As a Sun Life financial advisor, we are trained to only provide the most accurate information. Life insurance like the VUL is often one of the most confusing types of life insurance for many clients. Life insurance VUL also known as investment-linked life insurance policy and another simple yet clear description, it is a life insurance fuelled by investment.
As a life insurance, VUL can also be the best for your financial goals providing an insured with more living benefits for future financial goals and family challenges like education funding, retirement funding solutions, family milestones like buying new assets, properties, and many more.
Life insurance VUL works by blending the security of life insurance with the flexibility of investing. Here’s a step-by-step breakdown of how the typical VUL policy functions:
- Premium Payments: The policyholder pays premiums. A portion of each premium goes toward the cost of insurance (covering the death benefit), while the remainder is allocated to the cash value.
- Investment Options: Once the cash value starts accumulating, the policyholder can allocate it into different sub-accounts offered by the insurance company. These sub-accounts function similarly to mutual funds, and the policyholder can select various asset classes based on risk tolerance and investment goals.
- Market Performance: The performance of the selected sub-accounts directly impacts the growth of the cash value. If the investments perform well, the cash value grows. If the investments perform poorly, the cash value can decrease, potentially affecting the sustainability of the policy if it drops too low.
- Death Benefit: In the event of the policyholder’s death, the insurance company pays the death benefit to the beneficiaries. The death benefit can be either level (staying the same) or increase depending on the cash value growth or the specific terms of the policy.
- Accessing Cash Value: The policyholder has the option to access the cash value while still alive, either through withdrawals or loans. However, these actions may reduce the death benefit or result in additional costs.
- Policy Flexibility: One of the major advantages of VUL is its flexibility. Policyholders can adjust the premium payments, death benefits, and investment options over time as their financial situation and goals change. However, managing a VUL policy well requires attention to market performance, fees, and ensuring sufficient cash value to cover insurance costs.
Pros of Variable Universal Life Insurance
- Investment Growth Potential: VUL policies provide the opportunity for the cash value to grow through investments in the stock and bond markets. This potential growth can be higher than that offered by traditional whole-life insurance policies, which usually grow at a fixed rate.
- Flexible Premiums: VUL allows policyholders to adjust their premium payments, offering more flexibility compared to traditional life insurance. This can be especially beneficial in times of financial uncertainty or if the policyholder wants to increase payments to build cash value faster.
- Access to Cash Value: Policyholders can access their cash value (aka, fund value) through withdrawals, providing financial flexibility for emergencies, investment opportunities, or retirement planning.
So, this one is a valuable part of owning a life insurance VUL since the investment can take advantage of the compounding accumulative growth, and matching the right amount of excess premium / top-up premium to reach your target future fund value during the early years, is crucial in saving and building wealth.
- Potential for Increased Death Benefit: If the investments perform well, the death benefit can potentially increase over time, offering more protection to beneficiaries.
Cons of Variable Universal Life Insurance
- Investment Risk: While the investment component provides growth potential, it also exposes the policyholder to market risks. Poor investment performance can result in a reduction of the cash value and, in extreme cases, could lead to the policy lapsing.
- Difficulty: Life insurance VUL policies are more complicated than other types of life insurance. Variable Universal Life policies are better overseen by your trusted financial advisor to manage investments, understand fees, and adjust premiums and other active involvement as part of financial literacy.
- Higher Costs: VUL policies typically come with higher fees and expenses than simpler policies like term life insurance or traditional whole life insurance. These fees can include mortality charges, administration fees, and fees related to the investment options.
- Potential Loss of Cash Value: If the cash value falls too low due to poor investment performance or high fees, the policyholder may need to pay additional premiums to keep the policy active. In some cases, the policy could lapse, resulting in a loss of coverage.
Is VUL Insurance Right for You?
VUL insurance can be a suitable option for individuals seeking life insurance coverage while also wanting the potential for investment growth. However, it’s important to understand that VUL requires active management and a tolerance for market risk. Those who are not comfortable with the fluctuations of the stock market or who prefer guaranteed returns may find a different type of life insurance, such as whole life or universal life, more appropriate.
Additionally, VUL is generally better suited for those with a longer investment horizon and a need for permanent life insurance coverage. It can also be a useful tool for individuals with estate planning needs, as the death benefit can help provide liquidity for heirs while the cash value can serve as a source of additional income during retirement.
Conclusion
Variable Universal Life (VUL) insurance offers a unique combination of life insurance protection and investment opportunities. With its flexible premiums, cash value accumulation, and potential for market-driven growth, VUL can be a powerful financial tool. However, it requires careful consideration, active management, and an understanding of the risks involved. For the right individual, VUL can offer both protection and a pathway to long-term financial growth. However it’s essential to evaluate personal financial goals and risk tolerance before committing to this type of policy.
If you want to start a life insurance VUL policy that is right for you, please feel free to message me. Our application processes can be done online in the comfort of your home and anywhere in the Philippines.