MANILA, Philippines — Variable unit-linked insurance, more commonly known as VUL, is a popular insurance product thanks to its two-in-one nature, having both life insurance coverage as well as an investment component.
It’s a good choice for those who are looking to protect their loved ones from future financial burdens in the event of their demise, but with the added opportunity to invest a part of the premium they pay in the stock market as well.
If you are unsure if VULs are a good fit for you and your goals, having a good grasp of its pros and cons can help you manage your policy. To help you better understand how to maximize the potential of VULs, Anthony Garces, Chief Investment Officer of AXA Philippines, shares his insights on this product.
Understanding your policy and avoiding misconceptions
Garces stresses the importance of knowing and understanding the primary characteristics of a VUL product to know how your money is working for you and to avoid believing in common misconceptions as well. A good place to start is to understand which components support the insurance benefit and which ones are invested.
“The two-in-one nature of VULs is one of its biggest advantages since there is no need to buy two separate products to reap the benefits of each,” said Garces. “This allows you to protect yourself with insurance, while also helping you save for your future through the potential growth of your account values.”
For instance, the insurance component of VULs is supported by the premium charges, cost of insurance and administrative costs – these charges are normally deducted from the premiums paid to sustain the protection benefits of an insurance policy such as life coverage and other built-in protection benefits like accident cover and waiver of premium.
On the investment component, which is the remaining amount after the deduction of charges, the account value varies, depending on factors such as the local and global economy, monetary and fiscal policies, company earnings and many more. This means your VUL’s cash value is not guaranteed or fixed, unlike the insurance coverage amount.
As with all investments, there is always a risk involved and there is no guarantee of how well investments may fare. In some cases, market performance may lower the value of investments below the amount invested or, conversely, exceed expectations, giving you higher than expected returns.
“Knowing what’s invested and what’s not can help you avoid the misconception that all of the money you paid goes into the investment component. It also helps you understand that your invested amount is not always guaranteed so that there will be no unpleasant surprises when you decide to cash out,” said Garces.
“You can also consider whether a regular pay or single pay VUL is a better fit for you. In single-pay products, the minimum entry premium is much higher and most of the premium is allocated for the investment component. Regular pay products, on the other hand, have a lower and periodic premium payment scheme and strike the balance between your immediate life protection needs and long-term saving plan,” he added.
Making your VUL work for you and your goals
A positive side to VULs is the flexibility to customize your fund depending on your goal while still being protected by the insurance component.
“VULs offer the flexibility of having a product that grows and adjusts with you across the different stages of your life. Regardless of your goal – whether it be for income protection, health fund, retirement, children’s education, big purchases, business capital, etc. – this product can be customized to fit your changing financial capacity and investment horizon,” shared Garces.
If you’re looking to invest a certain amount within a relatively long period, around ten years or so, then a VUL is a good choice. Companies often provide customers with special bonuses to reward them for keeping their policies locked in the long-term, making it even more enticing to stick to your investment goals.
Knowing your worth – fund-wise
When making a withdrawal, the amount will be at market value, which can help you determine if your investment realized a loss or a gain. Keep in mind though that a partial withdrawal will also automatically reduce the insurance coverage.
However, a good thing about VULs is that certain components are tax-free, such as the death benefit. In case of the policyholder’s untimely demise, beneficiaries will be given the insured amount plus the account value of the policy free of tax, unlike UITFs or mutual funds which are subjected to Estate Tax.
When in doubt, ask an expert
A lot needs to be considered and understood when investing one’s hard-earned money, but doing so makes it easier to work towards our goals. Financial advisors can also help customers understand the different risks and unique benefits of VULs and will be more than willing to answer any questions you may have.
To consult with an AXA financial advisor, visit axa.com.ph/appointments.