Over the past weeks, there is a viral post that spread on social media pertaining to a product and a certain insurance company. From there, it appeared the client has been very much frustrated on the returns of his fund, which was not entirely in line with the projected returns as presented.
From here, there had been word wars and comments from each side, defending and even attacking. While they may come from personal experience, not all can be valid as the comments can come from wrong information or even misinterpretation. Therefore, a lot of factors come into play so we have to distinguish which ones should be given attention or not.
The product that has been the topic is VUL or Variable Universal Life (or Variable Unit-Linked), an insurance product that has an underlying investment instrument. Typically, the beneficiaries get the sum assured plus the market value of the underlying instrument; some gets the underlying investment’s market value or the death benefit, whichever is higher.
One advantage VULs offer is that the value of your insurance and benefits grow with the market over time—of course, depending on the underlying fund that you have chosen. But for the long-term, VULs are a good way to increase your insurance coverage and benefits without having to pay more as you age.
Another good thing about VULs is that should there be gains on the investment component, you can withdraw your earnings partially, subject to some maintaining value.
VUL is a very good product. Yet if VUL is such a good product, why was it thrown in a negative light?
The answer may be found in medicines: a medicine is good, but it is another question if the medicine you are taking is the right one and in the right dosage. Of course, if you have a headache, you need paracetamol or even ibuprofen—not loperamide—and at the right dosage. To drill down further, not all can even take Ibuprofen because some may be allergic to it, so giving it without any proper diagnosis would be harmful, if not fatal.
The trouble sometimes is that VULs are positioned as some sort of a panacea of financial goals: insurance, investment, retirement, education, even health. This may be true given certain factors, but returning to the medicine analogy, just imagine paracetamol being positioned as the cure for all headaches!
So the key really here is knowing the client in a very detailed manner: the goals, the amounts to be targeted, the needs, their risk appetite/tolerance and their buying capacity. So before getting one, what are the things that you need to know about VULs? Here’s a brief rundown:
1)Insurance coverage–Ask your financial advisor what will your beneficiaries get should something happen to you. Ask for the minimum amount they would get. This amount should cover for your: funeral expense, final hospitalization bills, estate tax (if ever), and the amount that your family would need to survive without your financial support. As life is unpredictable, do not have the projected benefits as a basis for your decision. Always get the insurance where the minimum sum assured is the total of the items aforementioned—the increase in value would just be icing on the cake.
2)Premium charge–In a VUL, not all of the money you pay is invested. A portion of it goes to paying your insurance, which is called the premium charge. Some premium charges could be 35 percent of what you pay, some 50 percent and some even 90 percent. So imagine, if you are paying 90 percent premium charge, then only 10 percent of what you have paid is being invested—imagine, if you paid P100,000, then only P10,000 is just invested! So with this, do not expect that what you have paid will grow as much had you invested it in full. Look also at the projection table being presented to you. Most especially at the first years, you would see that there is minimal growth on your money, if at all. So ask your financial advisor on how much the premium charge is so you can manage your expectations on your money’s growth.
3) Your buying capacity– As with all financial products, the premium you need to pay your VUL should fit your budget and not impair your other financial goals and priorities. One thing that most people and financial advisors miss out is the buying capacity of the client. If you need a huge amount of insurance coverage, then a term insurance would be best as it gives the highest coverage for the least cost (there are now term insurances that can be converted to ordinary life insurances so your money can still be maximized). One thing with VUL is that it offers a very low coverage; so any prudent financial advisor will prioritize your insurance coverage needs first and not the insurance product. So ask yourself if you can sustainably and happily pay the premium charges for the coming years without compromising your other needs and goals.
4) The underlying fund–Usually, VULs have projections on the fund value and they are just projections.
They are not guarantees, they are not commitments. They are projections. As such, they may or may not come true so your money may or may not grow. Markets may change and it can affect the value of your VUL. Your choice of fund also has an effect. Of course, the more conservative you are, the lesser your potential returns are. So ask your advisor on which fund you should go for by taking the risk assessment test. Talk to them at least one a year so you would know if your fund growth is still in line with the projections.
Rienzie P. Biolena is a registered financial planner of RFP Philippines. He’s also a chartered wealth advisor (CWA) and chief financial planner of WealthArki and Consultancy, a financial planning firm. Learn more about personal financial planning at the 78th RFP program in September 2019. To inquire, email firstname.lastname@example.org or text to 0917-9689774.