Dissecting VUL

Some people still ask the question whether VUL is a good investment and I had already written my view about it. Here's a detailed explanation why for me it's not an investment:

1) They say it's a 2-in-1 product (insurance + investment)

Let's review the product. 2-in-1 meaning death benefit plus riders (accidental benefit, critical illness etc.) + investment (mutual funds which can be withdrawn or borrowed so it's a living benefit).

However, the policy will lapse once the fund value (investment) is insufficient to pay for the charges. Yes, you read that right. That's why some people complain about those who have limited pay VULs (5, 10, 20 years to pay) why do they have to pay again for additional premiums.

With that, is it really a 2-in-1 product? Well, I think it depends on what you want to achieve.

2) Fees! Fees! Fees!

Agents/advisors usually don't discuss this matter. Didn't you know that there are 3-4 charges in a VUL.

a) Premium Charge - deducted upon payment of premium. Like mutual funds, this is the sales load being deducted.

b) Cost of Insurance/Periodic Charge - deducted monthly. This amount is for the death benefit plus riders. So the more riders you have, the higher the charges. In short, we are actually paying for that benefit. Take note that the charge is deducted as units in the fund value. *As per research, cost of insurance is increasing. You can verify it with the agent.

c) Management Fees - like mutual funds, the NAVPu (net asset value per unit) is already net of fees.

Example:

Death Benefit: P1 million
Annual Premium: P25,000

Usually for the first year, 85% goes to charges right away so P25,000 x 15% = P3,750 is the amount that will be left less 5% premium charge and say the cost of insurance is P500 monthly = (P2,437.5). With that, you still owe the company. That's why they say it will take you 3-5 years at most before you can see the growth of your fund; and others prefer the BTID (buy term invest the difference).

However, if you are still keen on this kind of product because of the protection part but wanted a larger portion of the premium to be invested, I would suggest a SPVUL (single pay VUL). It's a one-time-big-time payment but the objective of the fund is more on investment. There will still be charges same as mentioned above but lower compared to the regular/limited pay. For more information, you can check http://www.ronmagsalin.com/2016/07/single-pay-vul-spvul-tool-for-wealth.html

**I tried searching on how to really grow the investment portion in a VUL and I found this http://www.lifeant.com/make-money-variable-universal-life-insurance-vul/. It's a bit vague however, if you know how mutual funds or stocks work, you will understand what the article means. I haven't tried it yet since I just came across with the article after years of researching about insurances. I will write a separate article upon application. I'll try to do a peso cost averaging method (monthly payment of premium) or advance premium payment if the market is down. For now, the market is still high so I am waiting for the right time.

#Happy Investing!!

 

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