Understanding Term Insurance and Variable Universal Life (VUL) Insurance

We all know that life insurance is an indispensable tool in planning our finances, you’re done with that.

One problem though, as you begin checking out the life insurance that you’ll be getting, you’re starting to get overwhelmed on the many choices that you have out there – Term Insurance, Variable Universal Life, Whole-life, and Endowment.

The question is, which one?

Confused? Let’s talk about each one of them, starting with the two types.

Two Types of Life Insurance

1. Traditional Life Insurance

Life Insurance has been a part of financial planning for several centuries, where the first policies were taken out in the early 18th Century. It had evolved so much back then.

Traditional Life Insurance are the type of insurance where our parents and grand parents are familiar with (they are, well, traditional). Kinds of Life Insurance here in the Philippines that fall in this classification are the following:

  • Term Life Insurance
  • Endowment Life Insurance
  • Whole-Life Insurance

These types of insurance may generate cash values and/or provide dividends.

2. Variable Universal Life Insurance

The evolution of life insurance has lead to the creation of Variable Universal Life Insurance, popularly referred to as VUL.

Since the introduction of VUL to the market, its acceptance lead it to become the best-selling Life Insurance policy during the past few years – taking 80% to 90% of life insurance policies sold.

VULs are popular for combining the protection brought by Life Insurance and the ability to grow your money through investments through Managed Funds

Confused?

Let’s dig deeper on two types of policies – Term Life Insurance and Variable Universal Life Insurance.

Understanding VUL & Term Life

Term Life Insurance

Plain vanilla Life Insurance – no frills, no complexities, just life insurance, period.

Term Life is the simplest type of Traditional Life Insurance, or in all types of Life Insurance in general. It does not earn dividends, no cash values accumulated, nothing – just life insurance, plain and simple.

The best feature of a Term Life Insurance is it’s inexpensive compared to other types of Life Insurance. It could provide the highest Life Insurance Coverage for a very low budget.

To provide you a perspective on how much it is, a Term Life Insurance for a 30-yr old non-smoker male, a P2 Million Pesos Coverage will cost around P9,300 per year (sample proposal from Sun Life’s SUN Safer Life).

However, since there are no cash values and/or dividends accumulated for this life insurance policy, you will be paying for it all throughout the lifetime of the policy while it’s enforced (active).

Also, premium rates increase as the years progress, how often depends on the design of the policy by different life insurance companies. It could increase every year, every 3 years, or in the case of the sampled proposal above for Sun Life’s SUN Safer Life, every 5 years.

Is Term Insurance for you?

Here are some profiles that fits perfectly the policyholders of Term Life Insurance:

  • You have a low budget and a very high need of considerably high life insurance coverage
  • You have short term needs of high life insurance coverage, e.g. used as Mortgage Redemption Insurance (MRI) for housing loans, or to protect your children to ensure whatever happens, they’ll be able to study, etc…
  • You opt to manage investments and savings separately from insurance – implementing the Buy Term Invest the Difference Strategy, often referred to as BTID

Variable Universal Life Insurance

Popularly known as VUL.

In the simplest context, a VUL is a combination of Life Insurance and Investments on managed funds, e.g. Mutual Funds (if you are not familiar on how managed funds work, you may check out the video that I have created here).

The Life Insurance portion is actually a term insurance, identical to what have discussed above.

Once we understand the separate concepts of Term Insurance and Managed Funds, understanding VUL is a breeze.

Two Types of VUL

Should you find yourself in a position wherein you’re inclined in getting a VUL, there’s one thing you should know – there are two types of them: Regular Pay VUL and Single Pay VUL.

Single Pay VUL (SPVUL)

As its name implies, this type of VUL requires a one-time pay investment – usually around P50,000 and up, depending on the insurance provider.

Single Pay VUL focuses on investment with a very minimal life insurance component. It is an insurance product in form, but really, an investment in substance.

I have dealt a very detailed explanation about SPVUL on an earlier blog post. You may check it out here.

Regular Pay VUL

If SPVUL focuses on investment, Regular Pay VUL “generally” focus on Life Insurance.

I used the word “generally” because it’s still flexible enough to focus on investment or life insurance, depending on how it is designed.

For a comparative analysis, let me show you some differences of Term Insurance and Regular Pay VUL using the same profile that I have used in the Term Insurance example above.

Term VUL
Annual Premium at age 30 9,300.00 44,160.00
Annual Premium at age 60 21,650.00 44,160.00
Estimated Fund Value at age 60 @ 10% Compounded Rate of Return 5,863,942.00

Please note though that this is not an apples-to-apples comparison. I showed this table so I can illustrate the differences between the two. For it to be comparable, you need to compare Regular Pay VUL vs. the BTID strategy. For more info, check it out here.

In the table, you may be able to spot some differences:

  • Term Insurance is way cheaper than Regular Pay VUL
  • Annual Premium for term insurance increase. Regular Pay VUL’s does not.
  • Regular Pay VUL accumulates fund values (cash values) which can be withdrawn anytime. Term Insurance does not.

Again, I don’t intend to show which is better. The purpose is to show the differences.

Is Regular Pay VUL for you?

Here are some profiles that fits perfectly the policyholders of Regular Pay VUL:

  • You opt to get “something back” to Life Insurance policies that you are paying.
  • You don’t have a considerable budget to go for BTID, but you want to target both Life Insurance and Investment at the same time.
  • You are diversifying your strategies – availing VUL while doing BTID.
  • You prefer monitoring less accounts and combining both Life Insurance and Investments makes it more manageable for you.

Which one is better?

It depends on a lot of factors.

The better choice will always be the one that meet your objectives. Thus, in choosing, it’s best to describe first to your Financial Advisor what you wish to accomplish – that’s the job of the advisor, to find a solution that will meet the requirements of the goals you want to achieve.

Should you wish to receive a FREE QUOTE/PROPOSAL, you may request here. A Financial Advisor will keep in touch with you.

Do I Really Need to Purchase Life Insurance if I Already Have That Benefit From My Employer?

Most Filipinos in the working class are employees. And since a very common benefit from employers are life insurance and health cards (HMOs), the need to purchase a separate individual life insurance is no longer necessary, right?

Besides, if one already own a car, why does he need another one? That’s luxury! So if I already have a life insurance policy from my employer, why would I need another one?

WRONG.

Let’s put it this way (oh I love metaphors!).

Does having a job necessarily say we have enough resources to sustain our lifestyle?

Not necessarily. Few questions needed to be answered. First, how much do we earn? Second, how much do we spend? Third, how far do you want to go with life?

Or say you have one set of clothing (shirt, undergarment, pants, etc…). Does having a set means you have enough? Obviously not since you needed to be “covered” for the rest of the week.

For both comparison, answering the question “How much do we need or how long do I need it” is very crucial before we can say we have enough.

Life Insurance is not different, and definitely investments (but let’s reserve that on a different conversation).

Understanding the Need

Life insurance plays different vital roles in the way we plan our finances. We have to understand that the question is not if we have life insurance, the question is how much coverage do we have.

Let’s take a look of the most common uses of life insurance to help identify whether what your company provides is enough.

Life Insurance for Income Replacement

Alright, before you leave this page after reading yet another financial jargon, allow me to explain what this alien term means.

Income Replacement generally refers to the ability of life insurance to provide income to the family during an untimely death of the family’s breadwinner. Life insurance “replaces” the lost income of the breadwinner caused by an untimely death..

Now, say your company gives you P500,000 life insurance benefit, will that amount continue to feed your family, pay the bills, bring your children to school, and shoulder their lifestyle in the next say 5 or 10 years.

If you answer no (and I’m sure you will), then adding up more life insurance coverage is necessary.

Shouldering the Cost of Death

Everyone is different, we have different lifestyles, different views in life, different likes and dislikes, and a very long list of things we do differently.

There are two life experience that we are 100% sure that we share – we were born, and someday, at our own time, we will face death.

For people who are in the stage wherein they are still building their wealth, life insurance provides a safety net to ensure that an untimely death will not compromise the journey to financial independence of the family left behind.

Simply put, we take responsibility to fund the costs relating to our own death (morbid, I know, but it’s one thing we should openly talk about). Let us not be a burden to anybody else.

Now, does your P500,000 life insurance coverage from your employer would suffice the cost of death? Well, studies say it could take around 1M to 1.5M to cover the cost of death in the Philippines.

Protecting the fruits of your Hard Work – Your Assets

There’s one scary thing about dying with too many assets named after us. We call these horror Estate Taxes (Alright! I might be exaggerating too much).

When a person dies, all the assets/properties he have accumulated over his lifetime will be frozen by BIR until appropriate taxes are paid be the heirs. We refer to these taxes as Estate Tax.

“Frozen” means your heirs won’t be able to access your bank accounts, investments, and real estate properties. Without having the ability to access your assets, how could they be able to pay the Estate Tax?

That’s where life insurance comes in.

Using the same example, is your P500,000 life insurance coverage provided by your employer enough to pay the estate tax? Let’s put it this way, if you have successfully built your wealth through your lifetime and have accumulated P20,000,000 worth of assets (savings, investments, and real estate), P500,000.00 is not enough.

At most, you’ll be needing P4,000,000 life insurance coverage.

Add the fact that your life insurance coverage from your employer usually does not extend after retirement.

Now, is having life insurance benefit from your employer enough?

Given the above considerations, it’s not in most cases.

Having a life insurance benefit in your company doesn’t necessarily mean you have enough. You are dressed today, but not for the rest of the week.

Remember that the question is not if you have life insurance. The question is how much life insurance coverage do you have.

In the next articles, let’s talk about how to compute the ideal life insurance coverage that you should have in order to have a solid financial plan.

Why Invest in a Single Premium VUL (SPVUL) instead of Mutual Funds or UITF

You have at least P500,000.00 in your bank deposit account and are planning to invest it in an investment that would help you make your money work for you. You were brought to several options, and you have ended up choosing between a Single Premium VUL, a Mutual Fund, or a UITF.

Now, you’re confused.

First off, the listed options are all pooled funds managed by professionals called fund managers. In investing in either of the three, you will be asked whether you’ll want to invest your money in an Equity Fund, a Bond Fund, or a Balanced Fund.

They are the same in almost all aspects. Their difference lies on the structural aspect. Single Premium VULs are offered by insurance companies, thus, are regulated by the Insurance Commission (IC).

Unit Investment Trust Fund, popularly referred to as UITF, are offered by banks and managed by their trust department. The regulatory body is the Bangko Sentral ng Pilipinas (BSP).

Mutual Funds, on the other hand, are managed by Investment Companies and are regulated by the Securities and Exchange Commission (SEC).

I know, stating those differences doesn’t bring up any clarity in your decision making. Now, let’s talk about benefits.

mf vs. spvul

Benefits of investing in Single Premium VULs over Mutual Funds and UITF.

The truth is, there’s really not much difference between a mutual fund and UITF in terms of benefit. For discussion purposes we’ll just compare Mutual Funds and Single Premium VULs.

Allow me to use Sun Life’s Maxilink One as a sample for Single Premium VUL, and Sun Life’s Prosperity Fund for Mutual Fund.

Here’s the situation. You have P500,000.00 to invest in a 10 year time frame. You are inclined to investing in an Equity Fund, you’re just not quite sure whether to choose a Mutual Fund (or UITF) or a Single Premium VUL.

Now, you decided to look at the numbers.

Let’s assume that in both funds, the average annual rate of return is 10%. Both funds, Mutual Fund and Single Premium VUL, uses a backend fee system of 5%, diminishing by 1% yearly (If investment is redeemed in the first year, charge is 5%, if on second year, 4%, and so on and so forth. Redemption of investment after the 5th year no longer have a redemption charge.)

Investing in Mutual Funds

 
Year Fund Values
1 550,000
2 605,000
3 665,500
4 732,050
5 805,255
6 885,781
7 974,359
8 1,071,794
9 1,178,974
10 1,296,871

Projected fund value of the mutual fund investment after 10 years is P1,296,871. Mutual Funds are very flexible that you can withdraw your investment anytime without being bounded by holding period. However, there are sanctions for early redemption.

Investing in Single Premium VUL

 
Year Charges Fund Values
1 266 548,615
2 168 602,146
3 137 660,995
4 102 725,608
5 61 796,537
6 18 874,399
7 959,872
8 1,053,700
9 1,156,700
10 1,289,986

At year 10, the projected Fund Value for a Single Premium VUL is P1,289,986.00. The difference of P6,885.23 to the fund value of Mutual Fund is attributable to the insurance charges for the Single Premium VUL. Investment benefits are identical for Mutual Funds and Single Premium VUL.

Looking at the projected 10 year fund value, you might be concluding that it’s best to invest in mutual funds because it’s higher than Single Premium VUL by P6,885.23.

Benefits of a Single Premium VUL over Mutual Funds, UITF, Bank Deposits, and Real Estate Investments

It is an insurance product. Thus, the minuscule difference of P6,885.23 is really very immaterial compared to the benefits it could provide to the investor (or beneficiaries of investors).

I. Minimum Death Benefit. The death benefit for a Single Premium VUL is then higher of 125% of Single Premium or the Fund Value. In our illustration, it is the higher of P625,000 (P500,000 x 125%) or the current Fund Value of the investment.

This means that in the event a policyholder (investor of a Single Premium VUL) dies while the fund value of his investment is lower than P625,000, his beneficiaries will still receive the minimum death benefit of P625,000.

Say the fund value of the invested P500,000 at the time of death is P400,000 (market declined significantly), the beneficiaries will still be receiving the GUARANTEED minimum death benefit of P625,000 (as long as no withdrawal was made in the fund).

Or lets say the fund value at the time of death is P800,000 (market rises significantly), the beneficiaries will be receiving P800,000, which is higher compared to the minimum death benefit.

In case of a Mutual Fund or UITF, the people left behind will receive only the fund value, regardless if it is higher or lower the the amount invested.

II. Liquidity upon death. While all other assets (investments including Mutual Funds, Stocks, Cash Deposits, and Real Estate) will be frozen by BIR until the appropriate taxes are paid, investment in a Single Premium VUL are readily available to your loved ones. The reason behind this is that Single Premium VUL is still an insurance product.

If you have defined an irrevocable beneficiary, your investment becomes tax exempt (tax-free).

The Bottom Line and Final Recommendation

On a more holistic financial planning perspective, I am recommending a Single Premium VUL over investing in Mutual Funds and UITF. It is a great tool to use in planning your Estate while having the ability to enjoy your investments while the investor is still alive, contrary to other insurance products wherein the benefit focuses upon death, including a Regular Pay VUL in it’s infancy years.

The only barrier to entry in using a Single Pay VUL is its price point – you’ll be needing a much higher initial investment compared to a Mutual Fund wherein you could start with just P5,000.

Here is my recommendation. If you have the funds and are thinking to invest in a managed fund, then go for a Single Premium VUL. Period. (Well, unless perhaps you are already FULLY INSURED)

**You can request for a Single Premium VUL Quotation here for FREE!