Things Your Financial Advisor May Not Be Telling You About VUL

Variable Unit-Linked Insurance or VUL has become the most popular insurance plan sold by insurance agents as a smart investment tool to many Filipinos. The sales pitch usually goes like this:

“You invest in a VUL. It is a 2-in-1 financial product that offers both a guaranteed insurance benefit and an investment component. You get to choose what you invest in: stocks, equity, bonds, balanced fund, you name it. In case of financial need (like for your retirement, children’s education or business start-up), you can withdraw from it or ‘borrow’ from it without incurring interest. You are able to enjoy your investment while you are still alive. When you die, your beneficiaries will receive the money (insurance and the investment fund) estate tax-free.”

Sounds amazing, right? Who wouldn’t go for it? It’s very appealing but by reading this post, you will learn a few things about VULs that your financial advisor might have failed to mention.

#1 There are 2 types of VUL insurance – Single Pay VUL & Regular Pay VUL

SINGLE PAY VUL is a one-time payment of variable unit linked insurance. It mainly focuses more on the investment and less on the insurance. While most single pay VULs provide lower insurance protection than regular pay VULs, it offers an opportunity for faster accumulation of fund value because it has minimal fees. The only disadvantage is that the minimum amount required starts between P100,000 to P200,000.

Let us study how a Single PAY VUL works.

ILLUSTRATION: You pay P100, 000 once.

Insurance terms/coverage: 
(1) 125% of your investment, (100,000*125% =125,000) or 
(2) your investment value whichever is higher.
Insurance/Investment payout:
 (1) If your P100, 000 invested decreases in value becoming P50, 000, upon your death,
your beneficiaries will receive the guaranteed amount of P125,000.
(2) If your P100, 000 invested doubles, becoming P200, 000 upon your death,
your beneficiaries will receive P200, 000 instead of the P125,000 which we computed as insurance coverage.

WHAT YOUR FINANCIAL ADVISOR ISN’T TELLING YOU: If you would like to focus more on the investment side of VULs, although it requires a high minimum amount, Single Pay VULs are a better choice.

Next… from single pay VUL, let’s go to regular pay VUL…

Regular Pay VUL as opposed to Single Pay VUL is a kind of VUL wherein you pay regularly either quarterly, semi-annually or yearly. The premiums received would be used pay for insurance charges first and then the rest to acquire units in an investment fund/s of the policyholder’s choice. Regular pay VUL focuses more on the insurance component. You can start for as low as P1,500 per month.

Let us study how a Regular PAY VUL works.

ILLUSTRATION: Let’s say for a 30 year old, female, non-smoker, you pay P30,000 annually for an insurance coverage of P1,000,000 for 10 years. (Regular Premium of P24,000 plus excess premium of P6,000.)

If you are thinking of getting a regular pay VUL, your agent would have given you a proposal indicating how much your premiums are and how much the charges are.  (YES, it’s on the proposals they provide you.) Here’s an example.

Disclaimer: The following tables are for illustrative purposes only. Different insurance companies have different charges, fees and fund allocation.

Money Girl Philippines - Regular Pay VUL Charges

To illustrate:

Money Girl Philippines - Regular Pay Illustration

Simply put, what this means is that the following premiums are being used to pay for the expenses to set up the policy (i.e. commission payable to agent and profit for insurance company). For the first three years, most of your payment will go to the insurance and premium charges. Only on the 4th year onwards will your money be really invested. For a Regular Pay VUL, just think of it as, you pay for the insurance charges first, then the investing later.

Based on our illustration, P89,000 will be used to pay for the cost for the policy while only P210,900 would be used to buy actual units in the mutual funds. Is this good for you, or your agent? Go figure.

WHAT YOUR FINANCIAL ADVISOR ISN’T TELLING YOU: If you want the protection of whole life insurance, go for a regular pay VUL. If your sole objective is purely investing, then this may not be the right investment for you at this time, because in the first 3 to 5 years, majority of your premium payments goes to sales charges (agent’s commission, insurance charges and other administration costs) and can get quite expensive.

#2 You can choose where your money will be invested.

VUL policies gives you a chance to control how your premiums are invested. You have the flexibility to choose where your money will be invested (equity fund, bond fund, balanced fund, index fund, growth fund) depending on your investment objectives and time horizon to maximize your money’s earning potential

WHAT YOUR FINANCIAL ADVISOR ISN’T TELLING YOU: Even after you have availed your VUL policy, you are allowed to move your investment from one fund to another. (eg equity fund to bond fund). This is known as fund switching. Usually, a limited number of fund switches are allowed each year without charge. This may be helpful if your financial circumstances or investment objectives have changed.

#3 Upon death, your beneficiaries will receive the insurance proceeds as well as the investment fund.

While other assets (investments including mutual funds, stocks, cash and real estate) will be frozen by BIR until the appropriate taxes are paid, investments in a VUL is readily available to your beneficiaries – provided that they are designated as irrevocable.

WHAT YOUR FINANCIAL ADVISOR MIGHT NOT TELLING BE YOU: By setting your heirs as irrevocable beneficiaries, you cannot withdraw your investment fund without their consent (signature) because irrevocable beneficiaries are already considered “part owners” of the policy.

#4 VULs are a helpful and convenient ‘automated’ savings tool.

With insurance companies coming up with better insurance and investment packages, it has become very convenient to own a VUL. You simply need to avail a single product to cover both your protection and investment needs. You only need to pay a fixed amount consistently which is then automatically divided to pay for your insurance charge and investment units. This has become very helpful for those who don’t have time to manage their funds or who are prone to spending rather than saving or investing.

WHAT YOUR FINANCIAL ADVISOR MIGHT NOT TELLING BE YOU: Another option to VUL policies is buying separate products to cater to the 2 financial needs – insurance and investment. This is usually dubbed as ‘Buying Term, Invest the Difference’ or (BTID). Although this is a much cheaper option, this is great for those who need short-term protection and has a well-disciplined saving and investing habit.

#5 In addition to your VUL policy, there are riders that offer additional coverage and protection at an additional charge.

There are optional riders that allow you to create a customized policy that best suits your unique needs and goals. Here’s a few examples:

  • Accidental Death Benefit – It pays an additional amount if death is due to accident.
  • Waiver of Premium- It pays your premiums should you become totally and permanently disabled.
  • Hospital Income Benefit – It pays a fixed allowance for each day of hospitalization.
  • Critical Illness Benefit – It pays an additional amount if the insured is diagnosed with a critical illness listed in the policy contract.

#6 You can withdraw from the fund value of your VUL policy.

In case of financial need, unlike traditional policies, this is treated as a withdrawal rather than a loan. Thus, the amount does not incur any interest. However, it is highly encourage that whatever amount withdrawn be reinvested again so that your financial goals on track.

#7 (For regular pay VULs), you have flexible premium payment terms.

Usually, you are given the option to pay premiums with a short fixed term (5, 7, 10 years). While you only make premium payments in a short period of years, the cost of insurance coverage increases year by year as you get older. This means that more units of your fund may be sold to pay for the insurance charges. In the event that the fund value is not adequate to pay the charges, you will have to increase premium payments

You have the option to put in more than your regular premiums anytime while your policy is in force. Any amount in excess of the regular premium becomes top-ups. This is great for those who are looking to invest their bonuses or extra cash.

In case you miss to pay your premiums on the due date, it would not lapse (at least not yet) as long there is enough fund value to cover the charges.

OK. Those are few things financial advisor might not be telling you about Variable Unit-Linked Insurance (VUL). Is there anything else I should add to the list?

QUICK TIP: From personal experience, here’s my action plan for my investing goals and how I did it. To maximize my investment and have the benefit of ease of transfer to my beneficiaries with insurance, I availed of the regular pay VUL with the least or minimal coverage. (I think the lowest is about P250,000.) Less insurance coverage means less regular premiums and less premium charges. And then after, I just increase my top-ups or excess premiums. And after, once I have a some cash stashed away (for investment) big enough to avail of a single pay VUL, then I go for Single Pay VUL.

But anyways…

There has been a lot of conflicting opinions about variable unit-linked insurance products. Some financial columnists often dismiss VULs as a poor choice, yet many disagree and will tell you that VUL is a great option.

So what’s the verdict?

Like any financial product, VUL has its potential advantages and disadvantages. VUL is not for everybody; no single financial or insurance product is. The goal of this post is not to encourage or discourage you to avail of a VUL. It is to give you a more comprehensive awareness of how VULs work so that you can make a smarter decision to see whether a VUL is appropriate for you.

 

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