Why Invest in a Single Premium VUL (SPVUL) instead of Mutual Funds or UITF

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.

mf vs. spvul

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

 
Year Fund Values
1 550,000
2 605,000
3 665,500
4 732,050
5 805,255
6 885,781
7 974,359
8 1,071,794
9 1,178,974
10 1,296,871

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

 
Year Charges Fund Values
1 266 548,615
2 168 602,146
3 137 660,995
4 102 725,608
5 61 796,537
6 18 874,399
7 959,872
8 1,053,700
9 1,156,700
10 1,289,986

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 perhaps you are already FULLY INSURED)

**You can request for a Single Premium VUL Quotation here for FREE!

19 thoughts on “Why Invest in a Single Premium VUL (SPVUL) instead of Mutual Funds or UITF”

  1. What if the market declined at an instance I am withdrawing the whole investment is the minimum guarantee still applicable?

    1. Hi Enrique,

      The minimum guarantee pertains to Death Benefit – this is the unique proposition of a Single Pay VUL.

      When the market declines, a Single Pay VUL will behave similarly like a Mutual Fund and UITF. Thus, if you withdraw when the market declines, kung magkano yung fund value, yun ung makukuha…

  2. I think you should mention in your article that this applies ONLY to Sunlife VUL and Mutual Funds.

    You should be transparent as MAJORITY OF THE UITFs in the country have NO BACKEND FEES and or FRONT END FEES. There are Mutual funds (mostly TRUST managed Mutual funds)that dont charge back end fees and front end loads. So everything held equal (i.e. a pse index funds of say sunlife and a bank managed index fund uitf with no back end and front end loads, youre better off with a UITF

    1. Sloppy writing. Lumped UITF with Mutual Funds as if they are the same.
      Major difference, UITFs do not have sales loads.

      1. Hi Mark,

        Appreciate your comment.

        In all fundamental aspects, Mutual Funds and UITFs are the same.

        They are both pooled funds, on similar prospectus (say peso equity fund) they are both invested in the local stock market, and they are both managed by fund managers.

        The effect of the difference in charges, I think my response to Carvi above (or below) would explain it in a more factual way.

    2. Hi Carvi,

      Perhaps as to MF, only Sun Life implements backend fees, but as to VUL funds, I believe Insular, Philam and other big players share the same charging scheme.

      That puts us in the “everything held equal” statement. The illustrated 10-year holding of MF above has no sales load (well, it’s a backend that expired on the fifth year).

      Given the illustration, everything held equal, say an index fund (just like you mentioned), fund values of a UITF (with no sales load) will closely be similar to that of a Mutual Fund (with 0% backend fee at 10th year).

      That doesn’t make Mutual Fund better than UITF, or vice versa. Everything held equal, theoretically well, they are equal – the same.

      And that’s the point I’m driving in this article.

      1. I dont think i mentioned anywhere above that VULs have no back end fees. Just taht wiser investors tend yo look for better deals in UITFs and MFs with no OTHER fees (AND good fund management of course)

        And they are completely different, assets under UITFs are required to be under 3rd party custody, thus they have potentially different (if not higher) fee structures than Mutual Fundss who just normally charge management fees and auditor fees. On top of this, Mutual Funds invested in Bonds can hold to maturity (accruals) thus can retain principal value unlike UITFs that can only be purely marked to market. –not necessarily positive …as in an upbeat market MFs may lag vs UITF but in a volatile market MFs may be more consistent.

        1. Definitely, good fund management.

          With all of those intricacies, in the eyes of an average investor. MF and UITF, are both pooled funds, managed by a fund manager, and invested on the same market for similar prospectus.

          They are the same. When one invest on them, they’ll get similar experience.

          I’ll just have to agree to disagree if that’s not your perspective.

        2. Hey I am just curious, I am new to pooled funds, you mentioned that UITF are required to be under 3rd party custody. Can you elaborate on that?

          And how different do UITF manage Bond portfolios? I think they are similar in every way with MF. And that is they are both market to market.

  3. I guess the answer here is when youre looking for an Investment, get an Investment Fund (mutual fund or uitf…know where youre investing is one of the primary things you should know when investing so look around…dont limit urself in insurance companies) if youre looking for an insurance dont get a VUL get a traditional insurance. If youre too old for an insurance then get a VUL. theres such a thing as over insurance in Financial Planning…unless of course the fund manager of the VUL is the Oracle

  4. …last thing. 6,885.43 is not small. When investing every single peso, invested long term can compound to millions…specially if invested in equities. Just to show you how much, around 2008 the psei was trading at 1400 level, early this year we touches 8,000pts. Thats around 5.7pesos per peso. Given that your 6,885 would have been 39,342.85. If thats small to you i dont know what is. Dont get me wrong insurance is important. Get the traditional one, if you love yoyr loved ones, insurance shows that you are a responsible person. But know when you need to buy insurance and know when to buy Investmebt funds

    1. Hi Carvi,

      There are two types of VUL – single pay and regular pay.

      The one that people are comparing to BTID is the regular pay. Single Pay, per design, is an investment in substance in a form of an insurance products. We accountants have this mantra “Substance over form”.

      Just want that one out of the way.

      Now, the comparison of a traditional insurance to Single Pay VUL is way out of the context.

      Let’s get down to the P6,885.43.

      I believe you’re aware that’s the future value in 10 years. Computing the present value, that amount will be P2,654.63 using the same rate of return of 10%.

      I don’t disagree, P2,654.63 is a huge money today, moreso P6,885.43 in ten years – that is, if you’ll be looking at it on it’s own and not on the exchanged benefit.

      Here’s how a Single Pay VUL works. Say the investor invested P500,000 in SPVUL and died during the 4th year. Let’s assume the market didn’t bid well, say it fell down to P400,000 after 4 years of investing.

      How much will he get in MF/UITF? P400,000. But beneficiaries can only get this after paying the estate taxes.

      How much will he get in SPVUL? P625,000. That’s the higher of fund value of the 125% of P500,000. Plus, the convenience that beneficiaries can get the money easily, without the prerequisite of paying the estate taxes first.

      With those facts, identifying how huge or small P2,654.63 or even P6,885.43 would make sense.

      1. Ok..

        … if he died.

        What if he lived to 60 or 70 or even 80…and hes just 25 now…(which is more likely, looking at stats) he’ll lose the potential gain of that 6k. Note that i mentioned in my 2nd point that theres such a thing as over inurance and if ur looking for investments…go for investments. —So if im insured that could easily cover 120% of my potential computed estate taxes, i should still go for a VUL? even if given that an MF is better, i’d go VUL? Doesnt sound like a good financial advise to me Mr.Nick.

        What im driving at above is the growth potential of that 6,000.00 and the opportunity loss you’ll get if u invested it in a VUL than in an MF. Investment if Investment and Insurance if Insurance…its that simple.

      2. Ok..

        … if he died.

        What if he lived to 60 or 70 or even 80…and hes just 25 now…(which is more likely, looking at stats) he’ll lose the potential gain of that 6k. Note that i mentioned in my 2nd point that theres such a thing as over inurance and if ur looking for investments…go for investments. —So if im insured that could easily cover 120% of my potential computed estate taxes, i should still go for a VUL? even if given that an MF is better, i’d go VUL? Doesnt sound like a good financial advise to me Mr.Nick.

        What im driving at above is the growth potential of that 6,000.00 and the opportunity loss you’ll get if u invested it in a VUL than in an MF. Investment if Investment and Insurance if Insurance…its that simple.

        1. On points of sales load, does your comment above means we’re settled on it?

          Now, for the argument whether the investor dies or not, saying they (we) won’t in any specific timeframe is not for us to say. Saying someone will or will not die is speculation – and the safest assumption is to prepare for the worst.

          However, for your point of being fully insured, that one I’ll have to agree. I’ll be adding a qualifier in my recommendation above.

          Thank you for raising that up.

  5. Nick, what happened to the comparison with UITF?
    UITFs do not have any sales load at all and most do not
    even have holding periods like Security Bank and BPI’s UITFs.

Comments are closed.