What a VUL guarantees and what it does not: death benefit formulas, illustrations, lapse risk and the PPF Scheme

Definition: what "guaranteed" means in a VUL

In a variable universal life (VUL) policy the investment result is not guaranteed. MoneySense states that investment-linked policies (ILPs) do not have any guaranteed cash value and that the policyholder bears the investment risk, with no bonuses; LIA states that ILPs typically do not provide guaranteed cash values or benefits and that a policyholder can lose the entire value of the investment. What the insurer commits to is narrower: a death benefit calculated by a formula, payable if the policy is in force and the terms are met, together with the administration of the policy under its terms. Everything that depends on markets, charges or the policyholder's own actions sits on the non-guaranteed side.

The death benefit formula

Two formulas are common in high-net-worth VUL designs. Under the first, the death benefit is the higher of a sum assured and the account value. Under the second, typically paired with guaranteed issue, it is the account value plus a fixed amount. Both are subject to the policy remaining in force and to the terms of the contract, and the payout is less any indebtedness and charges due. The figures below are hypothetical and illustrate arithmetic only.

The first design protects against a fall in markets: the benefit does not fall below the sum assured while the policy stays in force, but the cost of insurance rises as the account shrinks (see charges). The second design gives little protection beyond the account value, so the benefit falls with the markets. Age limits, exclusions and other conditions attached to the death benefit are set out in the policy contract.

Illustrations are scenarios, not promises

The LIA's member update on ILP illustrations applies where an LIA-format policy illustration is issued: to regular-premium ILPs, and to single-premium or recurring-single-premium ILPs that are protection-oriented, meaning the death and critical-illness benefit is 150% or more of the premium paid. Such an illustration must show the prevailing upper and lower investment rates of return (currently capped at 8% and 4%) and a third column at 0%, and must state that the policy value may drop to zero, in which case the policy is terminated. Investment-oriented single-premium ILPs have had no LIA-format illustration since 1 February 2014, and a guaranteed-issue VUL whose death benefit is the account value plus a small fixed amount falls on that side of the line, so it may come with the insurer's own projection instead. Either document is a set of hypothetical scenarios and not a forecast, and past performance is not indicative of future performance (LIA).

Read an illustration in this order:

1. Start at the 0% column, or ask for a 0% or low-return projection if the document has none. It shows what the structure costs when the assets earn nothing.
2. Check whether the illustration includes the asset-level fees (custody, management, dealing) or only the insurer's charges.
3. Find the year the illustrated value first falls below the premium paid.
4. See which assumptions differ by asset class and who chose them.
5. Compare the illustrated surrender value with the account value in the early years.

Ask the insurer in writing which format applies to the policy you are considering and whether the figures include asset-level fees.

Can the policy end while the life assured is alive?

Yes. If the account cannot cover the charges, the policyholder must pay a top-up or reduce cover (MoneySense), and if the value reaches zero the policy is terminated. Most contracts also set:

• a minimum account value, below which the policyholder must add funds;
• a cash buffer, a minimum proportion held in cash or equivalents;
• a grace period to restore either, after which the insurer may sell assets or terminate the policy.

Terms and periods are product-specific; do not assume them. After termination there is no death benefit. Early surrender also reduces what is returned. A policy is most exposed when markets fall after a large withdrawal, because charges continue and the net amount at risk rises.

A hypothetical example shows the mechanism. Suppose annual deductions (cost of insurance and administration) are US$24,000. Against an account of US$3,200,000 that is 0.75% of the account each year; after a 25% fall to US$2,400,000 the same deductions are 1.00%, and in a year of flat or negative returns they are paid from a smaller base. Repeated over several years, deductions can exhaust the account, which is why the minimum account value and the grace period matter more in falling markets than the illustration suggests.

What "guaranteed issue" guarantees

Guaranteed issue (GIO) guarantees acceptance without medical underwriting, not the investment result. A policy issued on this basis usually provides a smaller death benefit above the account value than a fully underwritten policy, and may have different benefits in the early months. The account value remains exposed to market loss and charges in the same way. A product that offers both routes is not offering a capital guarantee on either.

It also does not remove the other features of the contract. Surrender charges, exclusions and conditions on the death benefit, the minimum account value and the duty to disclose accurately still apply, and some terms, such as the benefits available in the first months after issue, differ by underwriting route. Read the guaranteed issue wording as a statement about how acceptance is decided, and compare the two routes on the same sum assured and the same assets before drawing conclusions. See eligibility for who may apply at all.

The Policy Owners' Protection (PPF) Scheme

The PPF Scheme is administered by the Singapore Deposit Insurance Corporation (SDIC). It covers policies issued in Singapore by a licensed life insurer to both residents and non-residents of Singapore, and does not cover policies issued by overseas branches of a licensed life insurer incorporated in Singapore. The caps are S$500,000 for the aggregated guaranteed sum assured and S$100,000 for the aggregated guaranteed surrender value, per life assured per insurer. SDIC states that ILPs with benefits directly tied to the value of underlying net assets are not covered, since those are not guaranteed benefits.

For a VUL the practical reading is that the scheme is not a backstop for the investment account. Whether any part of a specific policy counts as a guaranteed benefit is a question for the insurer and SDIC. Insurer ratings, designation as a domestic systemically important insurer (D-SII) and MAS supervision are not a government or regulator guarantee of any policy.

Risk register

The register below turns the sections above into a checklist. Each row names a risk the policyholder carries, what it looks like in practice and the document that governs it. None of these risks is removed by the insurer's licence, a credit rating or the scheme described above, and several interact: a market fall raises the net amount at risk, increases the charge, shrinks the buffer and brings the minimum account value closer at the same time.

To have a specific illustration or projection read against these points, register an enquiry through the contact details on this site.