Insurance Concepts

VARIABLE UNIVERSAL LIFE

REVIEW
March 2015 version

1
 Concepts of V.U.L
Insurance Concepts
March 2015 version

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 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

3
 Concept of VUL

Traditional Policies Non-Traditional Policies

1. Premiums, cash values and 1. Cash Values/Fund Values

death benefits are pre- are not pre-determined
determined. 2. Additional premiums may
2. Policyholders do not have be allowed (on top of
investment options regular premiums)
3. Implicit charges 3. Policyholders may have
investment options
4. Explicit charges

Examples: Whole Life,

Examples: Universal Life,
Endowment and Term
Variable Life, and Variable
Universal Life

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 Concept of VUL

Universal Life (UL) Variable Life (VL)

1. Unbundled 1. Fixed premium, minimum

2. Flexible Premiums, Death death benefit
Benefit 2. Cash value depends on
3. Seen as savings account investment performance
plus term insurance 3. Policyowner has a choice
4. Interest credited to account of investment funds
value, usually subject to
minimum interest rate
5. Policyowner does not have
a choice of the investment
funds

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 Concept of VUL

V U L
Variable Universal Life

Investment Premium Death

Control Flexibility Benefit

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 Concept of VUL
POT OF GOLD ILLUSTRATION
Single Premium or Top-Ups/Excess
Regular Premium Premiums

Initial/Premium Initial/Premium
Charge Charge

Purchase Units in
Select Funds

Insurance Periodic
Charge Charge

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 VUL Advantages

Professional
Diversification Management Flexibility Access

Transparent
Administration Charges Investment Risk Client is Involved

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 Peso Cost-Averaging

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

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 Peso Cost-Averaging

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

10
 Peso Cost-Averaging

How can we maximize the returns of the fund?

Regular Top-Ups Habit of Saving Buy low, sell high!

* It complements peso-cost averaging

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 Financial Planning
V.U.L Insurance Concepts
March 2015 version

12
 Financial Planning
RISK
GOALS
TOLERANCE

FINANCIAL
PERSONAL
RESOURCES
CIRCUMSTANCES

- is managing one’s financial resources in order to achieve specific goals

- necessary to develop a financial plan that is suited to client’s unique
requirements

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 Financial Planning Process

Set Goals

Analyze Resources
Evaluate the Plan

Implement the Plan Evaluate Investment

Options
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 Financial Planning Process

To enhance or provide a comfortable standard

of living; to provide for dependents

To improve one’s financial situation

To supplement retirement income

To provide funds for the education and bringing

SET up of children
GOALS
To provide a fund for paying necessary costs
and taxes when a person dies

1 To save for the down payment/major purchase

or event (house/car/debut or wedding)

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 Financial Planning Process

Keep stock of what you already have (cash/

To enhance or provide
time deposits, a comfortable
dollar deposits, real estate)
standard of living; to provide for
The investment decision is greatly affected
dependents
by the level or amount of funds available
To improve one’s financial situation
For the investor:
To supplement theincome
retirement more funds, the
greater/wider is the choice of investment
To provide funds for the education and
available
ANALYZE bringing up of children
Set aside the less liquid assets from those you
RESOURCES To provide a fund for paying necessary
could use for investment purposes & include a
costs and taxes when a person dies
contingency fund
To save for the down payment/major
Review monthly expenses byorseparating the
2 purchase
wedding)
or event (house/car/debut
essential or living expenses from the non-
essential or discretionary expenses.

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 Financial Planning Process

You will realize that you can’t afford to set

To enhance or provide
aside funds for all a comfortable
your goals at the same time.
standard of living; to provide for
Categorized goals:
dependents
short-term (less than 5 years)
To improve
mediumone’s
termfinancial situation
(5-10 years)
long term (over 10 years)
To supplement retirement income
Tip #1funds
To provide – Don’t invest
for the in something
education and you don’t
EVALUATE bringing up of understand
children
INVESTMENT • Educate
To provide a fundyourself
for paying necessary
OPTIONS Understand
costs• and taxes when the
a investment
person diesproduct
• Go out of your way to see what investments are
To save available
for the down payment/major
in the market

3 purchase or event (house/car/debut or

wedding)

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 Financial Planning Process

Evaluate …
To enhance
1. orPotential
provideReturn
a comfortable
– How much can you reasonably expect
to earn by
standard of living; to provide for
investing in the product? Historical return on investment or yield on
dependents
the investment.
To improve
2.
one’s financial situation
Safety – What are the risk involved? Can you lose all or
part of your
To supplement
investment?
retirement income
To provide funds for the education and
3. Liquidity & Marketability (Accessibility of Funds)
EVALUATE bringing- Ifup
theof children
individual requires the fund in a short time. Can you readily
convert your instrument into cash?
INVESTMENT To provide a fund for paying necessary
OPTIONS costs and taxes the
- Consider when
cost a
or person
penalty ofdies
realizing the investment before its
maturity period. Are there any penalties for pre-termination?
To save for the down payment/major

3
- Is there
purchase a ready
or event buyer or a market foror
(house/car/debut your investment? How
much is the initial cost in setting up or buying into the investment?
wedding)Minimum investment amount?

18
 Financial Planning Process

Evaluate …
To enhance or provide
4. Performance of the a comfortable
investment
standard of living;
- country’s to provide
economic factorsfor
dependents
- competencies/capabilities of the management team
- the invested company’s level of costs
To improve one’s financial situation
5. Taxation Treatment – Different types of investment
To supplement
vehicle/s enjoyretirement income
(or burden) a wide range of tax treatment. What are the tax
To provide funds for
implications? the
What areeducation andtaxation liabilities of the
the subsequent
EVALUATE bringinginvestor?
up of children
INVESTMENT To provide a fund for paying necessary
OPTIONS costs and taxes when a person dies
To save for the down payment/major

3 purchase or event (house/car/debut or

wedding)

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 Financial Planning Process

Tip#2 - No Risk , No Gain

To enhance or provide a comfortable
Tolerance
standard fortothe
of living; magnitude
provide for and variability of
future return loss.
dependents
- The one’s
To improve higherfinancial
the risk,situation
the higher must be the potential
return in order to attract people into investing in it.
To supplement retirement income
2 Types of Investors
To provide
1. Somefundsinvestors
for the education and
may be tempted to PLAY it
EVALUATE bringing up
safeof –children
CONSERVATIVE instruments (people
INVESTMENT with
To provide less for
a fund financial
payingresources
necessary– less tolerance
OPTIONS costs andfor Risk).
taxes when a person dies
2. High net worth individuals are the ones who
To save for
arethe down
less aversepayment/major
to risk – they have money to

3 purchasecover
or event (house/car/debut
for losses. (people with
wedding)high tolerance for RISK).
or more money –

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 Financial Planning Process

Types of Risk Investment:

To enhance or provide a comfortable
1. Low
standard Riskto
of living; investment
provide for- Bank deposits/short-term
government securities (locked-in at interest)
dependents
2. High
To improve Risk
one’s investment
financial – investment in shares
situation
Investor’s retirement
To supplement level of risk averseness depends on…
income
1. Age
To provide funds for the education and
2. up
bringing Investment Objectives
of children
EVALUATE 3. Financial Condition
INVESTMENT To provide a fund for paying necessary
4. Personality
OPTIONS costs and taxes when a person dies
To save for the down payment/major

3 purchase or event (house/car/debut or

wedding)

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 Financial Planning Process

Tip#3 - Match the investment product with your

To enhance ortime horizon
provide a comfortable
standard of living; to provide for
- A match between the investment horizon and the
dependents
maturity of an investment asset is very important
To improve one’s financial situation
1. Short – Term Goals
To supplement retirement income
- Consider investments that are not risky or highly
To provide speculative
funds for the(ex. Government
education and securities, time
EVALUATE bringing updeposits, high-grade commercial paper, bond
of children
INVESTMENT mutual funds & money market funds)
To provide a fund for paying necessary
OPTIONS costs2.andMedium
taxes when a person
– Term Goalsdies
- Objective: “medium risk-medium return”
To save for the down
- Less payment/major
speculative investment returns such as

3 purchase or
wedding)
event (house/car/debut
blue-chip stocks & balancedor mutual funds

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 Financial Planning Process

3. Medium – Long Term Goals

To enhance or providetoaMAXIMIZE
- Objective: comfortableinvestment return rather
standard ofthan
living; to provide
MINIMIZE for
investment risk
dependents
- take some risks since you have more time to
make-up for possible losses
To improve one’s financial situation
- establish a portfolio that is heavy on “high-risk-
high retirement
To supplement return” (ex:income
stocks)
To provide funds for the education and
EVALUATE bringing up of children
INVESTMENT To provide a fund for paying necessary
OPTIONS costs and taxes when a person dies
To save for the down payment/major

3 purchase or event (house/car/debut or

wedding)

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 Financial Planning Process

Tip#4 - Diversification
To enhance or provide a comfortable
- Risk
standard are inherent
of living; in all
to provide fortypes of investments
dependents
• Process of investing across different asset classes
andone’s
To improve across different
financial market environments
situation
• Proven effective in reducing risk without sacrificing
To supplement
returns retirement income
• “Don’t
To provide fundsputfor
allthe
your eggs in one
education and basket.” Spreading
EVALUATE bringing of
uprisk by putting the money under management
of children
into several categories of investments such as
INVESTMENT To provide a fund
stocks, for paying
bonds necessary
and money market instruments.
OPTIONS costs and taxes when a person dies
To save for the down payment/major

3 purchase or event (house/car/debut or

wedding)

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 Financial Planning Process

To enhance or provide a comfortable

standard of living; to provide for
dependents
Avoid procrastination
To improve one’s financial situation
Achievingretirement
To supplement one’s financial
income goal is financial
discipline
To provide funds for the education and
IMPLEMENT bringing up of children
Stick to plan if you haven’t changed your goals
THE PLAN To provide a fund for
or personal paying necessary
circumstances
costs and taxes when a person dies
To save for the down payment/major

4 purchase or event (house/car/debut or

wedding)

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 Financial Planning Process

A continuing process because the plan has

To enhance or provide regularly
to be evaluated a comfortable
standard of living; to provide for
dependents
The plan may have to be revised from time
to timeone’s
To improve due financial
to changes in the market
situation
conditionsretirement
To supplement & the investor’s
income needs & wants
To provide funds for the education and
Changes……
EVALUATE bringing
-- inup
theof Market
children Conditions:
THE PLAN - new
To provide investment
a fund for payingproducts
necessary
- revisions
costs and taxes whenof atax laws dies
person
- prolonged period of economic growth or
To save for the down payment/major
difficulties

5 purchase or event (house/car/debut or

wedding)
-- in the Investor’s personal requirements:
- being promoted/getting married/ getting older

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 Types of Investment Assets
V.U.L Insurance Concepts
March 2015 version

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 Types of Investments

1. Fixed Income Securities

Investments with a fixed principal amount, a fixed period of

time (term) and a specific rate of interest (coupon).

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 Types of Investments

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

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 Types of Investments

1. Fixed Income Securities

B. Bonds

Loan that pays interest over a fixed term or period of time

3 general types of bonds - Government Bonds

Corporate Bonds
Convertible Bonds

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 Types of Investments

2. Equity Securities (Stocks)

• Pieces of a corporation pie
• The ownership interest of shareholders in a corporation

Preferred Stocks

Common Stocks

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 Types of Investments

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)

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 Types of Investments

4. Mutual Funds

• 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)

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 Types of Investments

5. Property
• Something owned; any tangible or intangible possession that is
owned by someone

3 Types of Properties:
✓ Agricultural Property
✓ Domestic Property &
✓ Commercial/Industrial
Property

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 Types of Investments

6. Insurance

A promise of
compensation for
specific potential
future losses in
exchange for a
periodic payment

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 Types of Funds
V.U.L Insurance Concepts
March 2015 version

36
 Types of Funds

Stocks or Equity Funds

Bond Funds

Balanced Funds

Money Market Funds

Cash Funds

Specialized Funds
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 Types of Funds

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

38 38
 Types of Funds

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

39 39
 Types of Funds

Balanced Funds
- invest in both shares of stock and
debt instruments

- the allocation my be fixed or may

vary at the portfolio manager’s
discretion

40 40
 Types of Funds

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

41 41
 Types of Funds

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)

42 42
 Types of Funds

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

43 43
 Types of Funds

Specialized Funds
- Restrict investments to a particular
country or region Income securities

- Offer exposure to different markets

in different industry/regions

44 44
 Types of Variable Contracts
V.U.L Insurance Concepts
March 2015 version

45
 Key Features of VUL

• Single
• Regular (Annual) Pay
Payment
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

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 Key Features of VUL

• Philippine Peso
• US Dollar
Currency

• Single Pricing Method

• Dual Pricing Method
Types of
Pricing
Method

• Policy Fee
• Mortality/Assurance Charges
• Unallocated Premiums
Types of • Full Withdrawal Charges
Charges
• Investment Management Charges
(Bid Offer Spread & Fund Management Fee)

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 Type of VUL Contracts

Type of Life Insurance LINKED to Investment Funds

SINGLE PREMIUM INVESTMENT REGULAR PREMIUMS INVESTMENT

LINKED WHOLE LIFE PLAN WHOLE LIFE PLAN

1. The amount of insurance 1. Paid on regular intervals for

protection is a percentage investments & life protection.
(usually 125%) of the single 2. Life protection is the priority.
premium paid 3. Premium holiday or top-ups
2. For long-term savings and are allowed.
investment; offers nominal 4. Partial & full withdrawal are
life protection allowed.
3. Top-ups are allowed
4. Right to withdraw full or
partial units

48
 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

49
 Type of VUL Contracts

Type of Life Insurance LINKED to Investment Funds

INVESTMENT - LINKED INVESTMENT-LINKED DREAD

PERMANENT HEALTH INSURANCE DISEASE INSURANCE

1. Provides health coverage 1. A policy which advances the

such as disability income. whole sum assured in the
2. Contains cash value unlike event of the diagnosis of a
the traditional health plans. critical illness.

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 Definition of Terms
V.U.L Insurance Concepts
March 2015 version

51
 Definition of Terms
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

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 Definition of Terms
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

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 How does VUL work?
V.U.L Insurance Concepts
March 2015 version

54
 How does VUL Work?

Single Premium
Ps. 100,000

Total Charges

Admin & Mortality

Total Charges
Charge
• Is usually imposed once as a • Covers the cost of providing
flat fee at the start of the life protection for the insured
policy • Varies according to the age of
the insured
• May be paid once at the start
of the policy or on a recurrent
manner

55
 How does VUL Work?

Single Premium
Ps. 100,000

Total Charges

Policy Fee Administrative &

Mortality Charge

Ps. 3% of the Premium

Ps. 200 Ps. 100,000 x 3%
= Ps. 3,000.00

Ps. 3,200.00

Ps 96,800 : Net Available for Investments

56
 How does VUL Work?
Ps 96,800 : Net Available
for Investments

Units Purchased & Remaining

Offer Price Bid Price

Is the price used to
allocate/create units
@ Ps. 1.50
Is the price used for
Purchased Units cash-in or claims
Ps. 96,800/Ps. 1.50 @ Ps. 1.40
64,533.33 units created

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.
57
 How does VUL Work?
Offer and Bid Prices

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

58
 How does VUL Work?
OFFER Price is the price used to allocate units

Ps. 100,000 : Single

Premium

Bid Offer Spread is Offer Price or

the difference Selling Price Ps
between Offer and . 1.50
Bid Price
.10 or 6.67%

Policy amount Units bought 64,

Ps. 90,346.66 533.33

Bid Price (
buying price)
Ps. 1.40

59 BID Price is the price for cash-in or claims

 How does VUL Work?
PARTIAL AND FULL
WITHDRAWAL Ps 96,800 : Net Available
for Investments

64,533.33 Units Purchased & Remaining

Partial Withdrawal BID PRICE

Is the price used
Ps. 20,000 for Cash-in or
• Full of Partial Withdrawal
of Units is Allowed Claims @ Ps. 1.40

Units to be CANCELLED
Ps. 20,000/ Ps. 1.40
14,285.7143 units

Units Remaining after

Withdrawal
64,533.33 -14,285.7143
60 = 50,247.6157 units
 How does VUL Work?
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.

EXAMPLE:

61
 How does VUL Work?
Computation of Units
Important Formulas

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

62
 How does VUL Work?
Single Pricing Method

No. of Units (bought) = Allocated Premium/Unit Price

No. of Units (cancelled) = Amount/Unit Price

Fund Value = No. of Units x Unit Price

Peso Units

63
 How does VUL Work?
Basic Computation
Single Pricing Method

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.

64
 How does VUL Work?
Basic Computation
1. The following outlines the steps in the calculating the number
of units bought after all the charges
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

65
 How does VUL Work?
Basic Computation
1. The following outlines the steps in the calculating the number
of units bought after all the charges
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

66
 How does VUL Work?
Basic Computation
2. The Single Premium (Net of Initial Charge) will then
be used to buy units

No. of Units Bought = Single Premium (Net of Initial Charge)

/Unit Price
= Php. 47,500.00/ 1.50
= 31,666.6667 Units

3. The Mortality Charge is deducted by canceling 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

67
 How does VUL Work?
Basic Computation
Withdrawal Benefit

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.

68
 How does VUL Work?
Basic Computation
Withdrawal Benefit

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

69
 How does VUL Work?
Dual Pricing Method

No. of Units (bought) = Allocated Premium/Offer Price

No. of Units (cancelled) = Amount/Bid Price

Fund Value = No. of Units x Bid Price

Bid Price = Offer Price (1- Spread) or BO1S

Offer Price = Bid Price/ (1-Spread %) or OB/1S

Peso Units
70
 How does VUL Work?
Basic Computation
Dual Pricing Method

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

71
 How does VUL Work?
Basic Computation
Dual Pricing Method

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

72
 How does VUL Work?
Basic Computation
Dual Pricing Method

A policyowner pays a single premium of Php 50,000 and the offer

price at that time is Php 1.50. The company’s 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

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 How does VUL Work?
Basic Computation
Dual Pricing Method

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

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 How does VUL Work?
Basic Computation
Cancellation of Units

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

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 How does VUL Work?
Basic Computation
Cancellation of Units

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)

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 How does VUL Work?
Basic Computation
Accumulation of Fund Over a Period of Time

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

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 How does VUL Work?
Basic Computation
Accumulation of Fund Over a Period of Time

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

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 THANK YOU!
&
GOOD LUCK!

79