I’ve read on Facebook a post regarding insurance and I felt sad about some of the comments. That’s why many people have negative sentiments about insurance because it is not properly explained. Also, I find a bit odd for those who are recommending VUL as an investment when in fact, it is an insurance (main purpose) with an investment part (that's why premium is more expensive compared to traditional).
When I first bought my insurance (VUL), I really didn’t understand what for. I just bought it because some of my former colleagues bought also. Then one day, upon checking my fund value online, I was disappointed. So, I did my research and continuous research until I somehow understood it. It’s still a bit vague actually and I hope those who are FA’s here in this group will verify my understanding.
In my opinion:
INSURANCE is NOT an INVESTMENT. Purpose is more on PROTECTION. Insurance, as defined by Investopedia, is a contract, represented by a policy, in which an individual or entity receives FINANCIAL PROTECTION OR REIMBURSEMENT AGAINST LOSSES from an insurance company. So, insurance for me is an EXPENSE in reality. Look at car insurance, home insurance, fire, health etc. Do you consider them as investments? For me, no and I think it’s the same as LIFE INSURANCE. The only difference is the type that it protects – LIFE. Why do you think getting insured comes first before investing? Because death, accidents, sickness are inevitable. Also, have you ever wondered why some recommend that the BREADWINNERS should get an insurance first and foremost? Well, to protect the family for income losses. In short, it is an INCOME REPLACEMENT FUND as others say. (For me, I call it 'expense with benefits')
With that, how then is an insurance be an investment? Based on my observation and understanding, it depends on the type of policy one has – Term, Whole life, Endowment, VUL/ILPs. People think that an insurance becomes an investment because of the CASH/FUND VALUE where one can withdraw/borrow from it. However, once the cash/fund value is insufficient to cover the CHARGES especially the insurance charges, the policy will either lapse or the insurer will ask you to TOP UP. (Yes, there are charges involved not only one but two or three depending on the insurer. For my policy, I only see two – transfer and administration charges. Deducted monthly as units since mine is a VUL. Actually that would be three, including the fees in the fund as the NAVpu is already net of fees. Also, check the allocation of your premium. Usually 80% of it goes to charges for the first few years while 20% goes to your investment.)
I also asked myself whether endowment plans or those with guaranteed values are worth buying or not. Why? Because usually these plans can be withdrawn only after a certain number of years. For example, pay the amount of xxx for xx years, withdrawable on the 15th or 20th year onwards etc. I tried computing it and noticed that, the interest is not really that high. It’s just the feeling that there is an amount guaranteed. That’s why some people get scammed because of the word GUARANTEED in it. I am not saying that these plans are scam; you just have to understand how they work. Why do you think companies offer such products if they will not be earning? Why do you think most pre-need insurances are bankrupt? Why do some say it’s better to BTID (Buy term, Invest the difference)
As per research, insurances earn from premiums paid and portion of that are invested in real estate, stock, bonds, money market etc. Try reading this for more understanding, http://insurance.credio.com/…/how-insurance-companies-make-… (Check the FS of Sunlife for verification or if you have any access to the FS of any insurance companies.)
Why am I sticking to my insurance despite of negativity? I recently checked my fund value and compared it with the projected value @ 4% (very conservative) provided in my policy and well, it's way below it. But since I am a breadwinner and I have been paying for 7 years already, it’s not worth giving it up and since I wanted to be financially free, it is for estate tax purposes. To be non-taxable, make sure that BENEFICIARY is IRREVOCABLE. My plan is payable until 88. I hope I will not outlive that or else, the face amount is gone. Also, I don’t intend on withdrawing the fund value unless needed and hopefully, by that time it will be more than the premiums I have paid for.
That’s why assess first your needs before buying one and also, make sure that you are not over insured, thinking it’s an investment. Also, always remember that the (unguaranteed) cash value/fund value is dependent on the company/fund's performance. Risk is the same as stocks, MF, UITF, business. Buying insurance is protecting yourself and family from the 'what ifs of life'. What if I (die early, meet an accident, get sick)? What will happen to my family? *Make sure you are clear about what you want for the protection of your family and whether you want the product to provide investment returns too. You do not need to buy a bundled insurance and investment product if you only require protection for your family. If your resources are limited, make sure you get some basic coverage first. You can always increase coverage later when you are better able to afford this. (*moneysense)
**Another thing, why do you think some people advise to have one while still young? Because, as you age, premiums get higher. So if you bought at 20 yrs old with a monthly premium of 1500php. That would be your premium even if you reach 40 or have a family unless you make changes in your coverage. That's why I don't like Term insurance. What if I outlive the policy? Then I need to buy another one and for sure, my premium would be higher then. (**depends on the policy. Ask your FA)
#Happy Investing Kabayan!
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