Six years ago, when my client Rod finished his maritime training, he looked forward to having a bright future as a seafarer. While only 21 at that time, his earning potential was enormous for his age, but he also knew the risks involved. Thus, he looked for something to help secure his earning potential for his and his family’s future. In 2008, Rod took out a Variable Universal Life (VUL) insurance plan to address his needs.
Six years later, his savings from the VUL policy saved his home from foreclosure. According to Rod, “(I)t was the best investment I ever made.”
VUL has become the most popular insurance plan in the past decade. In simple terms, VUL is a financial product that offers the best of both worlds - guaranteed insurance benefit and fund accumulation. Since the policy is linked to different asset classes such as stocks and bonds, VUL presents earning potential that may not be offered in a traditional policy.
If you’re considering a VUL plan to beef up your portfolio, these features of the VUL may convince you:
1) Flexible premiums
With a VUL plan, a policyholder has the option of putting in more than the regular premium. Any amount in excess of the regular premium becomes additional investment or top-up. In effect, the fund value accumulates faster for the policyholder. This is great for those who are looking for investment options for their bonuses or windfalls.
On the flip side, in the event of unforeseen financial catastrophe, a VUL plan allows the policyholder to paying the charges only, thereby keeping the policy in-force. Furthermore, as long as there is enough fund value to cover the charges, a VUL policy will not lapse.
2) Potential higher returns
Since the underlying assets are linked to stocks and bonds, the returns of the VUL plan –may exceed that of other types of insurance policies. Since its inception 10 years ago, the average returns for an equity and bond fund are 16.6% and 7.8% respectively* according to the Historical Investment Performance of Investment Funds of Sun Life's Variable Life Insurance Products. In contrast, dividends and accumulation rate are now down to just four percent. And with present economic conditions, all signs point to even lower rates in the future.
Although a VUL plan entails higher risk, the higher returns allows the policyholder to realize his goals faster. Or better yet, achieve a bigger fund than he initially set out for.
Just like Rod, a VUL policyholder can access the fund value in case of financial need. Unlike in traditional policies, this is treated as a withdrawal rather than a loan. Thus, the amount withdrawn does not incur any interest. Better yet, the amount withdrawn is not deducted from the face amount. However, it is highly encouraged that whatever amount was withdrawn be reinvested again so that the policyholder remains on track with his financial goals.
All told, VULs have helped Filipinos become savers and investors. Now, our financial dreams become much easier to achieve with the help of the VUL plan.
*Returns are not guaranteed. Past performances do not reflect future returns.
Image used under Creative Commons from Alexander Stein