by Venus Zoleta, on category "Personal Finance"
July 31, 2018
An insurance agent, who happens to be your friend or relative, is selling a VUL plan to you. But you aren’t sure if getting this type of life insurance is a wise investment decision. Should you invest in VUL insurance?
A VUL insurance policy comes with pros and cons that you need to consider before putting your money in it. Understand first what VUL is, its benefits, and risks to know if this is the right investment for you. Here’s an objective guide to help you decide whether to purchase a VUL plan or explore other options.
Variable unit-linked insurance, also called variable universal life insurance (VUL), is a permanent life insurance and investment rolled into one product. It provides living, death, and disability benefits with an investment component. In the Philippines, the usual practice is that 5% of the premium goes to the cost of insurance, while 95% goes to investments.
It’s crucial to highlight the meaning of the terms “variable” and “permanent” in VUL:
For the past few years, VUL has been a popular financial product in the Philippines because it offers financial protection for when the policyholder either dies too soon or lives too long. This means your beneficiaries will receive the proceeds if you pass away early. Or if you live beyond your 60s, you can use the investment returns from your VUL plan to fund your retirement.
Reputable insurance companies in the Philippines such as AXA Philippines, Manulife, Philam Life, Pru Life UK, and Sun Life offer a variety of VUL products. VUL policies allow a minimum monthly investment of PHP 1,500 to PHP 3,000. The premiums are paid and held for the long-term, typically five to 20 years.
The main advantage of VUL insurance over investment-only products like mutual funds, UTIFs, and stocks is that the insured’s beneficiaries will receive the death benefit and investment returns without having to pay an estate tax to the government. The tax exemption applies only to irrevocable beneficiaries, though.
In contrast, if you put your money purely in investments and you pass away, your earnings will become part of your estate. This means your beneficiaries won’t get the proceeds until they pay the estate tax.
Unlike term life insurance that provides only death benefits, VUL offers living benefits that policyholders can enjoy while they’re still alive. The liquidity of VUL insurance is one of its best features. You may partially or fully withdraw the policy’s fund value, which is the investment portion of a VUL policy.
Tax-free and interest-free, a withdrawal from a VUL investment can be used to pay for emergencies, your child’s college tuition, medical bills, retirement, or any financial need. If you have sufficient fund value in your VUL policy, you can even settle your unpaid loans to save your property from foreclosure or repossession.
Newer VUL insurance products in the Philippines come with optional benefits, also called riders, that aren’t available in other types of life insurance. These riders include insurance coverage for critical illnesses, accidents, and income protection for hospitalization. Depending on the policy, your premiums may be waived when you’re diagnosed with a critical illness like cancer, stroke, or kidney failure.
VUL brings the same benefits of a mutual fund: diversified and professionally managed investments. These help yield higher returns than other types of life insurance and even regular savings accounts and time deposits in banks. The premium payments are invested in a variety of assets such as bonds, stocks, and money market instruments. Full-time fund managers handle the investments, too, which raises the earning potential of a VUL policy.
Millennials who find it hard to get into the habit of saving and investing can benefit from VUL insurance that forces them to set aside a portion of their monthly income for the premium payments. VUL insurance providers in the Philippines regularly send premium payment reminders through print and electronic billing statements. Also, insurance agents personally remind their clients of any overdue payments.
Like other investment options, VUL doesn’t guarantee returns. Investment markets rise and fall—these fluctuations can cause your fund value to go up or down at certain times. In rare cases, policyholders may lose their investment when the fund value is no longer enough to pay for the policy fees. When this happens, the VUL policy gets automatically terminated and all living and death benefits end.
VUL charges higher premiums than term life insurance. You’re paying for the personalized services of your financial advisor (a.k.a commissions) as well as the professional services of the fund manager. VUL insurance providers charge these costs through management fees, policy fees, and annual insurance fees. On the other hand, term insurance charges a little or no fee at all.
Is it worth investing in VUL? Or is it better to do insurance and investment separately? The right choice depends on your financial goals, needs, and savings discipline.
VUL is a great choice for the following people:
Is VUL not suitable for you? An alternative worth considering is a strategy called BTID (buy term, invest the difference). It involves purchasing a term insurance plan and investing the amount you’ve saved from the cost difference between VUL and term insurance. BTID is cheaper than getting a VUL insurance. But you need financial discipline and diligence in monitoring market trends to invest on your own and earn high profits.
If your goal is to simply invest and nothing more, then choose from mutual funds, UITF, stocks, and other investment options that offer greater flexibility in terms of timing and strategies.
Whatever insurance or investment product you choose, it should support your financial goals. Study your options well and compare VUL quotes. Don’t just rely on what an insurance agent tells you. Buying a VUL policy is a major decision that you just don’t do in a snap.