Single Pay VUL (SPVUL) - A tool for Wealth appreciation and wealth protection.

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We continue to look for opportunities on how to make our money grow and with lots of investment instruments available out there, it is confusing to know which one to choose. In order to help us decide, it is important for us to understand how a particular product works. One of the products that is becoming a popular choice when it comes to making our money grow is Single-Pay VUL. This post will help us understand how it really works and what benefits can we get from having a Single-Pay VUL.

What is Single-Pay VUL (SPVUL)?
SPVUL is a life insurance product that provides living and death benefits. From its name, the premium required to have this type of plan is only paid once and majority of it is invested. It provides protection and at the same time, your money has the potential for growth that you can use in order to achieve your future financial goals.

Single-pay VULs are invested in pooled funds managed by professionals.

What are the different investment funds that you can choose from?

Equity Fund - Is a fund that aims for capital appreciation over the medium to long period of time by investing primarily on exchange-listed shares of stocks.

Bond Fund  - Bond is an instrument of indebtedness. When you are investing in a bond fund, you are investing in a diversified pool of long-term debt securities issued by the government or corporations.

Money Market Fund - Just like Bond Fund, money market fund is also invested in debt securities. However, the debt securities that money market fund is invested in are short-term debt securities such as treasury bills and may also include short term placements such as deposit placements. This fund seeks to provide a stable return.

Balanced Fund - This fund is a combination of Equity and Bond fund. Depending on the strategy of the fund manager, balanced fund can be dynamic with tilting from equity to bond fund or fixed combination.

HotForex Analysis Benefits of Single-Pay VUL
Since SPVUL is not a pure investment product, it has benefits that other instruments don't. These benefits include:
  • Death Benefit - The minimum death benefit of a single-pay VUL is equivalent to 125% of the one-time premium paid. However, when the value of the investment is higher than 125% of the single-premium, the death benefit will then be equivalent to the fund value. Investment returns are not guaranteed and sometimes you will experience volatility that will result to a negative return. The minimum death benefit ensures that your beneficiaries will get higher than the money you have placed regardless of the market condition.
  • Optional Benefits - To provide you with a comprehensive protection, you may opt to increase coverage by adding optional benefits called riders. Depending on the design of the plan, riders may include Total and Permanent Disability benefit, Additional Death Coverage, Personal Accident Benefits, etc.
Unlike a pure investment, SPVUL works differently. Since there are benefits not found in other investment vehicles, there are some charges in SPVUL not found in other instruments. Let us enumerate the charges in a Single-pay VUL.
  • Initial Charge - This is also known as premium charge. This charge is used to cover expenses of issuing a policy. This charge is deducted from your Single-Premium paid before the rest is being invested. Premium charge ranges from 0% to 7% depending on the design of the plan.
  • Policy Fee - Policy fee is used to cover administrative expenses of your insurance plan. Some products are designed without a policy.
  • Insurance Charge - This charge is used to provide you the minimum death benefit. The rate varies depending on the age of the insured. The insurance charge decreases as the value of the investment increases. When the fund value is higher than 125% of the singe-premium, the will no longer be an insurance charge deducted from your funds.
  • Rider Charge - If you opt to add riders in your plan, this charge is used to cover those benefits. Similar to insurance charge, the rate varies depending on the age of the insured. However, as long as the rider is in force, the rider charge continues.
  • Extra Charge - Insurance is a business of taking risks out of people's lives. Substandard ratings means that an insured poses higher risks than other people. This charge is used to cover increased mortality or morbidity ratings.
  • Annual Management Fee - This is the cost of managing the investment portion of the plan. This charge is already imputed in the unit price also known as Net Asset Value per Unit (NAVPU).
Initial charge is deducted from the premium while policy fee, insurance charge, rider charge, and extra charge are paid on a monthly basis by automatic selling of units equivalent to the amount of charges.

When you pay the premium in a Single-Pay VUL, the Premium Charge will be deducted and the remaining portion of the premium will be used to buy units of the investment fund you chose.

Let us say you decide to invest PHP 1,000,000 in a Single-Pay VUL. Minimum death benefit will be PHP 1,250,000.  The PHP 250,000 is the amount at risk being taken by the insurance company.

Assuming the initial charge is 0.5%. This means that PHP 5,000 will be deducted from your single premium and PHP 995,000 will be used to buy units of investments.

If the price per unit is 2 pesos when the policy was taken, PHP 995,000 / PHP 2 per unit will result to 497,500 units.

From that available units, the charges will be deducted by automatic selling of units. Let us assume that the charge is only insurance charge. The amount at risk is 250,000 and the cost of insurance is PHP 1.50 per 1000 coverage.

       Insurance Charge  = 250,000 coverage x PHP 1.50 per 1000 coverage

                                        = PHP 375 a year

Take note that insurance charge is deducted on a monthly basis so we will divide it by 12.

        Insurance Charge = PHP 375 / 12
        Insurance Charge = PHP 31.25

This means that PHP 31.25 must be paid in order to cover the amount of coverage provided in the plan. This will be paid by automatic selling of units.

How many units will be deducted?

PHP 31.25 / PHP 2 per unit = 15.625 units will be deducted in order to cover the insurance charge.

Remaining Units = 497,500 units - 15.625 units
                             = 497,484.375 units

To get the Fund Value of your plan, you multiply the remaining units by the price per unit.
Fund Value = 497,484.375 units x PHP 2 per unit
                    = PHP 994,968.75 is the value of your investment at the beginning of the plan.

Now let us assume that after a month, Unit Price grew by 2%. So from PHP 2.00 per unit, it became PHP 2.04

Fund Value = 497,484.375 units x PHP 2.04 per unit

                    = PHP 1,014,868.125

Automatic selling of units will be based on the unit price the monthly charge falls due.

The future value of your plan depends on the actual performance of your chosen investment fund and is not guaranteed. 
When the fund value reaches 125% of the single-premium paid or is higher than that, there will no longer be an insurance charge deducted from the fund since there's no longer an amount at risk on the part of the insurer. Comparing the potential of capital growth to other pooled funds such as mutual fund or unit investment trust fund (UITF), SPVUL can be as competitive as the others even with the insurance benefits that it provides.

What can you do to your Single-pay VUL policy?

Add/Remove Optional Benefit - Depending on the design of a single-pay VUL, you may add riders to your existing plan or remove optional benefit attached to it. You can also increase or decrease the amount of the optional benefit of your plan.

Fund Switch - Depending on your investment strategy, you can switch from one fund to another. You can also have different funds in one plan.

Top-up - Should you wish to add to your investment, you may do so by making an additional payments called top-ups.

Partial or Full withdrawal - SPVULs may or may not have withdrawal charges depending on the design of the plan.

HotForex Pamm V2
SPVUL in different areas of Estate Planning

Estate Creation/Accumulation – This is the stage wherein you are building your wealth by acquiring assets such as real properties, paper assets, and other assets with monetary value. SPVUL provides potential growth of our money for waelth building and can be your option for wealth accumulation.

Conservation – Preservation and protection of a person's wealth. With its fund switch feature, you can strategize with your investment and switch from an aggressive fund to a conservative fund in order to preserve your earnings and lessen exposure to volatility.

Unlike other types of investments, SPVUL provides liquidity upon death. Since it is an insurance product, proceeds are immediately available upon death of the insured whether the designation of beneficiaries is revocable or irrevocable. Other assets such as bank deposits, UITF, and MF remain unaccessible unless necessary certification from BIR has been issued and taxes are paid.

When the designation of beneficiaries is irrevocable, insurance proceeds will not form part of the insured's gross estate and will not be subject to estate tax. Hence, you conserve your wealth.

With the minimum death benefit of 125% of the premium paid, you are assured that your beneficiaries will get more than what you have invested regardless of the current performance of the investment fund as long as the policy is in force. 

Distribution – A stage of a person’s life wherein the goal is the disposition of his/her wealth for the enjoyment of his/her heirs with least possible cost. An insurance plan is one of the easiest ways to distribute wealth to our heirs. By designating qualified beneficiaries, the proceeds will directly be given to them upon death of the insured and will not undergo probate since insurance proceeds shall be applied exclusively for the beneficiaries written in the policy.

Our investment goals may change depending on our life circumstances and mere capital appreciation may not be the only thing we are looking in a plan. With all the benefits that a Single-Pay VUL that can provide as well as its competitiveness in growth compared to other pooled funds, then this may be your product of choice.
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