What happens to your Variable Universal Life policy if you don't pay your premiums or when premium payment stops?

9:47 AM


VUL policies can be quite confusing to understand and one of the questions mostly asked is what happens when a policy owner stops paying his premiums. To answer that question, let us first understand what happens when you pay premiums of your VUL plan. 

Every time you pay premiums, a portion or up to 100% of the premium is used to buy units of investments. From the units of investments that you own, insurance charges and policy fee are deducted.


So what happens if you don't pay?

The answer is simple. You DON'T BUY units anymore and from that units of investments left in your policy, the charges continue


Charges are paid through cancellation of units or the automatic selling of units whether you pay your premiums or not.

These charges are:

Insurance charge - to provide you the basic life cover.
Rider charge - to provide optional benefits attached to your policy.
Policy fee/monthly periodic charge - the cost of maintaining your policy.

Usually, charges are paid on a monthly basis, again, by automatic selling of units. So when premium payment stops, no buying of units happens, selling of units on a monthly basis continues.


EXAMPLE: To make it simple, let's just use "Insurance Charge" as the monthly charge.

Assuming after 2 years of payment, you were able to accumulate 20,000 units and current Unit Price is 2.00 pesos. Fund value is 20,000 units x 2 pesos per unit = PHP 40,000. 


Then you stopped paying your premiums. 

Let us assume that annual cost of insurance is PHP 1.50 per 1000 face amount and deducted by cancellation of units on a monthly basis.


Face amount: 1,000,000

Annual Insurance Charge = 1M face amount x Php 1.50 / 1000 face amount = 1,500
Monthly insurance charge = 1,500 / 12 = PHP 125

What happens to your VUL policy?

You have 20,000 units in your policy and the price is 2 pesos each. When the insurance charge falls due, units are cancelled in order to cover the charges.


Let's compute:

Number of units: 20,000
Monthly insurance charge: Php 125 pesos
Unit Price: 2.00
Units to be cancelled: PHP 125 / 2 pesos per unit = 62.5 units
Remaining units = 20,000 units - 62.5 units = 19,937.5 units
Fund Value = 19,937.5 units x 2 pesos per unit = PHP 39,875



Now let us assume that after a month, NAVPU grew by 2% and you still didn't pay your premium so no buying of units happened and insurance charge is due.

Number of units: 19,937.50
Monthly insurance charge: PHP 125
Unit Price: 2.04
Units to be cancelled = PHP 125 / PHP 2.04 per unit = 61.27 units.  

As you can see here, lesser number of units were cancelled when the Unit Price increased.

Remaining units = 19,937.50 - 61.27 = 19,876.23 Units
Fund value = 19,876.23 x 2.04 = PHP 40,547.50



Then let us assume that after a month the market did not perform well and Unit Price fell to 1.95 per unit and you still didn't pay your premium so no buying of units happened and insurance charge is due.

Number of units: 19,876.23
Monthly insurance charge: PHP 125
Unit Price: 1.95
Units to be cancelled = PHP 125 / PHP 1.95 per unit = 64.10 units. 

More units are cancelled since the price of units is lesser.

Remaining units = 19,876.23 - 64.10 = 19,812.13 Units
Fund value = 19,812.13 x 1.95 = PHP 38,633.65

This is a simple way to show how charges are deducted from your VUL policy. Please take note that different companies have different charges and different design of products. Some do include premium holiday charge if you fail to pay your premiums. Companies have different rates on insurance, riders, and policy fees as well.

Insurance charge also increases as the insured gets older since it is dependent on the mortality rate of the insured. So the older the insured is, the higher the insurance charge.The number of units to be cancelled also depends on the performance of the fund. The lower the Unit Price, more units will be cancelled, the higher the Unit Price, less units will be cancelled.


So when someone tells you that there will be no charges in your VUL policy after a certain period, then ask that person about insurance charge, rider charge, and policy fee. 

Take note that when the value of your units is not enough to cover the charges, your policy will terminate. In this case, the company will request you to resume payment of premiums to keep your policy in force.


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