VARIABLE UNIT-LINKED (VUL) insurance, which combines life insurance policy with mutual fund-like investment, has gained acceptance from the Filipino market over the last six years. With the lingering global financial turbulence triggered by the US credit crunch, however, most underlying instruments in managed funds—whether equities or bonds—have seen that kind of volatility that make investors jittery.

But what if the investor can have a type of product that combines life insurance with a guaranteed investment instrument almost at par with the deposits offered by banks?

Such “structured” products which allow investors to profit from the upside in financial markets while capping downside risks have become popular across Asia in recent years, especially at the height of the US-epicentered global financial turbulence when everyone is looking for a “safe” haven for their hard-earned money. Pru Life UK—the Philippine subsidiary of British life insurance giant Prudential Plc. which pioneered VUL insurance in this market—has rolled out the country’s first peso-denominated life insurance product with a guaranteed investment return of 21 percent over a fixed period of four-and-a-half years.

For a minimum investment of P120,000, PruLink Capital Secured Plus allows the investor to gain from underlying Philippine global bonds or ROPs while avoiding downside risks from a continuing global market volatility, top company officials say.

Nishit Majmudar, Pru Life UK president, says this guaranteed product would “address the increasing demand of investors for an option that will provide them a venue to park their money and can secure returns in addition to some insurance protection.”

The guaranteed minimum return of 21 percent over a four-and-a-half years implies an annual return of about 4.7 percent, better than the average yield on most bank deposits. And it gives life insurance protection, too. Pru Life thinks that the return can hit as much as 23-24 percent at the end of four-and-a-half years, but because it also incurs some cost on selling this product, it guarantees only at least 21 percent at the end of the investment period, Majmudar says.

With this offering, Pru Life assumes that the value of ROPs will henceforth increase on the back of the country’s improved macroeconomic fundamentals over its investment horizon. For instance, the country’s inflation rate may have peaked, thereby lowering risk premium on ROPs over the long term.

Majmudar says it’s thus now a good time to invest in managed funds, to benefit from a rebound in underlying instruments. “Managed funds offer great value, but if they’re not comfortable with that, this is an alternative,” he says. He notes that this product is for people who want to diversify or are looking for safe investments aside from bank deposits.

“We’re in for exciting times and what’s pleasing for me is that the Filipino customer has more choice,” he adds.

There are similar products offered in the local market by other insurance giants, Majmudar says, but these are denominated in foreign currency, have a higher minimum requirement (usually $5,000) and are thus geared more toward the upscale investor market.
“We think there are more customers we can serve with peso products,” Majmudar says.

Since the investments are in pesos but are invested in offshore Philippine government bonds or ROPs, the foreign exchange risk is hedged using forward foreign exchange contracts, Pru Life UK senior vice president and chief finance officer Manuel de Rosas says.

De Rosas adds that this product would be an attractive option for any investor, especially at a time marked by economic and other global uncertainties.

“The credit crisis in the US, the surge in oil prices in the world market and the spike in supply side inflation, both here and abroad, have caused uncertainty and volatility in the local bond and equities markets,” De Rosas says. He notes that this product is designed for the customer without appetite for market fluctuations because the return on investment was assured if the investors hold the instrument until maturity (Feb. 15, 2013).

A life insurance product becomes “variable” when the policy value at any time varies according to the value of the underlying investment funds at that time. This means that the policy value is “linked” to the investment funds, so that the fund’s investment performance is directly reflected in the policy value. But unlike regular VUL products, this new product offered by Pru Life guarantees a minimum yield.

“This product is the first of its kind, offering capital protection, secured competitive returns and shorter holding period and is denominated in peso. Other companies currently offer only capital protection, a much longer holding period and products denominated in US dollars,” De Rosas adds.

If something happens to the investor while the investment contract is still enforced, his beneficiaries will get the insurance coverage plus the investment yield.

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