments because it is a life insurance product with an investment component and not a pure investment instrument only.
On the first two years of your policy contract, don’t feel anxious if you see nothing or just little in your account. You have to make sure your FA should have explained to you that less than 10% of your premium will be invested in these years. That’s because you’re paying first the administrative charges of both insurance and investment, the reason why it is costly. Your investment capital starts to regain on the third year but you will be advised not to withdraw yet. You have to let your money grow over more years. VUL doesn’t work like a savings account in a bank where you can withdraw anytime you want.
VUL is like a forced savings account. The downside of this is if you missed paying your VUL, you run the risk of having your policy lapsed. A policy is considered lapsed when you missed paying your contribution beyond grace period after the deadline. Example, you have chosen a monthly frequency of your payment. Your deadline is March 2 but you failed to pay on that day, the company will be giving you a 30-day grace period for your missed payment. That means you should pay it on or before April 2 but if you missed paying again on that last day of your grace period, your policy will be lapsed and thus your policy is risked to cancellation or termination.
Moreover, if you have been consistently paying for many years and you suddenly missed paying, your units will be lessened and will be used to pay the monthly insurance charges. This consequence would depend on the insurance product you purchased but is very much applicable to limited-pay policies such as 5-year, 7-year or 10-year plans. For regular-pay policies or those products that you need to pay for more than 10 or 15 years, you can apply for the so-called “premium holidays.” This is when you’ve decided to stop paying for a while but without lessening of units, and then continue paying again when you want to. This condition is only applicable after you have reached the tenth year of your policy or may depend to the company you applied.
It is particularly heartbreaking if you’ve already put a lot of money in your plan yet if you stopped paying, you can get nothing. So it is important for you to finish paying your policy and never miss your deadlines to avoid penalty and cancellation.
However, you have to remember that once you finished paying your policy, you’ll reap the benefits and you’re entitled to a payout-- usually a large sum.
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