What is Variable Universal Life Insurance?
Variable Universal Life Insurance (VUL), similarly to ULI, is an investment-linked insurance structure providing both protection and investment/cash value. These policies typically carry high levels of death benefit and are generally used to cover significant liabilities or to provide substantial inheritance gifts to your loved ones.
Investment returns are based on the underlying assets invested into the policy. These can be managed by an appointed professional, alternatively the policyholder themselves can opt to manage the investments. Unlike ULI, the VUL product can hold a wide array of assets within the policy and the investment returns are not produced by the insurer – this also means that guaranteed returns available through some ULI products are not available within the VUL structure.
How does VUL work?
Investment control works similarly to the PPLI structure, where the policy owner can contribute premiums either in cash or by way of asset-transfer. This means that the policy owner has control over the rate of return provided and is able to fund the insurance using existing assets, reducing the potential cash outlay at inception. In short, VUL is an excellent high-death benefit tool for asset-rich, cash-poor individuals and companies.
VUL is a product that is available in Singapore, Hong Kong and throughout Asia and has been bucking the trend of ULI and bank-led premium financing since 2014. By allowing the policy owner to appoint an investment manager, clients can experience the same investment control that they have with the existing investment managers whilst securing a high death benefit for the purpose of protection or estate equalisation.
VUL contracts often pay high levels of commissions to the insurance brokers, typically capped at 11% with some providers enabling a reduction of this commission to reduce on-going product charges. It comes with flexibility to structure the death benefit to be increased or decreased with the former typically requiring additional underwriting.
On death, VUL works similarly to other insurance contracts by paying out a lump-sum of cash to the beneficiaries.
What are the Advantages of VUL?
There are a few primary benefits to utilising a Universal Life structure:
• Secure high death benefits
• Ability to withdraw cash value
• Investment control
• Differing death benefit calculations
The ability to secure high death benefits and withdrawal of cash values are similar to the ULI products, which we discussed in the previous article.
Investment Control:
As referenced in the ULI article, there are both advantages and disadvantages to insurers controlling the investment returns on insurance products. Outside of the guaranteed contracts available within ULI structures, insurer controlled investments tend to produce low returns, with high allocations to fixed income assets – perhaps not the desired exposure for many clients in a rising interest-rate environment.
VUL allows clients to either self-trade or appoint a licensed investment professional to manage the investments within the policy, ensuring that risk tolerance is in line with the client’s profile. As mentioned above, this could come in the form of transferring an existing investment portfolio which enables clients to have the comfort of understanding how the investments are managed and likely to perform over the longer-term. Many VUL providers also allow the option for the policy applicant to determine on which platform the investments are managed, further giving choice and flexibility to clients.
Different Death Benefits:
VUL generally provides two options for securing life cover, where the death benefit is either 1) the higher of the sum assured or asset value; or 2) the sum assured plus the asset value
1)The most common calculation of death benefit within VUL, this structure endows should the underlying investments grow to a value greater than the level of sum assured applied. At this point, insurance costs would fall away and the policy could be encashed or simply used as a PPLI type structure.
2)Less commonly available, the sum assured plus asset value option of death benefit calculation enables planning around known liabilities. For example, a known estate tax based on foreign property investments whereby the asset value is to be passed on to the next generation and the sum assured pay out covers taxation to mitigate the potential requirement to sell illiquid assets.
Summary
VUL is an excellent wealth planning tool that has the potential to provide individuals and businesses with optimal financial outcomes. The ability to use existing assets, both listed and private, to fund premiums whilst ensuring investment control is determined by the applicant provides greater flexibility than any other high-death benefit solution currently available. The structuring of the policy can be complicated, making the value of good financial advice even more important than off-the-shelf solutions like Whole-of-Life and ULI.
VUL can be used not only for protection of known liabilities but also for estate equalistation (where one child may take over the family business while another would receive a cash inheritance) and key-man / shareholder protection for businesses.
Reach out if you would like to discuss your options in more detail.