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It has been a while, I know, but well, it is great to be back.
This Monday, let’s talk about “Should You Get a VUL?”
A long time ago, VULs are totally unheard of, but nowadays, even tweens and teens know about VULs!
Well, my son does! (They must have read this book…)
VUL stands for Variable Universal Life Insurance.
Insurance agents, for the sale factor, call them Investment-Linked Policies.
Since the “investment” portion really stands out (If I were to get a VUL, I would really be proud of myself because I am making an investment), the VUL, along with Mutual Funds is one of the best selling products of insurance companies.
So, to answer that little question…
Is VUL, since it is an Investment-Linked Insurance Policy, Worth Having?
VULs are insurance agents’ best selling products (final expenses insurance should also always be considered, especially for our senior population.
My dad had one!)
I have probably been offered a VUL since 2005, but best selling does not necessarily mean that VULs are a perfect fit for you.
Disclaimer: I am not affiliated with any company, and I am not claiming that I have absolute knowledge of these products. Also, the figures/numbers that I will be using are just examples and for explanatory purposes only. You may consult a financial advisor for the current market rates.
What is a VUL?
A VUL is a hybrid kind of insurance policy, since it it basically a two-in-one product. It is an insurance policy with an investment component.
Since it is a life insurance, in case of the policy holder’s death, the beneficiaries will receive the proceeds.
Your investment will grow and you will get money when you grow old.
Isn’t that great?
If you pass away early, your beneficiaries will be taken care of.
If you retire, aside from the retirement benefits you will receive, the VUL’s investment portion has you covered.
Does this mean each one of us should rush out and get a VUL?
Before you do, let us study how a VUL works.
There are two kinds of VUL:
- Single Pay VUL
- Regular Pay VUL
Single Pay VUL is a kind of VUL wherein you pay one time, that is why it is called SINGLE PAY VUL.
Let us study how a Single PAY VUL works.
Illustration:
You paid P100,000.
Insurance terms/coverage: (1) 125% of your investment, or (2) your investment value whichever is higher.
Insurance coverage: You are covered for up to 125% of your investment – P125,000.00 (P100,000 * 125%)
Investment portion: VULs offer you a choice on where you would like to invest your money, giving your money a chance to grow over the years. If your P100,000 invested doubles through the years, becoming P200,000, your beneficiaries will get P200,000 instead of the P125,000 which we computed as insurance coverage.
Regular Pay VUL, as opposed to Single Pay VUL is a kind of VUL wherein you pay regularly either quarterly, semi-annually or yearly.
One of the mistaken notions of people availing of the Regular Pay VUL is that they are investing while they are paying.
With the Regular Pay VUL, your payments for the first years will go to the insurance portion of your policy. It is only after usually 3 or 5 years that your payments will go to the investment component.
Illustration:
- Insurance Coverage – P1,000,000
- Annual Payment – P25,000 annually
For the first year, most of your payment will go to the insurance component. Most likely, around P22,000 will be for insurance while the rest (P3,000) will be allotted for the investment portion.
This will go on until the third year. On the third year, you would have paid P75,000, but take note that you can only withdraw P9,000 (P3,000 * 3 years) which was the investment part of what you have paid.
Only on the 4th year onwards will your money be really invested.
For a Regular Pay VUL, you pay for the insurance first, then the investing later.
Insurance Part | Investment Part | |
Year 1 | 22,000 | 3,000 |
Year 2 | 22,000 | 3,000 |
Year 3 | 22,000 | 3,000 |
Year 4 | 3,000 | 22,000 |
Year 5 | 3,000 | 22,000 |
Now that we are enlightened on what a Single Pay VUL and Regular Pay VUL is, should you get a VUL?
On the Insurance side, Regular Pay VULs are good rather than having no life insurance at all (worse, no savings at all), but Single PAY VULs are better. Single Pay VUL is better because in Regular Pay VUL, majority of your payments go to the insurance component and can get quite expensive.
On the Investment Side, Single Pay VULs are good, but Regular Pay VULs are bad as an investment. The first three years of your insurance premium payment, when you think your money is being invested, only goes to buying very expensive insurance.
So should you get a VUL?
If I were you, I would prefer the Single Pay VULs, because Regular Pay VULs are kind of ok in terms of insurance (although very expensive) but bad investments.
Take note that this is just my opinion and the important factor is that you educate yourself about the different financial products offered and not to plunge head on just because your agent promised that your product has an “investment” portion.