How To Choose The Right Insurance Product For You
Most people who I read about who advocates financial literacy recommends that before investing, one should first secure protection by getting an insurance.
The reason behind it is that in the event that something happens to us while we are building our wealth, insurance will help cover up the costs of an untimely death and will save your beneficiaries a large sum of money to pay estate taxes.
I always hear the term VUL when talking about insurance. From what I previously know, a VUL (Variable Unit Linked) is an insurance and investment packaged into one product.
A VUL sounds like a good idea if an individual wants to have protection and a retirement fund at the same time by just paying a certain amount within a period. VULs typically are payable within five to ten years and guarantees you insurance protection until you grow old. It also removes all the complications of investing directly on stocks, bonds and mutual funds.
Then, there’s also Term-Life Insurance where you pay until you grow old or when you die. Life insurance is also cheaper but unlike VUL’s it doesn’t have an investment component.
I have read a lot of articles and watched a lot of youtube videos about the subject of insurance. The topics I’m deeply interested is the comparison of VUL’s over BTID’s (Buy Term Invest the Difference).
I’ve found out that BTID’s are the better choice whereas some say that VUL’s are the best insurance protection every individual must have.
I don’t have any knowledge about insurances so what I did is I asked a friend of mine who is a financial advisor on one of the leading insurance companies in the Philippines to visit me in our office to discuss about it.
Here’s The Story
A friend of mine (let’s call her friend 1) once quoted me a VUL insurance two years ago. Since I’m not interested at investing or getting insurance protection at that time, I didn’t mind her and let the offer pass by.
Two years passed and it so happened that just recently, this friend of mine (let’s call her friend 2) asked me if I know someone who sells insurance since she’s interested. I remembered friend 1 and recommended friend 2 to her.
Because of that recommendation, I had a nice chat with friend 1 regarding the topic. The idea of getting a VUL made me excited.
Since I’m one of the breadwinners of the family, I initially thought of getting a VUL since I’m not insured yet. The fear of not having an insurance scared me because I already experienced motorcycle accidents since I started riding.
If I get disabled or if I die, what would eventually happen to my family? That thought scared me a lot.
I also thought of getting one to diversify my investments. Since the stock market is down these days, mutual funds are now cheaper to buy.
With all that reasons mentioned, I’m now inclined to get a VUL. So I invited her to visit me in my office to give me a quotation and explain what are the advantages of this type of insurance.
I was given two quotations. Here’s the breakdown;
Proposal # 1
The second quotation is much more expensive;
Proposal # 2
You’ll notice that the second quote is much more expensive than the first because as she explained to me, the second quote is geared for a much higher retirement fund. The first quotation has more benefits but the retirement fund at the age of 65 is much lesser than the second.
Now what concerns me is the retirement fund. I was literally shocked to see the estimated retirement fund calculations. When I reach 65 years old, the first quote only shows a Php 416,842.00 assuming a 10% projected rate of return. The second quote, I get Php 1,904,465.00 assuming a same rate of return. It’s high but still not enough.
Will you really be happy if you reach 65 years with just almost four hundred thousand pesos? I think with that kind amount of money, you’ll be wiped out dry within the next three years.
Now what about the other one which will get you almost two million pesos? That is good if don’t live longer than expected. But if you do, you’ll definitely exhaust all those funds in a matter of years. After that, you’ll be left to ask support from your children who at this time might be fighting their own financial battles too.
After carefully evaluating the proposals given to me, I can say that I’M NOT impressed on the returns on the whole duration of my proposals. It made me think of the BTID strategy so I asked for a Life Insurance proposal from her. I told her that I want to compare Term-Life BTID strategy and VUL. It took her two weeks because of unavoidable delays in her part.
Here’s the details of my Term-Life Insurance proposal;
Proposal # 3
Monthly premium would be;
Now that I have three proposals; 2 VUL’s and a Term-life insurance at my hand, I decided to do a comparison on the three to find out if VUL’s are really the best insurance option at my age.
Studying The Numbers
Before anything else, let me first state that both VUL and Term Insurance are good protection vehicles. Each one has advantages and disadvantages over one another. The right insurance for you will depend on your future goals so better sit down with a financial adviser to get professional advice.
With that said, let me proceed.
The proposals sent to me were based on three things;
- I’m only willing to pay as much as 1.5k/month for insurance premiums;
- Face amount should be at least 500k pesos, and;
- Must have the highest amount of invested returns with respect to the premium payments.
I don’t want to prioritize paying insurance premiums. I don’t want spending a lot of money over thinking what would happen in the future that’s why I decided as much as possible to limit my insurance premiums by Php 1,000.00 – Php 1,500.00 per month. I’m also not interested in high benefit amounts.
500k is more than enough for my beneficiaries to start a thriving business that will replace my income if something happens to me since I don’t have any estate at all at this time.
And more importantly, I want to invest at the same time so I also want the highest amount of investment returns that can be attained by the premiums I’m willing to pay.
How VUL’s Work
In a VUL, part of the premium payments goes to the insurance charges and the rest into a pooled fund of your choice. What I want to know is how much money goes to the pooled funds.
In the 1st and 2nd proposal, I was given a computation of the estimated projected returns until I reach age 65. In the figure below, you’ll see the amount of premium payments and the projected fund value on the first twenty years assuming a 4% annual rate of return on the 1st proposal. You can also see the charges based on the 4% return.
I only projected it for twenty years because the proposals doesn’t include a detailed breakdown after the 20th year.
Putting it into a chart, we can see that the fund value is declining every year because the charges is eating away the capital.
By the time my fund reached the end of its 20th year at a steady 4% return, I would only have Php 68,326.00 left in my fund.
I also learned that if this continues at a steady rate, the policy will terminate at year 26 if premium payment is not paid. Reason is that the fund value would no longer be enough to pay for the monthly charges.
For the VUL to be sustainable, additional premium payments will be needed to pay for the charges on the succeeding years.
Well that sucks if you’ll ask me because the reason why you’re paying for VUL is for protection and retirement.
But, if the fund will perform an average of 10% yearly, there wouldn’t be a problem. I would have approximately Php 416,842.00 in my fund when I reach the age of 65.
I like the 2nd proposal where I would have to pay Php 20,678.00 annually because even at 4% annual returns, I would have Php 261,325.00 in my fund after 20 years.
When I reach age 65 at 4% annual investment return, I would have Php 348,321.00. If the fund performs at 10%, I would have Php 1,904,465.00.
Using BTID Strategy
Without actual numbers backing up to prove the thoughts presented, I thought of making a self-analysis about the topic to find out myself if it is true or not because there are also a lot of articles out there explaining why BTID isn’t wise either like here.
To give a brief overview, BTID or “buy term invest the difference” is a strategy that separates insurance and investment in which the main objective is to lessen the expense and get higher returns as compared to getting a VUL.
Comparison Of Total Premium Payments
I did a comparison of the total premiums I have to pay on the first twenty years on the three policies. I found that out of the three, The Term-Life Insurance proposal (proposal # 3) has the highest premium payments in a span of twenty years.
One reason I think that my life insurance proposal has the highest premium payments is because of its face value. The VUL’s have Php 350,000.00 and Php 600,000.00 whereas the life insurance has a Php 1,000,000.00 face value.
As I’ve said, I only want insurance who will fit my budget. I thought that life insurance would be cheaper than VUL’s but I guess based on my profile, I’ll be paying more in the former. If the VUL’s have the same face value as the term-life, then maybe the term-life proposal will have the cheapest cost.
Comparison On Investment Returns Of Proposal #1 (VUL) And Proposal # 3 (Term-Life BTID)
The table below illustrates what will happen to the investments if I apply BTID instead of getting the first VUL proposal. The difference of the premium payments between the two is shown starting from duration 1 to 10. The difference is then invested in a mutual fund assuming a 2.15% management fee at a 4% annual rate of return. The gains are shown on the last column amounting to Php 67,897.63 net of charges.
Putting it into a chart, it shows that after twenty years, both strategies shows almost the same returns. But as I stated early on, the VUL will run out of funds at year 26 while the BTID will continue to rise.
With the figures above, I think BTID is the best option if you just want to be insured for twenty years. If you choose VUL, you’ll be needing to pay premium payments just to maintain payment for the charges.
The advantage of VUL over BTID in this scenario is that you’re still insured even after the 20-yr. period.
But of course, the figures above reflects a 4% return which is very conservative. If the fund performs for an average of at least 10%, then I think VUL would be the better choice on the investment side.
Comparison On Investment Returns Of Proposal #2 (VUL) And Proposal # 3 (Term-Life BTID)
On the third proposal, I will definitely go with VUL this time. The table and chart below shows the returns on a 20-yr period at an annual 4% return.
Comparison Of Investment Returns On All Proposals At 4% Annual Rate Of Return
In the chart below, I can conclude that the 2nd proposal (VUL) will yield a much higher investment return on a 20-yr. period.
Some thoughts to consider;
- VUL#2 has the least amount of insurance benefits compared to the other two. If I prioritize investment over protection, then this is the better choice.
- I can also consider getting term-life since I’m already investing in stocks. That would be the cheapest option if I plan on insuring myself in just twenty years and use my investments on stocks for my retirement.
- I can also choose VUL#1 since the investment returns I considered in the study is 4%. If the fund will perform higher than 10%, then it strikes a balance between the benefit amount and the investment return.
Before you decide to buy an insurance, I suggest that you ask yourself these four things first;
- How long would you want to be insured? Do you want to be insured your whole life or just within a certain time frame?
- How much money are you willing to pay for your insurance coverage?
- How much face value and how many riders do you want included in your insurance coverage?
- How much money you want in your retirement?
The term-life insurance sent to me has a 1 million face amount which has a guaranteed 200% on death. In the three proposals, I would say that this is the choice on the insurance side.
What I don’t like in term-life insurance is that you have to pay even after you’re retired unlike VUL where it is only payable in ten years. Payments are also increasing every five years on term-life while on VUL, it’s almost the same.
On the other hand, VUL gives you the best investment return in exchange for a lower benefit amount. To increase the face value to 1 million means that the premium payments would also increase which I may not be able to afford if I get one. Since I don’t be needing an insurance worth 1 million and I’m contented with just 500k, I think I would choose proposal #2 out of the three.
So choosing the right insurance product for you really depends on your life goals and plans. What I suggest for a newbie like me shopping for insurance is to get different quotes and make a study like the one I did above so that you can make better decisions.
To conclude, I think BTID strategy is only good if you want short-term protection while investing. If you want a long-term insurance while investing at the same time, then go buy a VUL.
Be safe and be insured!
Disclaimer: The above tables and charts presented are based on proposals given to me that reflects my life goals and investment horizon. Everyone of us has different views and goals so it is very important to consult with a licensed financial adviser regarding VUL’s and BTID’s if you ever plan on buying one.