Wednesday, July 8, 2015

VUL Phobia. Is it Really That Bad?

There are still many people who are not into investing yet they have huge amounts of money stuck in their savings accounts. They are capable yet one of the biggest reasons why most of them don't is their scepticism of the investment processes and having very little trust to financial advisors/agents. Unfortunately for some financial advocates, they think they are helping these people to decide better by telling them to stay away from an investment product by merely giving this subjective reason of "greed" of some agents.

Sure, there are really those sales people who are more concerned after the cuts and commissions from their client's moolah than into helping them. But we cannot generalize advisors/agents based on the product they sell. And it does not follow that if one is pushing for a product that you don't agree with, then he's just after the client's money. Every financial case is different and so with each of the solution and it could be something different from what you think is applicable with your case. It is just sad that even some of those seasoned "gurus" give this type of advise simply because they don't like one product nor it does not suit their ways which in turn scares away inexperienced potential investors from more possible options they can choose from.

One of the usual victims of such "hate" is the VUL or Variable Universal Life. For those who doesn't have an idea yet of what VUL is, it is basically a type of product that combines a whole life insurance and an investment facility into one. "VUL is too expensive", they say. "It's for the lazy people", they say. "It's for the agent's commissions only", they say. I will tell you right away that there's a bit of truth about these things, BUT... these TRUTHS could actually work in your favor as an investor.

1. First, by saying it's "too expensive", what is it that makes other people say that it is? You can only say that one thing is expensive if you have a comparison. Upon reading observations of some finance advisors who believe that VUL is expensive, they are wrongly comparing it like apples to oranges with other pure investment type of products. And if they understand what they are doing, then that's dishonesty. But there are some who makes a better case in comparing VUL from investing in Mutual Funds/UITF plus getting a term insurance policy separately and proving that the latter is cheaper. There might be cases like that. Though basic economics knowledge will tell you that maintenance charges of a single product compared to two will always be cheaper. And that's the case with VUL versus UITF/MF + Term Insurance nowadays. There was a period that it was not. However due to continuous researches of financial companies and the high level of competitions, companies offering VUL improved a lot on this part. That would be more true if you compare offering of each product within the same company who provides them. Don't just take my words for it. You can have an advisor/agent make a quote for you on each of these products they offer and let them compare the charges and the projected amount you can earn in a certain period considering all factors (age, face amount, length of years to invest, fund options, etc) are equal.

2. Some will disagree on the whole life insurance part of VUL and will tell others that it's always better to buy a term insurance. Let's take a specific scenario. If you are young,buying a 10 yr term life insurance and would be cheaper than the charges you will pay in 10 years for a whole life insurance combined with a VUL. But after 10 yrs, if you want to renew your insurance, you have to undergo with another approval and application process. There's a big possibility that your health condition will change at that time and there's a bigger risk that you will not be approved because of it. And even if you get approved for a renewal, then guess what, your charges will be higher than what you paid for your first term. Unlike when you have it integrated with a VUL, you will undergo with just a one time approval process for an insurance coverage that you will have for your entire life until maturity and charges get even lower as you age. The fact is, there are even many VUL products now where its insurance charges are cheaper compared to what you would pay for with a separate term insurance policy.  There was a time that VUL charges were higher than getting a separate insurance policy + MF/UITF (or what they call BTID meaning Buy Term, Invest the Difference) but it was so long ago and it did not last that way since people nowadays are smarter in choosing the right investment product for them. But it seems some people were not able to move on from that period and are stuck with the idea of what the VUL looked like on its initial offering which in turn blinded their opinion about it.

3. And there will be those who will argue on why would you sell a VUL when the client only wants a pure investment. That's another case. One would ask why would you offer someone who has an insurance already to buy another one? You will not unless he needs it as he thinks that his first one's coverage isn't enough. And also, if one doesn't have an insurance yet and he wants to start an investment, a good financial advisor would encourage that person to buy an insurance first for reasons that all advisors and seasoned investors must already know. And offering him a VUL to have it both at once can be a good option. 

4.  Is laziness a reason for buying VUL? Yes and No. Yes since you read the reasons above on why it's better to choose getting a VUL than having to deal with twice the process for separate insurance and investment. That's one good reason to be lazy. But it can also be that you are NOT lazy but a hard working person that doesn't have much time in your hands and that you could benefit more in getting a 2 in 1 product. But of course, you have to consider your needs first before starting with anything.

5. Are agents selling you VUL solely because of the commissions they will get? It is possible. And it is NOT limited to VUL agents. There will always be sales people who will try to manipulate others to buy the things they don't need. Therefore, you must not use this reason on not getting a VUL since it is not the product's fault that we have those unethical sales people. You must decide what investment product you need based on your knowledge of your own situation, not on what other people think about you or to the others. Besides, do you really think those who are selling term insurances, UITFs or MFs are doing it for free?

6. You can maximize benefits of VUL only if you die early.  True. Very true. As investors, we all know that every type of investment is a risk. We understand that time is our friend which helps us minimize the risk. But do we always have time on our side. Maybe. Maybe not. And what if you are a young parent with small kids or a young professional who is the breadwinner of your family? What if you only have invested for a year and let's say it has Php 100,000.00 cash value in it, and then something happens and you die? I hope that this could even cover the whole funeral service fee. Then after that, who will bring the food on the plates of your loved ones you leave behind? Every investment is a gamble. So is life. And I don't think it's bad enough to gamble by at least starting with Php 3000 per month and pay it out after 1 quarter for a VUL and be able to protect yourself with a Php 1,000,000.00 insurance value right away just in case the inevitable happens. But then, if you live long enough, you just have to make sure that you choose the best fund option so you can enjoy the fruits of this "gamble" during your old age.

You must also keep in mind that an investment product (MF, UITF, VUL, etc) which are offered by each company although similar are to be treated as different animals by themselves. There are different paying terms, charges, funds options, fund managements, etc.  Therefore, there will always be the worst among them in terms of charges, management, processes, etc. But in any case, the worst in its field will not defeat the purpose of what a specific investment product would provide to a client's needs. The best way is choosing the product that suits your need, then finding the company that gives the best offering for that kind of investment. So for those who are just beginning to research about the best type of investment to start from, please, do yourselves a favor. Hold on to your emotions and let it not be swayed by a strong opinion against persons. Give yourselves the chance to look at all the options logically before finally deciding what's best for you. And let me be the one to tell you that VUL will NOT be always the best choice for you, but then, you will not know which one is unless you unbiasedly read, listen or ask.