1. 1. 1 March 2015 version Insurance Concepts VARIABLE UNIVERSAL LIFE REVIEW
2. 2. 2 Concepts of V.U.L March 2015 version InsuranceConcepts
3. 3. 3 Course Content I. Concept of Variable Universal Life II. Financial Planning Process III. Types of Investment Assets IV. Types of Funds V. Types of Variable Contract VI. Definition of Terms VII. How does VUL work? VIII. Basic Computation of Units
4. 4. 4 Non-Traditional Policies 1. Cash Values/Fund Values are not pre-determined 2. Additional premiums may be allowed (on top of regular premiums) 3. Policyholders may have investment options 4. Explicit charges Examples: Universal Life, Variable Life, and Variable Universal Life 1. Premiums, cash values and death benefits are pre- determined. 2. Policyholders do not have investment options 3. Implicit charges Examples: Whole Life, Endowment and Term Traditional Policies Concept of VUL
5. 5. 5 Variable Life (VL) 1. Fixed premium, minimum death benefit 2. Cash value depends on investment performance 3. Policyowner has a choice of investment funds 1. Unbundled 2. Flexible Premiums, Death Benefit 3. Seen as savings account plus term insurance 4. Interest credited to account value, usually subject to minimum interest rate 5. Policyowner does not have a choice of the investment funds Universal Life (UL) Concept of VUL
6. 6. 6 Variable Universal Life Investment Control Premium Flexibility Death Benefit Concept of VUL
7. 7. 7 Insurance Charge Single Premium or Regular Premium Initial/Premium Charge Initial/Premium Charge Top-Ups/Excess Premiums Periodic Charge POT OF GOLD ILLUSTRATION Purchase Units in Select Funds Concept of VUL
8. 8. 8 Professional ManagementDiversification Flexibility Access Investment RiskAdministration Transparent Charges Client is Involved VUL Advantages
9. 9. 9 Peso cost averaging is an investing technique intended to reduce exposure to risk associated with making a single large purchase. The idea is simple: spend a fixed peso amount at regular intervals (e.g., monthly) on a particular investment or portfolio, regardless of the unit price Peso Cost-Averaging
10. 10. 10 Example: If you invest Ps. 10,000 today, and the unit price is Ps. 1/unit, you will receive 10,000 units. If you invest the same amount next month, and the unit price is 90 centavos/unit, you will have purchased 11,111 units then. By adding your investment (Ps. 10,000 + 10,000) and dividing the by the total number of units (10,000 + 11,111), you would end up having an average purchase price of 95 centavos per unit. Ps. 20,000 investment = 21,111 units Peso Cost-Averaging
11. 11. 11 * It complements peso-cost averaging Habit of Saving Buy low, sell high!Regular Top-Ups How can we maximize the returns of the fund? Peso Cost-Averaging
12. 12. 12 Financial Planning V.U.L InsuranceConcepts March 2015 version
13. 13. 13 - is managing ones financial resources in order to achieve specific goals - necessary to develop a financial plan that is suited to clients unique requirements GOALS RISK TOLERANCE FINANCIAL RESOURCES PERSONAL CIRCUMSTANCES Financial Planning
14. 14. 14 Set Goals Analyze Resources Evaluate Investment Options Implement the Plan Evaluate the Plan Financial Planning Process
15. 15. 15 SET GOALS To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) Financial Planning Process
16. 16. 16 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) ANALYZE RESOURCES Keep stock of what you already have (cash/ time deposits, dollar deposits, real estate) The investment decision is greatly affected by the level or amount of funds available For the investor: the more funds, the greater/wider is the choice of investment available Set aside the less liquid assets from those you could use for investment purposes & include a contingency fund Review monthly expenses by separating the essential or living expenses from the non- essential or discretionary expenses. Financial Planning Process
17. 17. 17 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS You will realize that you cant afford to set aside funds for all your goals at the same time. Categorized goals: short-term (less than 5 years) medium term (5-10 years) long term (over 10 years) Tip #1 Dont invest in something you dont understand Educate yourself Understand the investment product Go out of your way to see what investments are available in the market Financial Planning Process
18. 18. 18 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS Evaluate 1. Potential Return How much can you reasonably expect to earn by investing in the product? Historical return on investment or yield on the investment. 2. Safety What are the risk involved? Can you lose all or part of your investment? 3. Liquidity & Marketability (Accessibility of Funds) - If the individual requires the fund in a short time. Can you readily convert your instrument into cash? - Consider the cost or penalty of realizing the investment before its maturity period. Are there any penalties for pre-termination? - Is there a ready buyer or a market for your investment? How much is the initial cost in setting up or buying into the investment? Minimum investment amount? Financial Planning Process
19. 19. 19 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS Evaluate 4. Performance of the investment - countrys economic factors - competencies/capabilities of the management team - the invested companys level of costs 5. Taxation Treatment Different types of investment vehicle/s enjoy (or burden) a wide range of tax treatment. What are the tax implications? What are the subsequent taxation liabilities of the investor? Financial Planning Process
20. 20. 20 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS Tip#2 - No Risk , No Gain Tolerance for the magnitude and variability of future return loss. - The higher the risk, the higher must be the potential return in order to attract people into investing in it. 2 Types of Investors 1. Some investors may be tempted to PLAY it safe CONSERVATIVE instruments (people with less financial resources less tolerance for Risk). 2. High net worth individuals are the ones who are less averse to risk they have money to cover for losses. (people with more money high tolerance for RISK). Financial Planning Process
21. 21. 21 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS Types of Risk Investment: 1. Low Risk investment - Bank deposits/short-term government securities (locked-in at interest) 2. High Risk investment investment in shares Investors level of risk averseness depends on 1. Age 2. Investment Objectives 3. Financial Condition 4. Personality Financial Planning Process
22. 22. 22 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS Tip#3 - Match the investment product with your time horizon - A match between the investment horizon and the maturity of an investment asset is very important 1. Short Term Goals - Consider investments that are not risky or highly speculative (ex. Government securities, time deposits, high-grade commercial paper, bond mutual funds & money market funds) 2. Medium Term Goals - Objective: medium risk-medium return - Less speculative investment returns such as blue-chip stocks & balanced mutual funds Financial Planning Process
23. 23. 23 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS 3. Medium Long Term Goals - Objective: to MAXIMIZE investment return rather than MINIMIZE investment risk - take some risks since you have more time to make-up for possible losses - establish a portfolio that is heavy on high-risk- high return (ex: stocks) Financial Planning Process
24. 24. 24 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE INVESTMENT OPTIONS Tip#4 - Diversification - Risk are inherent in all types of investments Process of investing across different asset classes and across different market environments Proven effective in reducing risk without sacrificing returns Dont put all your eggs in one basket. Spreading of risk by putting the money under management into several categories of investments such as stocks, bonds and money market instruments. Financial Planning Process
25. 25. 25 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) IMPLEMENT THE PLAN Avoid procrastination Achieving ones financial goal is financial discipline Stick to plan if you havent changed your goals or personal circumstances Financial Planning Process
26. 26. 26 To enhance or provide a comfortable standard of living; to provide for dependents To improve ones financial situation To supplement retirement income To provide funds for the education and bringing up of children To provide a fund for paying necessary costs and taxes when a person dies To save for the down payment/major purchase or event (house/car/debut or wedding) EVALUATE THE PLAN Financial Planning Process A continuing process because the plan has to be evaluated regularly The plan may have to be revised from time to time due to changes in the market conditions & the investors needs & wants Changes -- in the Market Conditions: - new investment products - revisions of tax laws - prolonged period of economic growth or difficulties -- in the Investors personal requirements: - being promoted/getting married/ getting older
27. 27. 27 Types of Investment Assets March 2015 version V.U.L InsuranceConcepts
28. 28. 28 Investments with a fixed principal amount, a fixed period of time (term) and a specific rate of interest (coupon). Types of Investments 1. Fixed Income Securities
29. 29. 29 1. Fixed Income Securities A. Money Market Securities Commonly referred to as cash and deposits Any deposit instruments with a maturity of 1 year or less e.g. Treasury Bills and Bank Deposits Types of Investments
30. 30. 30 Loan that pays interest over a fixed term or period of time 3 general types of bonds - Government Bonds Corporate Bonds Convertible Bonds B. Bonds Types of Investments 1. Fixed Income Securities
31. 31. 31 Common Stocks Preferred Stocks Pieces of a corporation pie The ownership interest of shareholders in a corporation 2. Equity Securities (Stocks) Types of Investments
32. 32. 32 3. Common Trust Fund A form of pooled investment maintained by a bank Sells and buys back units of participation at net asset value Monitored by Banko Sentral ng Pilipinas (BSP) Types of Investments
33. 33. 33 Open-end investment company A regulated investment company with a pool of assets that regularly sells and redeems its shares Monitored by Securities & Exchange Commission (SEC) 4. Mutual Funds Types of Investments
34. 34. 34 3 Types of Properties: Agricultural Property Domestic Property & Commercial/Industrial Property 5. Property Something owned; any tangible or intangible possession that is owned by someone Types of Investments
35. 35. 35 A promise of compensation for specific potential future losses in exchange for a periodic payment 6. Insurance Types of Investments
36. 36. 36 Types of Funds March 2015 version V.U.L InsuranceConcepts
37. 37. 37 37 Types of Funds Stocks or Equity Funds Bond Funds Balanced Funds Money Market Funds Cash Funds Specialized Funds
38. 38. 38 38 Stocks or Equity Funds - invest in shares of stocks- prices may be volatile - mainly to generate long-term for capital appreciation through investment in high-quality equities diversified across sectors Types of Funds
39. 39. 39 39 Bond Funds - invest mainly in long-term debt instruments and high-quality fixed income instruments that are classified as below average risk - aim to generate fixed regular income Types of Funds
40. 40. 40 40 Balanced Funds - invest in both shares of stock and debt instruments - the allocation my be fixed or may vary at the portfolio managers discretion Types of Funds
41. 41. 41 41 Balanced Funds - it combines the current income from bonds and capital appreciation prospects from stocks. For example, 60% of the funds are in bonds & 40% in equities Types of Funds
42. 42. 42 42 Money Market Funds - invest purely in short-term (one year or less) debt instruments - may be diversified or specialized type of money market instrument (prime commercial paper/short-term government securities) Types of Funds
43. 43. 43 43 Cash Fund - Invest in cash and other forms of bank deposits bonds and capital appreciation prospects from stocks. For example, 60% of the funds are in bonds & 40% in equities Types of Funds
44. 44. 44 44 Specialized Funds - Restrict investments to a particular country or region Income securities - Offer exposure to different markets in different industry/regions Types of Funds
45. 45. 45 Types of Variable Contracts March 2015 version V.U.L InsuranceConcepts
46. 46. 46 Key Features of VUL Single Regular (Annual) PayPayment Period For Regular Premium: Premiums are paid regularly Have flexibility of varying the level of regular premium payments, making single premium top-ups or taking premium holidays If funds are sufficient, the policyowner may stop paying for premiums The policyowner may vary the sum of his policy without changing the level of his regular premiums
47. 47. 47 Philippine Peso US Dollar Currency Single Pricing Method Dual Pricing Method Types of Pricing Method Policy Fee Mortality/Assurance Charges Unallocated Premiums Full Withdrawal Charges Investment Management Charges (Bid Offer Spread & Fund Management Fee) Types of Charges Key Features of VUL
48. 48. 48 Type of Life Insurance LINKED to Investment Funds Type of VUL Contracts SINGLE PREMIUM INVESTMENT LINKED WHOLE LIFE PLAN 1. The amount of insurance protection is a percentage (usually 125%) of the single premium paid 2. For long-term savings and investment; offers nominal life protection 3. Top-ups are allowed 4. Right to withdraw full or partial units REGULAR PREMIUMS INVESTMENT WHOLE LIFE PLAN 1. Paid on regular intervals for investments & life protection. 2. Life protection is the priority. 3. Premium holiday or top-ups are allowed. 4. Partial & full withdrawal are allowed.
49. 49. 49 Type of VUL Contracts Type of Life Insurance LINKED to Investment Funds INVESTMENT - LINKED INDIVIDUAL PENSION PLAN 1. Usually involves a high allocation of the premium contributions to investments through simply accumulating the fund to retirement 2. No life insurance cover other than a return of investment funds 3. There are tax advantages for employees
50. 50. 50 Type of VUL Contracts INVESTMENT - LINKED PERMANENT HEALTH INSURANCE 1. Provides health coverage such as disability income. 2. Contains cash value unlike the traditional health plans. INVESTMENT-LINKED DREAD DISEASE INSURANCE 1. A policy which advances the whole sum assured in the event of the diagnosis of a critical illness. Type of Life Insurance LINKED to Investment Funds
51. 51. 51 Definition of Terms March 2015 version V.U.L InsuranceConcepts
52. 52. 52 Unit Pricing is the process whereby the unit price of units is set. Offer price or Selling Price the price which the insurer uses to allocate units to a policy when premiums are paid Bid price or Buying Price the price which the insurer will give for the units if the policyholder wishes to cash in or claim under the policy Top ups are single premium injections which can be used to buy additional units Premium Holiday refers to the cessation of premium payments on a variable life insurance contract for a period, with a view to continue it later on Forward Pricing is a pricing structure wherein the buying and selling prices of units are determined at the next valuation date Allocation of premiums means the periodic distribution of premiums to insurance and units 15 day cooling-off period the contract may be returned within 15 days of receipt by the policyholder Grace Period 31 days grace period Definition of Terms
53. 53. 53 Policy Fee it covers administrative expenses Mortality Charges it covers mortality cost (dependent on age) Unallocated Premiums a part of the premium being deposited for marketing & setting-up expenses of the policy Full Withdrawal Charges deducted when the policy is fully withdrawn Bid-Offer Spread difference between bid and offer prices Fund Management Fee it is imposed on each investment fund (.5% - 2% per annum) - used to cover investment expenses Fund Switching Charge What is Switching? - Facility for transferring from one fund to another - Limited number of switches are usually not charged - Useful in retirement and education fees planning Fund Allocation Charge changes in fund allocation in the policy Definition of Terms
54. 54. 54 How does VUL work? March 2015 version V.U.L InsuranceConcepts
55. 55. 55 Total Charges Admin & Mortality Charge Covers the cost of providing life protection for the insured Varies according to the age of the insured May be paid once at the start of the policy or on a recurrent manner Is usually imposed once as a flat fee at the start of the policy How does VUL Work? Single Premium Ps. 100,000 Total Charges
56. 56. 56 Single Premium Ps. 100,000 Total Charges Ps. 3,200.00 Ps 96,800 : Net Available for Investments Policy Fee Ps. 200 Administrative & Mortality Charge Ps. 3% of the Premium Ps. 100,000 x 3% = Ps. 3,000.00 How does VUL Work?
57. 57. 57 Ps 96,800 : Net Available for Investments Offer Price Is the price used to allocate/create units @ Ps. 1.50 Purchased Units Ps. 96,800/Ps. 1.50 64,533.33 units created Bid Price Is the price used for cash-in or claims @ Ps. 1.40 Units Purchased & Remaining Note: OFFER PRICE or SELLING PRICE is the price which the insurer uses to allocate units to a policy when premiums are paid. BID PRICE or BUYING PRICE is the price which the insurer will give for the units if the policyholder wishes to cash in or claim under the policy. BID -OFFER SPREAD is the difference between the bid price and the offer price. How does VUL Work?
58. 58. 58 REMEMBER Offer Price is always greater than the Bid Price Bid Offer spread is expressed in percentages, e.g. 5% or 0.05 Prices (and computation) are rounded down to 4 decimal places Offer and Bid Prices How does VUL Work?
59. 59. 59 Ps. 100,000 : Single Premium Policy amount Ps. 90,346.66 Offer Price or Selling Price Ps. 1.50 Bid Price (buying price) Ps. 1.40 Bid Offer Spread is the difference between Offer and Bid Price .10 or 6.67% How does VUL Work? OFFER Price is the price used to allocate units BID Price is the price for cash-in or claims Units bought 64,533.33
60. 60. 60 PARTIAL AND FULL WITHDRAWAL Ps 96,800 : Net Available for Investments Units to be CANCELLED Ps. 20,000/ Ps. 1.40 14,285.7143 units Partial Withdrawal BID PRICE 64,533.33 Units Purchased & Remaining Ps. 20,000 Full of Partial Withdrawal of Units is Allowed Units Remaining after Withdrawal 64,533.33 -14,285.7143 = 50,247.6157 units Is the price used for Cash-in or Claims @ Ps. 1.40 How does VUL Work?
61. 61. 61 Computation of Units Single Pricing Method There is only one price quoted whether the policyowner is buying or selling his units. Dual Pricing Method The policyowner buys the units at the offer price and sells the units at the bid price. How does VUL Work? EXAMPLE:
62. 62. 62 How does VUL Work? Computation of Units No. of Units = Single Premium/Unit Price rounded down to 4 decimal places Bid Price = Offer Price (1-Spread%) or BO1S Offer Price = Bid Price / (1-Spread%) or OB/1S Yield = (Full Withdrawal Value / Single Premium) 1/n - 1 Accumulation of Fund = x (1 + i) n Important Formulas
63. 63. 63 No. of Units (cancelled) = Amount/Unit Price No. of Units (bought) = Allocated Premium/Unit Price Fund Value = No. of Units x Unit Price How does VUL Work? Single Pricing Method
64. 64. 64 How does VUL Work? Basic Computation Example: A policyowner pays a single premium of Php 50,000 and the unit price at that time is Php 1.50. The insurance company deducts an initial charge of 5% and a mortality charge of 1.6%, both as a percentage of single premium. The initial charge is deducted before the premium is allocated while the mortality charge is deducted by canceling the units. Single Pricing Method
65. 65. 65 We calculate the charges first. Initial Charge (5% Single Premium) Php 2,500.00 Mortality Charge (1.6% x Single Premium) 800.00 Because the initial charge is deducted before the single premium is used to buy units, we calculate the remaining single premium. Single premium Php 50,000.00 Less: Initial Charge - 2,500.00 Single Premium (Net of Initial Charge) 47,500.00 1. The following outlines the steps in the calculating the number of units bought after all the charges How does VUL Work? Basic Computation
66. 66. 66 We calculate the charges first. Initial Charge (5% Single Premium) Php 2,500.00 Mortality Charge (1.6% x Single Premium) 800.00 Because the initial charge is deducted before the single premium is used to buy units, we calculate the remaining single premium. Single premium Php 50,000.00 Less: Initial Charge - 2,500.00 Single Premium (Net of Initial Charge) 47,500.00 1. The following outlines the steps in the calculating the number of units bought after all the charges How does VUL Work? Basic Computation
67. 67. 67 How does VUL Work? Basic Computation No. of Units Bought = Single Premium (Net of Initial Charge) /Unit Price = Php. 47,500.00/ 1.50 = 31,666.6667 Units The No. of units to cancel (Mortality Charges) is: (Mortality Charges) = Mortality Charge/ Unit Price = 800.00/1.50 = 533.3333 Units 31,666.6667 - 533.3333 = 31,133.3334 units 2. The Single Premium (Net of Initial Charge) will then be used to buy units 3. The Mortality Charge is deducted by canceling units.
68. 68. 68 How does VUL Work? Basic Computation Partial or full withdrawal of units can be made by the policyholders at anytime while their policy is in force. Withdrawals are made by selling (or canceling) some or all of the units using the unit price at the time of withdrawal. When full withdrawal of units is made, the insurance policy is terminated. All policy benefits like the sum assured guarantee and other supplementary benefits will cease. Example: Suppose that the policyowner has 10,000 units and the unit price is Php1.97. He wishes to withdraw (partially) Php 10,000 from his policy. The following steps show how the withdrawal is made and the remaining no. of units after the withdrawal. Withdrawal Benefit
69. 69. 69 How does VUL Work? Basic Computation Because the withdrawals are made by selling units, the no. of units that needs to be sold to fund the withdrawal is calculated. No. of Units to sell = Withdrawal Amount Unit Price = Ps10,000.00 1.97 = 5,076.1421 units The remaining no. of units after Withdrawal is therefore: = 10,000 - 5,076.1421 = 4,923.8579 units Withdrawal Benefit
70. 70. 70 No. of Units (cancelled) = Amount/Bid Price No. of Units (bought) = Allocated Premium/Offer Price Fund Value = No. of Units x Bid Price How does VUL Work? Bid Price = Offer Price (1- Spread) or BO1S Offer Price = Bid Price/ (1-Spread %) or OB/1S Dual Pricing Method
71. 71. 71 How does VUL Work? Basic Computation Under the dual pricing method, there are two prices quoted : - The price used to create/allocate units (offer price) is higher than the price used to cancel/cash-in/claim units (bid price). - One price can be worked out from the other if the bid offer spread (Spread %) is known using the formulas: Bid Price = Offer Price x (1-Spread%) or BO1S Offer Price = Bid Price/(1- Spread%) or OB/1S Dual Pricing Method
72. 72. 72 How does VUL Work? Basic Computation Example: If the offer price is 1.50 and the bid offer spread is 5%, the bid price can be worked out as: Bid price = Offer Price (1-spread%) and = 1.50 (1-5%) = 1.4250 Dual Pricing Method
73. 73. 73 How does VUL Work? Basic Computation A policyowner pays a single premium of Php 50,000 and the offer price at that time is Php 1.50. The companys bid-offer spread is 4% The insurance co. deducts an initial charge of 5% and a mortality charge of 1.6%, both as a percentage of single premium. The charges and fees are deducted by canceling units after the whole single premium is used to buy units. 1. We calculate first the number of units allocated without charges: No. of units allocated = Single Premium Offer Price No. of units allocated = 50,000 1.50 No . Of units allocated w/o charges = 33,333.3333 units Dual Pricing Method
74. 74. 74 How does VUL Work? Basic Computation 2. Because the initial charge and mortality charge are deducted by canceling units after the single premium is invested, we add the charges then convert into units using the bid price (bec. the policyholder, in effect, buying units to pay for the initial and mortality charges. In the example, only the offer price is given. Thus, we have to compute for the bid price using the given bid- offer spread. Bid price = Offer price (1-Spread%) = 1.50 (1-4%) = 1.44 Dual Pricing Method
75. 75. 75 How does VUL Work? Basic Computation 3. We now calculate for the number of units to cancel: Initial Charge (5%Single Premium) 2,500 Mortality Charge (1.6% x Single Premium) 800 ------------ Total Charges in peso 3,300 Total charges in units = Total charges Bid price = 3,300 1.44 Total charges in units = 2,291.6667 units Cancellation of Units
76. 76. 76 How does VUL Work? Basic Computation Now subtract the total charges in units from the no. of units allocated for investment. No. of units bought 33,333.3333 Total charges - 2, 291.6667 31,041.6663 units (after all charges) Cancellation of Units
77. 77. 77 How does VUL Work? Basic Computation To compute for the accumulation of fund over a period of time Where the amount is X after n years and it increases by i (interest rate), we will you use this formula X (1+i) n Example A: What is PhP 20.00 after 10 years if it increases by 5% annually? Using the formula, X (1+i) n 20 (1+ 0.05) 10 = PhP 32.58 Accumulation of Fund Over a Period of Time
78. 78. 78 How does VUL Work? Basic Computation Example B: Over the next 6 years, the offer price is projected to constantly increase by 7% annually. Compute for the bid price and offer price after 6 years if the bid price now is PhP1.20 and the bid offer spread is 5%. Offer Price (present) = P1.20/unit (1-0.05) = 1.26 Offer Price (after 6yrs) = x (1+i) n = 1.26 (1+0.07) 6 = P1.89 Bid price after 6yrs = 1.89 (1-0.05) = P1.80 Accumulation of Fund Over a Period of Time
79. 79. 79 Simulated Examination V.U.LInsuranceConcepts March 2015 version
80. 80. 80 Test Taking Tips V.U.LInsuranceConcepts March 2015 version
81. 81. 81 1. Be prepared, Read and Review. 2. Before the test list everything you will need for it that is allowed. Like pencils/pens, a watch, etc. 3. Review your VUL Simulated Exam & Reviewer. Before the Exam Test Taking Strategies
82. 82. 82 1. Read the directions carefully. 2. Get the big picture. 3. Answer easy questions first. 4. Eliminate answers to difficult questions 5. Review your test to make sure that you have answered all questions. During the Exam Test Taking Strategies
83. 83. 83 THANK YOU! & GOOD LUCK!