How Does VUL Work

In this module, you will discover how Variable Unit-Linked (VUL) works.
Lesson 1 of 11

Learning Objective

By the end of this module, you will be able to:

Describe how 
Variable Unit-Linked 
(VUL) works.
Lesson 2 of 11

Single Premium Explained

To help you understand how VULs work, here's a quick

summary using Single Premium VUL.

In a Single Premium VUL, a portion of your premium or payment will be used to pay the Initial Charge
and the Admin & Mortality Charge.

Total Charges = Initial Charge + Admin & Mortality Charge

Click the previous (left) and next (right) arrows.

Complete the content above before moving on.

The remaining portion net of the total charges will be invested into an investment fund.

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.
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

Example:

In this Ps. 100,000 Single Premium, the OFFER PRICE is the price used to allocate units. While the BID
OFFER SPREAD is the difference between offer & bid price.

Next: Computation of Units

Explore the two methods of pricing the units in an investment linked plan.
LEARN MORE
Lesson 3 of 11

Computation of Units

You will now explore how unit prices for buying and selling
are determined.

Click each card to learn more.

There is only one price

quoted whether the
policy owner is buying
or selling his units.

The policy owner buys

the units at the offer
 price and sells the
units at the bid price.

Complete the content above before moving on.

Important Formulas
Number 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

Next: Single Pricing Method

Explore how Single Pricing is computed.

LEARN MORE
Lesson 4 of 11

Single Pricing Method

Explore how selling and buying prices for the units are done through the Single Pricing Method.
Example: A policy owner pays a single premium
of Ps. 50,000 and the unit price at that time is
Ps. 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.

Basic Computation
The following outlines the steps in the calculating the number of units bought after all the charges.

Step 1

Calculate the charges first.

Initial Charge (5% Single Premium) Ps.  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, calculate the
remaining single premium.

Single premium    Ps.  50,000.00

Less: Initial Charge       -                             2,500.00

Single Premium (Net of Initial Charge) ___________

    47,500.00

Step 2

The Single Premium (Net of Initial Charge) will then be used to buy units.

Number of Units Bought = Single Premium (Net of Initial Charge)/Unit Price

                                    =  Ps. 47,500.00/ 1.50
                                    =  31,666.6667 Units

Step 3

The Mortality Charge is deducted by canceling units. 

The Number 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
Next: Withdrawal Benefit
Discover how Withdrawal Benefit is computed.

LEARN MORE
Lesson 5 of 11

Withdrawal Benefit

Partial or full withdrawal of units can be made by the policyholders at any time while their policy is
in force. Withdrawals are made by selling (or “cancelling”) 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 policy owner has 10,000 units and the unit price is Ps. 1.97. He wishes
to withdraw (partially) Ps. 10,000 from his policy.

The following steps show how the withdrawal is made and the remaining number of units after the
withdrawal.

Because the withdrawals are made by selling units, the number of units that need to be sold to fund
the withdrawal is calculated.
 Number of Units to sell        =     Withdrawal Amount
                                                          Unit Price                                                        

                                            =         Ps. 10,000.00  
                                                              1.97                

                                            =      5,076.1421 units

The remaining number of units after Withdrawal is therefore:

                                            =   10,000 -  5,076.1421  

                                          =   4,923.8579 units

Next: Dual Pricing Method

Explore how Dual Pricing is computed.

LEARN MORE
Lesson 6 of 11

Dual Pricing Method

In this method, the offer price (also called buying price) is different from the bid price (also called sale
price).
In the example, the premiums and the top-ups are prices using the Offer Price, while the value of
withdrawals and cancellations is based on the Bid Price.

Explore how selling and buying prices for the units are done through the 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

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%)

                     =  1.50 (1-5%)
                     =  1.4250

Example: A policy owner pays a single premium of Ps. 50,000 and the offer price at that time is Ps.
1.50. The company’s bid-offer spread is 4%. The insurance company 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.

Basic Computation
The following outlines the steps in the calculating the number of units bought after all the charges.

Step 1

Calculate first the number of units allocated without charges:

Number of units allocated     =       Single Premium  

                                                         Offer Price
 Number of units allocated     =             50,000   
                                                             1.50
Number of units allocated w/o charges   =  33,333.3333 units
      

Step 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. This is
because the policyholder, in effect, is 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

Step 3

We now calculate for the number of units to cancel:

Initial Charge (5%Single Premium)   2,500

Mortality Charge (1.6% x Single 800

 Premium)    

                        
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

Step 4

Now subtract the total charges in units from the number of units allocated for investment.

Number of units bought 33,333.3333

- 2, 291.6667
Total charges

 ________________________
31,041.6663 units (after all charges)

      
           
Next: Accumulation of Fund 
Discover how fund value accumulates over a period of time.

LEARN MORE
Lesson 7 of 11

Accumulation of Fund Over a Period of Time

Learn how investing your fund involves rewards that accumulates over time.
How is this computed? 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 Ps. 20.00 after 10 years if it increases by 5% annually?

Using the formula, X (1+i) n      

20 (1+ 0.05) 10   = Ps. 32.58

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 Ps. 1.20 and the bid offer spread is 5%.

    Offer Price (present)      =   Ps. 1.20/unit   

                                           (1-0.05)

                                        = 1.26

     Offer Price (after 6yrs)  = x (1+i) n

                                        = 1.26 (1+0.07) 6

                                        = Ps. 1.89

    Bid price after 6yrs        = 1.89 (1-0.05)

                                        = Ps. 1.80
 Complete the content above before moving on.

Next: Knowledge Check

Review what you've learned.

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Lesson 8 of 11

Knowledge Check
Question

01/05

When computing units using this method, there is only one price quoted whether the
policy owner is buying or selling his units.

Variable-Unit Linked

Dual Pricing Method

Single Pricing Method

Question

02/05

Investing your fund involves rewards that accumulates over time. Compute the value of
Ps. 15.00 after 10 years if it increases by 5% annually?

Hint: Use the formula, X (1+i)n

22.22

24.43

225.43

223.32
Question

03/05

The Offer Price is always greater than the Bid Price.

True

False
Question

04/05

This amount is usually imposed once as a flat fee at the start of the policy.

Bid Offer

Total Charges

Bid Price

Mortality Charge
Question

05/05

This is the price which the insurer uses to allocate units to a policy when premiums
are paid.

Total Charges

Bid Price

Offer Price

Mortality Charge
Lesson 9 of 11

Summary

Click the hotspots to review the key takeaways.


 

A portion of your premium or payment will be used to pay the Initial Charge and the Admin & Mortality
Charge.
 

Offer Price

Is the price which the insurer uses to allocate units to a policy when premiums are paid.
 

Bid Price

Is the price that 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.
 

There are two methods to determine the selling and buying prices for the units:

(1) Single Pricing, and

(2) Dual Pricing

Complete the content above before moving on.

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You are about to complete the module.

CONGRATULATIONS
Lesson 10 of 11

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Lesson 11 of 11

Downloadable Handout

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How Does VUL Work.pdf

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