You have at least P500,000.00 in your bank deposit account and are planning to invest it in an investment that would help you make your money work for you. You were brought to several options, and you have ended up choosing between a Single Premium VUL, a Mutual Fund, or a UITF.
Now, you’re confused.
First off, the listed options are all pooled funds managed by professionals called fund managers. In investing in either of the three, you will be asked whether you’ll want to invest your money in an Equity Fund, a Bond Fund, or a Balanced Fund.
They are the same in almost all aspects. Their difference lies on the structural aspect. Single Premium VULs are offered by insurance companies, thus, are regulated by the Insurance Commission (IC).
Unit Investment Trust Fund, popularly referred to as UITF, are offered by banks and managed by their trust department. The regulatory body is the Bangko Sentral ng Pilipinas (BSP).
Mutual Funds, on the other hand, are managed by Investment Companies and are regulated by the Securities and Exchange Commission (SEC).
I know, stating those differences doesn’t bring up any clarity in your decision making. Now, let’s talk about benefits.
BENEFITS OF INVESTING IN SINGLE PREMIUM VULS OVER MUTUAL FUNDS AND UITF.
The truth is, there’s really not much difference between a mutual fund and UITF in terms of benefit. For discussion purposes we’ll just compare Mutual Funds and Single Premium VULs.
Allow me to use Sun Life’s Maxilink One as a sample for Single Premium VUL, and Sun Life’s Prosperity Fund for Mutual Fund.
Here’s the situation. You have P500,000.00 to invest in a 10 year time frame. You are inclined to investing in an Equity Fund, you’re just not quite sure whether to choose a Mutual Fund (or UITF) or a Single Premium VUL.
Now, you decided to look at the numbers.
Let’s assume that in both funds, the average annual rate of return is 10%. Both funds, Mutual Fund and Single Premium VUL, uses a backend fee system of 5%, diminishing by 1% yearly (If investment is redeemed in the first year, charge is 5%, if on second year, 4%, and so on and so forth. Redemption of investment after the 5th year no longer have a redemption charge.)
INVESTING IN MUTUAL FUNDS
Projected fund value of the mutual fund investment after 10 years is P1,296,871. Mutual Funds are very flexible that you can withdraw your investment anytime without being bounded by holding period. However, there are sanctions for early redemption.
INVESTING IN SINGLE PREMIUM VUL
At year 10, the projected Fund Value for a Single Premium VUL is P1,289,986.00. The difference of P6,885.23 to the fund value of Mutual Fund is attributable to the insurance charges for the Single Premium VUL. Investment benefits are identical for Mutual Funds and Single Premium VUL.
Looking at the projected 10 year fund value, you might be concluding that it’s best to invest in mutual funds because it’s higher than Single Premium VUL by P6,885.23.
BENEFITS OF A SINGLE PREMIUM VUL OVER MUTUAL FUNDS, UITF, BANK DEPOSITS, AND REAL ESTATE INVESTMENTS
It is an insurance product. Thus, the minuscule difference of P6,885.23 is really very immaterial compared to the benefits it could provide to the investor (or beneficiaries of investors).
I. Minimum Death Benefit. The death benefit for a Single Premium VUL is then higher of 125% of Single Premium or the Fund Value. In our illustration, it is the higher of P625,000 (P500,000 x 125%) or the current Fund Value of the investment.
This means that in the event a policyholder (investor of a Single Premium VUL) dies while the fund value of his investment is lower than P625,000, his beneficiaries will still receive the minimum death benefit of P625,000.
Say the fund value of the invested P500,000 at the time of death is P400,000 (market declined significantly), the beneficiaries will still be receiving the GUARANTEED minimum death benefit of P625,000 (as long as no withdrawal was made in the fund).
Or lets say the fund value at the time of death is P800,000 (market rises significantly), the beneficiaries will be receiving P800,000, which is higher compared to the minimum death benefit.
In case of a Mutual Fund or UITF, the people left behind will receive only the fund value, regardless if it is higher or lower the the amount invested.
II. Liquidity upon death. While all other assets (investments including Mutual Funds, Stocks, Cash Deposits, and Real Estate) will be frozen by BIR until the appropriate taxes are paid, investment in a Single Premium VUL are readily available to your loved ones. The reason behind this is that Single Premium VUL is still an insurance product.
If you have defined an irrevocable beneficiary, your investment becomes tax exempt (tax-free).
THE BOTTOM LINE AND FINAL RECOMMENDATION
On a more holistic financial planning perspective, I am recommending a Single Premium VUL over investing in Mutual Funds and UITF. It is a great tool to use in planning your Estate while having the ability to enjoy your investments while the investor is still alive, contrary to other insurance products wherein the benefit focuses upon death, including a Regular Pay VUL in it’s infancy years.
The only barrier to entry in using a Single Pay VUL is its price point – you’ll be needing a much higher initial investment compared to a Mutual Fund wherein you could start with just P5,000.
Here is my recommendation. If you have the funds and are thinking to invest in a managed fund, then go for a Single Premium VUL. Period. (Well, unless you are already FULLY INSURED)
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- Managing Partner at Princeton Business Initiative
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