When you hear the words ‘life insurance’? What does it mean to you? Does it mean an additional expense on your budget? Or does it mean a product for your financial security?
I was offered several life insurance products before but admittedly I declined because as most people, I thought it was just an expense. This was my notion not until I took the licensure exam from Insurance Commission and became a financial advisor myself that I learned the importance of life insurance.
In most cases, people would either live too long or die too young. Both needs to be addressed in terms of financial security.
When you die too young, your dependents will suffer especially if you’re the breadwinner of the family. They will lose the major income earner which they depended for many years. Aside from the hard time coping for your loss, they will also have a hard time coping for the expenses of the family. So how do you make sure that the financial needs of your loved ones will be taken cared of when you suddenly pass away? The answer is life insurance.
Consequently, when you live too long, you need some retirement funds to address your needs when old age comes. Nowadays, Filipino men have a life expectancy of 68.72 years while Filipina women are at 74.74 years. When you live that long, you would need some funds to address your needs most especially your health. You don’t want to be a burden to your sons and daughters when that time comes. So how would you address this need? The answer is investments.
Variable Universal Life Insurance or VUL
Life insurance has evolved to address the needs of dying too young and living too long. And this is where Variable Universal Life Insurance or VUL comes into play.
This is a type of permanent life insurance that pays the death benefit to your beneficiary when you “die too soon”, but also has an investment component just like a mutual fund that generates income and builds on cash value which you will receive if you “live too long”.
A win-win situation right? To understand more about VUL insurance products, Pesos and Sense made an educational video below:
VUL insurance products have been designed to come up with riders to protect more of life’s uncertainties. Upon studying some of them in detail, I can say that the most important are the accidental death benefit, the critical illness benefit, and the hospital income benefit.
Accidental death benefit doubles the face amount that the beneficiary gets when the insured dies due to accident.
Critical Illness Benefit gives additional benefit the moment when insured contracts any of the 36 diseases listed as critical illness. This will be a big help on medicines and hospitalization expenses.
Hospital Income Benefit gives additional 2,000 per day when insured gets confined in a hospital due to sickness or injury.
The Best Time To Invest in Insurance
As with most investments, TIME is the best ally and the most important factor in investing in life insurance. The younger and healthier you are, the lower your premiums and the more time for the investment component of your insurance to grow and build cash.
Dying young or living to old age, we need money in both cases. Life insurance is the only product that we need to have when we don’t need it because we can’t avail it when we already need it. It’s like an umbrella. You don’t need it not until it starts to rain but if you don’t have it with you when it’s already raining, its too late to go home and get it.
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is vul better than term life and invest the difference?
For me the “buy term and invest the difference” is more of an expense rather than an investment. It is because it does not address the “live too long” scenario. What will happen if you live too long renewing your term insurance every year or every 5-years for some policies? The premium keeps on increasing as you age and when you reach old age, you don’t have retirement funds to address your health needs.
In contrast with VUL, VUL’s insurance premium is fixed as you age. In term insurance, you are guaranteed to pay the premium for your entire life where as in VUL, you can go in premium holidays depending on the fund value.
What are the fees connected with VUL’s? in the past, when i invested in these, the broker did not disclose the fees upfront, they were buried in 24 binders, thus i bought and got stuck for 5 years with something that for the most part lost money (since it was tied to stocks, index, etc). I was paying $200 for the investment part and only $50 towards insurance, and when i finally realized i was being dinged fees left and right, plus the stock market sank, i wasted 5 years of paying $250/month with nothing to show for it. If i had invested $200/month and only paid for term life, i would still have the insurance part plus i would have left over (at least a little bit) as opposed to being wiped out due to junk fees and the market.
My point is, not everyone has the financial literacy to make decisions based on what’s good for them, most of the time they rely on insurance brokers who gladly prey on hapless individuals, such as myself at one point, to make the sale and enjoy the ‘residuals’ for themselves.
So, after that losing episode, i just bought term life with a rider that enables me to extend after the term, but at the same time, i have my investments going (the difference) that will make money for me overtime that will not necessitate having to depend on VUL or insurance for that matter (except for estate taxes).
Bottomline is, i admire your stand on finances and believe this should also be taught in school early so that future generations will not be stuck with a ‘victim’ mentality but rather have the encouragement to be entrepeneurial to escape the ‘rat race’ you speak of all too often.
Cheer.
Chester
I just sent an e-mail to financial jerk. hehe
Good post! Life insurance is definitely more enticing when it has an investment component.
Do you know which companies offer great VULs?
“When you live that long, you would need some funds to address your needs most especially your health. You don’t want to be a burden to your sons and daughters when that time comes. So how would you address this need? The answer is investments.”
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You mean that after taking care of our children until they are completely capable and do stay by themselves away from you, which means us spending money, care, time, trouble, work, etc., etc., etc, to prepare them to live and enjoy life one day on their own, we must not be a burden to them when we live too long?
Something is very wrong here, and we are not helping to correct the situation ourselves who are living too long, by when we are taking care of our kids, etc., etc., etc., we must also prepare not to be a burden to them when we live too long, as to no longer earn a living for ourselves in our old age.
Does anyone not see that?
I did not see your point in your second paragraph. Please be clear on the way you state your point.
I’ll be telling you a true to life and real scenario in a family. And I hope you get my point.
A dad who has his own family to feed addresses the health needs of her mother who is already on her 70s. Aside from the daily expenses of the family and the tuition fees of the children, he also needs to address to the health needs of his wife who has an ailment which is more serious and thus needs more medical attention than her own mother.
Her mother is no longer working and thus no income to address her own health problems. If she got an insurance during her young age, she would have something to depend on and not be a burden to her son which has family to feed and a wife that also needs medical attention.
I am sorry, but Tyrone, you have not said anything as to give me any idea what it is all about, in particular what premium part will go into the mutual fund component.
“This is a type of permanent life insurance that pays the death benefit to your beneficiary when you “die too soon”, but also has an investment component just like a mutual fund that generates income and builds on cash value which you will receive if you “live too long.”
Of course I am supposed to request for more information by sending an email, but I wish you had also given an exposition as simple and clear as you know how, what premium part will go to make up the mutual fund.
Marius de Jess
Different insurance products have varying percentage allotted on their mutual fund investment during the first year. It can go as low as 15% and as high as 35% but only during the first year. The second year onwards is 95% and up, depending on the insurance product.
Hi Tyrone,
I do have a VUL but does not include riders you mentioned above, can you tell what insurance companies include these riders to their VULs?
Thanks.
Hi MC,
I am actually a licensed financial advisor from Sun Life. Sun Life offers these riders to clients.
Sir gusto ko lang po itanong kung adivisable
paba na maginvest ako sa stocks at mutual fund
kahit may VUL na po ako. Ilalagay ko po kasi sa
mutual fund yung magiging retirement fund ko
then yung sa stocks pang bili ko ng bahay pag
lumago na.
Yes it is. Diversification is the key to successful investing
Sorry Tyrone I’d have to disagree with you on this. Investing in a VUL and then in a Mutual fund and the stock market is not really diversification especially if the VUL and Mutual Fund are still equity-based.
There’s also another concept that states that if you’re invested in only PAPER ASSETS (MF, UITF, Stocks) then you are not truly diversified as well.
But to answer Justin Heinz’s question simply, yes I do believe it’s still good to invest in those instruments but not because it’s diversification. If you’re investing in the Philippine stock market, i would suggest though that you wait for a correction before doing so – or selectively buy companies that are still cheap.
Nakakalito talaga tong VUL na to. The best way to treat the VUL I think is to think of it as an insurance and nothing more. It is a life insurance that has the potential of increasing it’s value so your benefactors can have more in case something happens to the insured.
I think VULs were created by insurance companies banking on the success of mutual funds and the bullish market so they can attract new and old investors to their insurance products again.
Firstly, if you have life insurance already, I don’t think you need to get another one through a VUL. If you need something for retirement then you can invest directly through mutual funds or UITFs. Like what’s written in the report, only part of the premium is set aside for the INVESTMENT part of the VUL. You’ll get more if the whole premium is used to buy the INVESTMENT and this can be done through a Mutual fund / UITF / Bonds.
Second, there is another product that insurance companies sell. It’s an insurance + pension plan. It’s similar to the VUL where in your money earns dividends yearly. The dividend rate however is quite low and comparable only to Treasury bond rates. It’s like a VUL with the investment portion invested in FIXED INCOME FUNDS. There’s no option to invest it other types of investments. If you have this type of insurance already then I don’t think you need a VUL as well. But if you don’t have this and you’re considering a pension plan then a VUL might be better because you can shift the investment part to possibly earn more. But note that the earning potential of VULs is not guaranteed – some responsibility is left to the buyer. If you leave it in Equity based investments and the stock market falls, you could end up with just the guaranteed face value of your insurance and nothing more.
Lots of financial instruments/products are being created by financial institutions to complicate matters and keep the investing public confused! We must all learn to ask the right questions so we can be well informed of our investing decisions.
Just realized that this is a great topic to write about. Will be sharing my insights about this more on my blog soon.
Great reply Money Magnets.
VUL’s (variables) and fairly recently FUL’s (fixed) products were precisely created to take advantage of the stock/fund sector and tie it into insurance products to give a sense of ‘comfort’ in telling the customers how the savings/stocks part will accumulate in value and ‘take care’ of the insured if they lived too long. It was widely misused however by financial institutions who misrepresented the fees associated with the ‘investment’ part, and due to the high broker fees, along with residual benefits for the brokers, it was pushed to low level insurance agents in the hopes that they would push these products broadly to ensure bigger commissions on their end. The fiduciary duty to the buyer was always ignored in the hopes of chasing bigger paychecks for the brokers. Great post here regarding VUL’s as well
There are a lot of scnearios to consider when working towards retirement, life insurance is only one part and investments another. The key is to effectively diversify and work with a financial professional who is truly honest and trustworth (i know that these words don’t go hand in hand in the insurance business but there are still a few out there, you just have to find them), i also encourage you to listen to Dave Ramsey he’s a huge proponent for ‘buy term and invest the difference’ and has written several NY Times Best Seller books regarding financial freedom and escaping the rat race.
As with Tyrone and everyone else who desires to be financially free, do your research, listen to millionaires and do what they do (which is live within and not beyond their means) and practice a lot of common sense, and as with everything that can be bought ‘caveat emptor’.
Cheers.
CML
Sir Tyrone,
I just want to ask ano po mangyayari kung
sobrang nalulugi yung part na iniinvest na pera
sa VUL. Mawawala po ba yung insurance ko
at mag babayad pa ako ng additional fees later on.
Thank you.
the credibility of some insurance company are some reason not to trust for any insurance company,.syempre yong perang pinaghirapan mo ng ilang taon,.mawawala lang ng isang saglit,.ilang insurance company naba ang nalugi o nawalan ng pondo,.
ibig sabihin,.mahirap ipagkatiwala ang pera sa kamay ng iba,.anjan ang educational ensurance,.at kahit mismong mga bangko,nangyayari ito.sa huli members parin ang talo..
You’re leaning to the negative side of it…
On this 21st century, google is our friend… research, research, research lang yan
Why invest sa di mo natindihan and paluging company diba?
It is good to have insurance, whenever purpose yan (medical or retirement), you will reap the frusits
Muntik na ako sana makukuha ng ganitong type (VUL) kaso di na lang na explain ng maigi ng agent kaya ibang product nakuha…
Talking risk naman, truth is risk is anywhere… hehehe kaya life is unexpected kaya nanjan nag mga insurance (sa magagandang company lang di yung pipittsugin). Even pag-upo may risk din
otherwise kong businessman ka or anak ng isang Milyoner, disregard my post 
Term Life Insurance security coverage is ideal for people who have a short-term need for way of insurance coverage security policy security or who need a lot of security, but are on a limited budget. Phrase insurance coverage security can also fulfill the needs of entrepreneurs who wish to cover the lifestyle of a key worker. Additionally, rather than passing excellent obligations to your loved ones, term insurance coverage security can be used to pay off these debts in the event of the insured’s death.