Saturday, July 25, 2015

VUL or Term Insurance?

In this post, I would like to highlight the reasons why a VUL is better that term insurance in all aspects other than one: budget. If you can save up at least 40k per year, go with a VUL.

For starters, a term insurance is a yearly renewable policy that:
1) is very affordable relative to the coverage amount (8,000 annual premium can cover your life for 1M;
2) is temporary, that is, you will have to pay yearly to get covered;
3) is not invested in the stock market (no withdrawable cash even after years of payment);
4) increases its yearly premium depending on the risk and age of the applicant.

Comparatively, a VUL is a policy with fixed premium payment duration and fixed payment amount. Say, my personal VUL that is:
1) a 5-year, 70k per annum deposit arrangement whose premium is partially invested in the stock market (hence there is withdrawable cash after years of depositing);
2) permanent; there is no need to renew and reapply;
3) Expensive at 70k per annum;
4) Eats up money that could have gone otherwise to mutual funds;
5) Provides estate tax exemption to cash, savings, time deposits, mutual funds, UITFs in the form of topup.

Now for the comparison. Many people believe in the principle of "pay a minimum for your insurance and invest the difference". While this is true, and a term insurance will likely do the job leaving one with more investable cash, it will fall short in some important aspects.

One can become uninsured when the term insurance renewal application is declined. Reasons include:
1) having had an illness, critical or otherwise, having become too old or too risky for the insurer;
2) Increasing premium as one ages and if one reapplies with a health condition;
3) Impossibility of having your cash savings tax-shielded (I plan to withdraw a large part of my MFs and trading capital and top it up onto my VUL before death, and it is possible).

Some say getting a term insurance first and then availing a VUL in the future makes more sense. However, getting a cheap term insurance in the early years and then deciding to get a VUL, say, at age 45 will result to VUL premiums that have become more expensive and its benefits too low.

Here is the takeaway:
Get your limited pay VUL and have your life and health insured permanently. Below is the numerical reason why I preferred a VUL to term.

*With a term insurance, from age 28-90 I would have paid roughly 930k worth of premium deposits. This does not have any withdrawable cash. I am also at risk of being declined upon renewal.

*With a VUL, from age 28 to 33, I would have paid 400k. I may have 5M withrawable at age 65, covered by 1M critical illness till age 75, AND at least 1M guaranteed death benefit till age 100.

Returns of VUL:
Total premiums paid: 400k
Total benefits by 20th year: 1M Life + 1M Critical Illness + 1.5M withdrawable cash
ROI: 775%

It is not a matter of what works for you or what makes you happy, as some financial consultants would say. There are objective, quantifiable things in this world and insurance is one of them.
Go with a VUL if you can save 40k yearly.

Horeb Eliot
Premiere Financial Consultant, Philamlife
Professor, Political Science and Economics of Development, UP