I’ve recently participated in discussions where people regard VUL insurance as a scam and I can understand their sentiment.
To be fair though, VUL insurance is a legitimate product that is allowed by the Insurance Commission.
So why are people calling it a scam?
The main reason is incorrect expectations.
People tend to think that putting money in VUL Insurance is tantamount to investing their money. Wrong! VUL insurance is NOT an investment, so don’t treat it as one. It’s basically just insurance with a mutual fund rider that has a hefty management fee.
Because of the heavy fees that get deducted from your premium + the cost of the insurance itself, expect that only a small portion of the amount you’re paying goes to the mutual fund. Add the fact that most of the mutual funds in the Philippines aren’t that great in terms of fund growth.
The management fees that Insurance companies collect annually are usually 2-4%. So for every 10000 pesos that you put in, 200-400 pesos goes to the insurance company. If you compare this with ETFs like VOO which has a 0.3% management fee, Vanguard will only take 3 pesos from your 10K.
However, I guess the problem here is that some “Financial Advisors” feature VUL insurance as an investment more rather than an insurance policy. And of course, those who aren’t familiar with investment securities will gobble it up.
I can’t blame these FAs for doing a hard selling on VUL products though. They earn 40-50% commission for the first year of payment. They also get a commission somewhere between 10-20% for the next 2-3 years of paying the premium. This is the reason why the fund value of the investment part of your VUL policy is very low, especially in the first 5 years.
But don’t I need an insurance policy?
If you are a breadwinner or have dependents, an insurance policy is a must-needed expense for you. That said, you don’t have to get VUL insurance to get that protection. There are traditional life insurance plans or term insurance that you can get at a way lower cost than what you’re paying for with VUL insurance.
By the way, when getting insurance, check the death benefits since that is a major factor for the premium price.
How much death benefit should I avail?
I guess the question is, if you die today, how much money does your family need to get back on their feet? So you’ll need to consider the following:
- Do you have investments or bank savings that your beneficiaries can inherit?
- Do you have a memorial plan?
- Your life expectancy
- Exposure to life-threatening situations
- Age of your dependents
- Financial capability of your dependents
A life insurance policy shouldn’t be considered a “pamana” or inheritance. Its main purpose is to simply act as an immediate financial relief for your dependents.
If you want some ball figures, let’s try this example:
20K – Let’s say this is the actual amount that you’re paying for your family’s monthly essential expenses
So in a year, that’s 240K.
This means that a 1 Million death benefit will give your dependents financial relief for at least 4 years without them having to do anything. Excuse me for putting it bluntly.
And this doesn’t even add investments/savings/other inheritance into the equation.
Kuro-kuro ni Kuya Well
Uulitin ko, in case may matrigger na mga FAs dyan, VUL insurance is not a scam. It’s a legit product. But in my opinion, VUL insurance is like a low-quality product that you shouldn’t buy.
Biruin mo, inaabot ng 15 years bago mag-break even ang hulog mo sa VUL insurance and that’s using their projection of 10% annual growth. Eh hindi naman talaga ganon kataas ang growth rate ng mga mutual funds sa Pinas. So kung ang gagamitin natin is 6% na annual growth rate, aabutin yan ng 20 years bago magbreak even. And if we factor in inflation, yung actual value ng money mo is less than that amount.
My suggestion for those who need insurance and want to invest? Kuha ka ng murang term/traditional life insurance na may 1-M death benefit. May makikita ka dyang less than 500 per month lang. Then, yung pera na matitipid mo sa di pagkuha ng VUL insurance, ilagay mo sa Pag-IBIG MP2 kung ayaw mo magresearch ng ibang investment types.
So kung 2000 ang babayaran mo sana sa VUL insurance kada buwan, 1500 ang ilagay mo sa MP2, then 500 for your term insurance. In 10 years’s time na nagseset aside ka ng 2000 per month for insurance at MP2, break even ka na kahit 3/4 lang ang nalalagay sa MP2. This is using the average annual dividend rate ni MP2 na 6%.
Eh paano pa kung yung premium na babayaran mo sana sa VUL eh 5K per month? 5 years plang break-even ka na since ang maseset aside mo for MP2 is 4500.
I would still suggest that you learn about ETFs lalo na yung nagtatrack ng S&P 500 kasi ang annual growth rate ng US stock market is 10%.