If you have a Variable Universal Life (VUL) plan that you got years ago and the policy is still active or in force, congratulations!
You are currently insured and have some sort of financial protection in case of the unexpected.
After all, that is the purpose of your VUL plan: to protect you and what matters most to you when life risks like death, disability, or dread diseases happen, with bonus unit-linked investments with potential fund growth.
As a quick review, in case your financial advisor has not disclosed or explained it, here is one important thing you need to know about VUL: Part of your premiums, or the payments you make with your life insurance policy, is placed in unit-linked investments and another part goes to the cost of insurance which keeps your coverage active.
What This Means
Given above important description, this means that not the entire premium you pay is placed directly into the unit-linked investments. Hence, the investment or fund value may fall short versus the total premiums paid.
Example: You pay 50,000 annually on a given VUL plan with a 2,000,000 coverage, and have paid for 10 years already. That means you already paid for a total of 500,000 worth of premiums, and yet your fund value is only around 350,000.
From an investment perspective, this is already a loss on your part. But from an insurance perspective, granted you have 2,000,000 worth of coverage and has a fund value worth 350,000, it is still a win for you.
Worth noting that several factors including performance of the pool of funds chosen, insurance cost, and age of insured have an impact on the fund value.
Let’s discuss these factors thoroughly.
Pool of Funds Chosen
Before you get or sign up for a VUL, you must have taken what is called a risk assessment as an investor. This forms part of the evaluation process in which your financial advisor will choose a specific pool of funds for you depending on the result of the risk assessment.
You will either be categorized as a conservative investor, a moderate investor, or aggressive investor.
- A conservative investor’s risk tolerance is very low, prioritizing safety over growth.
- A moderate investor’s risk tolerance is balanced, willing to take on some risk for higher returns.
- An aggressive investor’s risk tolerance is high, comfortable with volatility in exchange for higher potential gains.
Check your current VUL’s fund and ask what the current composition of the funds is. If the funds have more bonds and fixed-income securities, it is on the conservative side. If the funds have more equities in them, it is on the moderate to aggressive side depending on the percentage share.
In the context of fund performance, of course conservative funds tend to get lower returns versus aggressive funds which might be influencing your current account value. Fund performance is proportional to the pool of funds chosen depending on the risks you could tolerate.
Just in case you want to transfer your funds to another pool or have evolved from one type of investor to another, good news is that your life insurance company provides options for fund switching, subject to applicable fees and charges.
Insurance Cost
In case you missed it: life insurance isn’t free! It comes with a cost, and you pay for it as well in your VUL.
This should not come as a surprise to you unless the VUL was positioned specifically by your financial advisor as an investment rather than a life insurance plan with investments. It is worth highlighting that VUL is first a life insurance policy, not a mere investment.
Other than the coverage itself, insurance costs include administrative fees and fund management charges. These should be explicitly included in your policy contract.
Your coverage amount would greatly matter as well. Those with a 1,000,000 coverage have higher insurance cost versus those with a 500,000 coverage. Much higher if you have 2,000,000.
Additionally, if there are several living benefits like lump amounts in case of critical illness and disability, among others in your VUL, you also pay extra for that further decreasing the allocation from your premiums to your fund value.
Furthermore, and perhaps often undisclosed about VULs, is that despite you finish paying for a limited-pay VUL, say 10 years, you still get charged afterwards for the insurance cost through deduction of units in your fund value. This potentially depletes your fund value eventually especially when the fund performance could not catch up to these charges.
Age of the Insured
You know what they say about life insurance: get it while you are young.
That’s because older people tend to have higher risks, therefore higher insurance costs.
Meaning, in VULs, you get charged higher as you age. If you are 50, your insurance costs are not the same with someone who is 30. And as mentioned above that the insurance costs continue after paying the contract’s specific number of paying years, make sure to keep your fund value in check and pay top-ups as needed.
Top-ups may be made to augment collected premium payments. They serve as extra contributions which go straight to your unit-linked investments, boosting your fund value’s growth over the long term.
If you want an in-depth discussion about your current VULs or other life insurance policies or ask for advise on what to do with your existing VULs, schedule a consultation with me here. Learn more about my portfolio and services.
Disclaimer: This article/content is AI-assisted for clarity and coherence.
