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Sun Life Training Course 2 (SLTC2):

Variable Universal Life (VUL)


1. The Concept of VUL
Given the volatility of the market and the desire for people to acquire passive
income, it had been important for insurance companies to meet these financial
needs in order to achieve lucrative prospects. Quite recently, Sun Life Financial
has released a new type of policy revolving around these financial needs, entitling
it as Variable Universal Life (VUL).

Financial Objectives:
> Educational and Health needs - medicine and tuition.

> Finer Things in Life - travel and other luxuries when you retire.

> Family Protection - assurance for family when you die that they will
be provided.

*In short, it is not enough to invest in banks due to low interest rates and low yields.
It would be better to invest in financial instruments/assets with higher potential
returns. VUL is the key to achieving these financial objectives.

Traditional vis-a-vis Non-Traditional


> Traditional: pre-determined premiums, cash values, and death
benefits that may come with or without dividends. The policy must be
participating to have dividends.
- Example: Whole Life Endowment and Term Insurance

> Non-Traditional: no pre-determined cash values. Cash values would


depend on amount of premiums payed, mortality charges, and expense
charges deducted plus investment results.
- Example: Universal Life and Variable Life
2. What is VUL?
V - Variable
> Policyowners themselves decide on amount and type of investment
where their money is placed depending on financial goals and risk
tolerance, unlike traditional life where insurer makes the decision.
Generally, there are 10 to 25 investment funds that policyowners can
choose from. Sun Life Financial offers 3 types of funds, namely:
- Bond Fund
- Equity Fund
- Balanced Fund
> There is guaranteed face amount when insured dies but this could
be increased depending on investment funds chosen. This could be
maximised by:
- Add more investments into policy.
- Change allocations of investments into the fund from time to
time.

U - Universal
> Refers to flexibility of VUL policy wherein, guaranteed cash values and
dividends of traditional policies are replaced with fund value that varies
depending on invested money and investment fund’s performance.

> Premium payments and death benefits are flexible; this would mean
policy owner could either pay higher or lower premium payments and
decide whether policy is insurance-based or investment-based.

> Non-payment of premiums beyond grace period does not equate to


a lapsed policy.
- As long as there is money in the fund, this will be enough to
cover insurance and administration costs.
- VUL provides more leverage to pay later.
- Flexibility: policyowners can withdraw from the fund anytime.

L - Life Insurance
>Addresses life insurance concerns
- Provide for family when policy owner dies.
- Covers death, sickness, and other related costs.
- Provide future need for money for living too long.
- Face amount will be payed in the event of death before maturity date.

In a sense, VUL can be explained formulaically as:

VUL = Insurance (Variable) + Savings (Universal) + Investment (Life Insurance



3. HOW VUL WORKS
> Premium or Regular Payments:
Policyowner pays premium either regular (annual) or single.
- Regular: Premiums are paid on regular basis, usually annually, but
it depends on client’s preference. They must keep paying in order to
enforce policy. People going for this are called “protection driven”
because death benefits are higher.
- Single: Premiums are substantially paid once. People going for this
are called “investment-driven” because they risk putting a lump-
sum to gain higher returns.

> Premium Charge (Initial Charge for single pay premiums or top-ups):
This is deducted from premium payment, percentage is deducted from
premium payment; take note this varies for each company, whether
regular or single. Both are still deducted, whatever the case.
Solely used to cover administering and operating expenses used by
company to maintain policy.

> Creating the Investment Fund


Remaining premium from premium charge is used to buy credits to create
the policy’s investment fund. The number of units depend on:
- Amount of remaining premium after premium charge
- Unit Price: price at which units are bought
Policy owner has 3 options of investment funds and these matter on his
risk tolerance:
- Bond
- Balanced
- Equity
> Growing the Investment Fund
After buying units and creating investment fund, the collective investment
funds are invested by company’s fund manager (this person is guided by
policyowner’s fund investment objective).

Case 1: Aggresive funds (equity fund) will be invested in stocks for


potential higher returns.

Case 2: Bond funds will be distributed across high quality fixed


income instruments to provide slow but steady potential returns.

> Insurance and Administration Charges


Revolves around the mortality Charge (Insurance Charge) which covers
protection cost for insured. This depends on the age, sex, smoking, and
other personal information as provided by the Insurance Commission.

It is quite similar to getting YRT (YEARLY RENEWABLE TERM) insurance


Policy Fee and Administrative Charge (Premium Charge and Monthly
Periodic Charge) which covers the maintenance of the VUL policy.

* VUL can hold as long as investment fund is sufficient to cover


these charges.
* It is possible to stop paying premiums (premium holiday or
cessation of premiums) though not highly encouraged, as
investment funds will deplete. Best that client buys top-ups or
continue with regular payments for policy.

> Investment Option


Switch Fund: You can transfer your investment from one fund to another.
Case 1: Transfer earnings from bond fund to equity fund.

Change Fund Allocation: Change how premiums paid are allocated into
the funds
Case 2: Transfer earning equally among bond and equity.

Withdraw: Pull out money from the fund (partial or full)


* Additional charges, cancellation of units included, may be incurred to
process each transaction.

> Redeeming Benefits


>If the insured lives: the policy can enjoy the living benefits. Maturity
benefits can also be incurred if insured outlives the policy, similar to
traditional whole life and endowment policies.

> In cases where policyowner needs money before maturity date:


they make fund withdrawals. This is because VUL can be savings.
*The condition is that there should be enough funds to pay for
administrative and insurance charges,
- Either full (policy will be terminated) or partial
- Done through cancellation of units (selling units)

> If insured dies: IC dictates a specified death benefit.


Single Premium variable life insurance (Single Pay)
125 % of initial premium paid; +
125 % of each subsequent top-up premium; -
125 % of partial withdraw
Annual Premium Variable Life Insurance (Regular Pay)
500 % current annual premium paid; +
125 % of each subsequent top-up premium; -
125 % of partial withdraw; and minimum death benefit should
not be affected by premium holiday.
* Even if policyowner quits paying, policy can remain in
force or client may cash out the value equal to fund
value of policy (depends on prevailing unit price at time
of withdrawal.)
4. VUL Policy Provisions
> Grace Period Provision
- Client is given 31 days, from premium date to pay his dues.
- Applicable for any subsequent premium after the first.
- Any unpaid premium may be deductible that may arise from 31 day
period.

> Incontestability Provision


- Policy will be incontestible after enforcement for a period of 2 years and
based on:
- The date of issue as shown in policy
- Date of approval of last reinstatement, except for non-payment of
premiums and violation of conditions of policy relating to
military/naval service in time of war.

> Exclusion for Suicide Provision


- Company will not be liable if the insured dies via suicide within 2 years of
effective date of last reinstatement of policy.
- If suicide was committed in state of insanity, it will be compensated
regardless when suicide was committed.
- If otherwise, liability of company will be limited to returns of premium.

> Cooling-Off period


- Policy owner will have cooling off period whereby VL insurance contract
may be returned within 15 days of receipt of policy by policy holder and
receive a refund equal to market value of units including initial charges.