For the savvy, VULs can be a financial tool
A recent article stated that the country’s insurance industry saw net income rise to PHP 28 billion in the first half of 2024. That’s up an impressive 24% from the same period last year.
But why? There are many factors. However, one thing that needs to be discussed is the increasing popularity of variable life insurance (VULs). You may have heard of VULs before but are unsure what exactly they are or if they are an option for you to consider. Let’s discuss the basics.
What is variable life insurance?
A VUL combines life insurance coverage with investment opportunities. It provides dual benefits: financial protection for your loved ones in the event of your untimely passing and a means to grow your wealth through investments.
This hybrid nature has contributed to its growing popularity, especially among Filipinos who prefer investing in something with tangible rewards.
How does a VUL work?
A VUL has an investment component, unlike other, more traditional insurance policies. This means that a portion of the premium goes toward life insurance coverage, while another part is invested in professionally managed funds, such as equity, bond, or balanced funds.
The value of your investment, also known as its cash value, fluctuates based on the performance of the underlying funds. This means the potential for returns is higher than that of fixed insurance products. However, it also comes with higher risks, as the cash value can decrease during market downturns.
Why is it so popular?
VULs combine the best of both worlds: Offering protection against the unexpected while providing investment opportunities.
Most VULs also allow policyholders to choose from various funds based on risk tolerance and financial goals. This means you have control over where and how your money is invested.
That said, VULs are not without their limitations. You must know precisely what you’re getting yourself into. While insurance providers differ, VUL policies are typically more expensive than traditional ones. This is to cover management fees for the investment component.
It is also wise to note that the greatest strength of a VUL may be its most significant disadvantage. Unlike guaranteed savings or insurance products, VULs carry risks. If the market performs poorly, your policy's cash value could decline, affecting the benefits available to you or your beneficiaries. This also makes variable life insurance policies more complicated to understand, particularly for those new to insurance or investing. It’s crucial to fully grasp how the product works before committing to it.
What should you look for when comparing VUL providers?
When talking to certified financial provider for a specific insurance company and reviewing their particular products, it is wise to consider the following:
- Reputation of their company: Choose an insurance company with a strong reputation and financial stability. This ensures they can fulfill their obligations, including paying out claims.
- Fund options: Check the variety of investment funds available. A good VUL policy should offer diverse options catering to different risk profiles.
- Charges: Understand the policy's cost structure. Look for fees, as these can significantly impact your investment returns over time.
- Flexibility and features: Evaluate the policy’s flexibility regarding premium payments, coverage adjustments, and investment switches.
- Transparency: A trustworthy provider should clearly explain the policy’s terms, fees, and risks. Avoid insurers that are vague about the potential downsides of the product.
- Commitment: Look for insurance providers known to stay committed to you – even after you get their products. Some providers may check all the above boxes but have financial advisors who leave you to fend for yourself once you’ve received your policy.
Should you get variable life insurance?
Variable life insurance can be a valuable financial tool, but it’s not for everyone. Its appeal lies in its dual purpose of providing insurance coverage and investment growth, but its risks and costs require careful consideration.
When evaluating whether a VUL policy is right for you, take the time to assess your financial goals, risk tolerance, and insurance needs. Most importantly, don’t hesitate to seek advice from a licensed financial advisor who can provide personalized guidance based on your unique situation.
We talk about this more in our free Earnest e-book.
Disclaimer: This article is for general information purposes and does not constitute formal financial advice. Always do further research before making financial decisions and seek professional advice from a certified personal finance counselor. For more information, read the Earnest disclaimer here.
