I have read some blogs of certain financial experts advising people not to buy or invest in a VUL insurance because of the high charges that can eat up their account value (No. of units x NAVPU) and that people should instead buy a term insurance, which is significantly cheaper, and invest the difference in stocks, mutual funds, UITFs or ETFs. Other arguments against VULs is that it is only for those who are lazy to learn about investing themselves and that people who reach a ripe old age no longer have any young children or dependents to worry about when the call of death arrives.
While these seem like valid objections, however, there are some very important things about VUL insurance products that these writers have failed to consider. But before I proceed to address these issues, let me first define what a VUL is. VUL stands for Variable Unit-Linked/Variable Universal Life. According to Investopedia, a VUL is “A form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount. The investment feature usually includes sub-accounts (pooled funds) which function very similar to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.” As Mr. Rienzie Biolena, RFP, puts it: “It is an investment and life insurance product in one. The difference between a VUL and other forms of life insurance is that part of the premiums is invested in pooled funds which, in time, are expected to grow in value.”
Now, for my observations: First, you cannot make withdrawals from your term insurance because it does not have cash value unlike Whole Life and VULs which have cash/account value and can therefore also serve as your savings “account” in the case of the latter. Hence, the only way for an insured to enjoy his purchase is that if he or she dies during the term of the policy, which, in this case it is not really the insured who enjoys it but the beneficiaries. Second, according to Mr. Randell Tiongson, RFP: “It is interesting to note that less than 20 percent of term insurance policies are still in force when the insured dies and, therefore, never pay a claim.” Third and most important of all, since the death benefits of a VUL, which include the amount invested in the pooled funds, is still classified as insurance, the proceeds thereof are excluded from the computation of gross income [Section 32(B)(1), National Internal Revenue Code of 1997] and gross estate [Section 85(E), Ibid] thereby exempting it in effect from taxation, provided, that the assignment of beneficiaries is irrevocable. Unfortunately, the same does not hold true for gains derived from investing in mutual funds, stocks, unit investment trust funds, or exchange traded funds, because in case of the death of the investor, such gains, if any, including the principal amount shall still form part of the gross estate and therefore subject to estate tax. And the worst part is, once the bank or financial institution finds out about the death of their depositor or investor, such funds are mandated by law to be frozen until payment of estate taxes is completed. That is why, as discussed in one of my previous blogs, life insurance, particularly VULs, is an indispensable tool in estate planning.
As a side note, there are VUL products, such as Philam Life’s Money Tree, that while providing minimal guaranteed life insurance coverage, has virtually the same rates of return as mutual fund investing. Maybe the writers criticizing VULs as a whole were not aware of the existence of VUL products such as the Money Tree or were greatly misinformed. As I conclude, remember that prior to investing, it is important to know your needs and goals before handing in your hard-earned money and diversify! As the wise teacher said: “Invest what you have in several different things. You don’t know what bad things might happen on earth.” (Ecclesiastes 11:2, ERV)