Monday, March 27, 2017

BTID and VUL from the Point of View of Someone Who Does Both






I have been talking to a friend for the past month because she wants to get a VUL. Her husband, on the other hand, is a fan of buying term insurance and investing the difference or BTID. He is also a TRC member like me.


Definition of Terms


Investopedia defines term insurance as a policy with a set duration limit on the coverage period. Once the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end. BTID is buying term insurance and investing the difference directly in paper assets like mutual funds, bonds, UITFs or stocks. 

On the other hand, a Variable Universal Life or Variable Unit Linked (VUL)  is a form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount of VUL is flexible and may be changed by the policy owner as needed. A VUL can also provide you with accidental death, hospitalization and critical illness benefits.



The Question: Can you compare BTID with a VUL?


I have read similar posts on the Internet comparing the two. There was even a post that says you can't compare them in the first place because they address different needs.

From my point of view, I can compare both, simply because I am doing both. And I will be sharing with you in this post what I have learned, without bias.

In my opinion, I do not think they address different needs. Both BTID and a VUL address the same insurance and investment needs that most of us have. The difference is simply HOW MUCH

How much insurance do I need in case I die too soon?
And how much investment do I need in case I live too long?


And here is where your trusted Financial Advisor (ahem!) plays an important role. As one, I do the math with my friends. With the information they provide me with, we compute for our target insurance amount, target health fund, target retirement fund, and target educational fund, whichever is applicable.



The Question: Which is Better? Doing BTID or Getting a VUL?



Recently, I have read a post that says getting a VUL is DEFINITELY NOT BETTER than BTID. I disagree.



Flashback to 2013



As many of you know, I began getting a financial overhaul in 2013. The book My Maid Invests in the Stock Market (get your ebook copy for FREE CLICK HERE) by Bo Sanchez was a wake up call and my journey began with the help of the Truly Rich Club. One of the many things it taught me was to BUY TERM INSURANCE and INVEST THE DIFFERENCE or BTID -- and that is exactly what I did.

I bought term insurance, and invested the rest of 20% of my income (20% for investment is a good start) directly in the stock market through COL Financial. COL Financial is the largest online stockbroker in the country today.

Although I have term insurance with my current company, I still got one with Insular Life in November 2013. Why? Because I will NOT be employed until I am age 99. And remember, we buy insurance not just with our money, but more importantly, we buy insurance with our health. Get insurance while time and health are still on your side.

For 1M life insurance coverage, and additional 1M if death by accident, my premium is only Php5,320 every year from age 31 to 41. I told myself then that it is very likely that I would already have 2M after 10 years, so the 10-year coverage would be okay.

I even wrote a blog post about this years back with the title I Bought My Peace of Mind and Family's Security for Php5,320 Only.

As one of the TRC mentors would say, "The purpose of insurance is simple. That when God calls you home, your family won't go hungry." And that was my thinking until recently, when I fully learned and understood the purpose of insurance.

 

And then I remember a mentor from Insular Life asked, "Why Not Get a VUL Instead?"



And this is what I told her, "Why would I pay for a fund manager when I already know which companies to buy, when to buy and when to sell them?" Everyday, the Truly Rich Club provides us with what we call a SAM Table that contains their recommended companies, buy below prices and target prices. For the INVEST THE DIFFERENCE part of BTID, I rely on this.


I also have that belief that insurance charges with a VUL are very expensive. Later I realized, that insurance charges are generally inexpensive, especially if you are still young and healthy. (I will explain this further below.)


She added, "But what if something happens to you? The only investment with insurance is a VUL." Back then, I thought that was merely what my term insurance will be for -- to make sure that my family won't go hungry when God calls me home -- and so the 1M coverage will be enough.


Fast Forward to 2016, I Became a Certified VUL Fan



What made the shift, you may ask? As more people ask me for financial advice, I continued to grow myself as a Financial Advisor through reading and attending trainings. Over time, these taught me what BTID and a VUL actually means for a long-term investor. And by long term, it does not only mean the time when your toddler enters college, or you being retired. By long term, it means until you "expire.".


Let me cite the reasons what caused the shift to happen.



1. The purpose of insurance is NOT just to make sure that my family won't go hungry when God calls me home.



Insurance has a lot of purpose. Not just to feed my family.


Insurance can assure that my kids will finish college, at a university and with the course that they prefer, and provide them with income up to a certain age. My two kids even have insurance policies that in the case of my sudden demise as the payor during the ten-year paying years, all succeeding premiums are waived.


Insurance will pay off my mortgage and other debts. Recently, my husband and I loaned a car, and we also began paying for a lot in Tarlac and a condo unit in Manila. I make sure that our insurance policies EACH has enough coverage to pay for all these, so that one will not be burdened in case of sudden demise of the other.


Insurance will pay my final (hospitalization and death) expenses. 


Insurance will continue to support my charitable institution. 


Insurance will pay my estate tax. Estate tax is defined as tax on the right of the deceased person to transmit his estate to his lawful heirs and beneficiaries at the time of death. If your estate is over Php10M, the estate tax that your beneficiaries need to pay is Php1,215,000 plus 20% of the excess over Php10M. As I have read before, "If you do not have a plan for your money, the government has."


And obviously, my 1M term insurance will not be enough to cover all these. 




2. I can use my insurance even while I am still alive.



My term insurance covers only my life. My health, my limbs and my eyesight are not covered. My beneficiaries receive my insured amount if and ONLY if I die.


With a VUL and its riders or add-ons, I can use my insurance even while I am alive. In case of hospitalization, I am covered. In case of temporary or permanent disability due to accident, I am covered. In case I lose my limbs or eyesight due to accident, I am covered. In case I am diagnosed with dreaded disease, I am covered.


You may say that you can also include these add ons to a term insurance. Yes, BUT if nothing happens to you for a particular year, the premium you paid for that year gets down the drain. Just like that.


But with a VUL, because your premiums include both insurance and investment, your money continues to grow whether you use the insurance part or not.



3. Insurance charges in a VUL are expensive is just a MYTH.



This is one of the reasons why I did not like VULs before. I have always believed that insurance charges in a VUL are expensive. This is just a MYTH.


TRUTH is, the cost of Php5M life insurance coverage, Php1M dreaded disease coverage, Php3M accidental and disability coverage of a not so healthy 34 year old (ME *wink*) is only Php1,793 every month. Just that.


Not only that. The younger and healthier you are, the cheaper it is.



You may ask and verify with your Financial Advisor from insurance companies how much are the admin and acquisition charges of your VUL, as these vary with different companies.


4. Your investment in a VUL can be ESTATE TAX FREE.



A few months ago, I wrote a blog post about the investment part of my BTID asking my online stockbroker what happens to my investment if I die. It is the same question that my mentor from Insular Life asked me three years ago. One of her concerns was estate tax. But because I have a 1M term insurance anyways, I just brushed off that topic back then.


From that inquiry, this is what I learned. MY MONEY IN THE STOCK MARKET, just like my money in the bank and other assets, FORMS PART OF MY ESTATE and is therefore SUBJECT TO ESTATE TAX. And note that estate tax is NOT deductible from your assets. You need to pay it first before assets are transferred to your heirs.


You may read the full post here: I Asked COL, "What If Account Holder Dies?"


I was thinking, if my money in the stock market grew to 10M over time, and I die by accident and my husband has no idea about COL (I've tried explaining it to him more than a couple of times but he has no interest and patience in it), my family needs to pay more than Php1.2M of estate tax before it can be transferred to them.


Not only is Php1.2M a huge amount for taxes, but more of my concern is where will my family get that sum of money? What happens to the money that I have grown my entire life if it can't be transferred to my family because of unpaid estate tax?


With a VUL, if I declare my beneficiaries as IRREVOCABLE, my beneficiaries get my insured amount plus current fund value in FULL if I die. It will not be subject to estate tax.



5. With a VUL, as my investment grows, so does my insurance coverage.




My first VUL with Insular Life was an investment for my retirement fund, and originally has the Minimum Guaranteed Death Benefit (MGDB) for the insurance part. But after realizing the many purpose of insurance, I have increased my sum insured, and I have also added the accidental, disability and critical illness riders.


Every time I make a top up to increase my fund value (investment part), my insurance coverage increases, too, by 125% of my top up amount. Meaning, every Php10,000 of top up to my VUL increases my sum insured by Php12,500.


And even if I do not make a top up, my insurance coverage includes the MGDB plus current fund value (investment part). As my investment grows, so does my life insurance coverage.

6. Having my VUL is the cheapest way to increase my net worth.
 

In 2013, I was flat broke living paycheck after paycheck. It was December 2014 when I got my first insurance policy with a 1M coverage. Just like that, my net worth (more like my "LIFE'S WORTH) became 7 digits.


Fast forward to today, only four years after, I have one term insurance and two VULs with different beneficiaries, amounting close to 8 digits!


And please do not think that I am bragging. I am just saying what actually happens when you insure yourself. And because I know how much I am "worth" right now, I take care of myself more. Remember how you handle that signature leather bag, not putting it on the floor and having a seat space of its own? Or how you clean your Limited Edition shoes before storing them? Or how much you spend on the tempered glass and case for your latest iPhone? It is the same logic why I take care of myself. I am THAT expensive. Lol. But, PRICELESS is more of the term I would like to refer myself to. This also applies to my husband who has a higher net worth that I am, also mostly from his insurance policies.


One Final Note


Today, I choose growing my money through a VUL for the many reasons I have stated above. And yes, I still invest directly in the stock market but only up to a certain amount.


You may opt to do BTID or VUL, whichever you think works better for you. 


Consult with your trusted Financial Advisor and continue growing yourself in financial knowledge.


As for my  34-year old friend who I mentioned above, her VUL has been issued recently. With her Php6,667 monthly premium for 10 years, this is what she gets:


- Php2M life coverage PLUS actual fund value in case of natural death
- Php4M life coverage PLUS actual fund value in case of death by accident
- Php2M lump sum in case she is diagnosed with dreaded disease
- An estimate of Php4M fund value when she retires at 60.


As Warren Buffett says, "Price is what you pay. Value is what you get." PRICE refers to her Php800,000 total premium in 10 years. VALUE refers to the insurance and investment she gets. I am sure you would agree with me when I say that is VALUE FOR MONEY indeed.


And the joy of insurance and investment is this...



Knowing that my insurance coverage is more than enough, and knowing that I am growing my golden nest egg for retirement, I enjoy sound sleep every single night, free of any financial worry. I choose to make small sacrifices today, instead of sacrificing my own future and the future of my dependents.


Last night on my way home to Tarlac, as I drive along McArthur Highway, I passed by Doubledragon's Citymall, Shell, Jollibee, Robinsons and SM Tarlac. That was probably a 2 km stretch. And within that 2 km, I felt proud knowing that I have a (small) part in these giant businesses. I may not be seeing huge profits now, but in ten years or so, I am confident that I will.




Disclaimer:


The details stated in this post are based from what I have learned and experienced over time. The VUL that I am referring to is my VUL from Insular Life. Its features may or may not apply with VULs from other insurance companies.


Be very blessed!

 

P.S. I you want to get a VUL that tailor-fits your needs, send me an email at financialplanningforpinoys@gmail.com or drop me a message on Facebook.

4 comments:

  1. Impressive! I really like your blog.
    Thanks for the post.
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  3. I literally couldn't stop reading from where it started, this is a very great topic and I couldn't wait to start investing on my own too! I'm just 20 yrs old and ever since I was a kid, I have things in my mind particularly investment matters to which I'm pretty sure I can benefit from it. I'm very excited to invest and sacrifice a little bit of today for bigger results tomorrow. Next week I will be reviewing VUL's and other types of investments from an insurance company and I hope that I can be better at explaining these things to help more Filipino people to be financially ready in the future, stocks as well.
    -Reigna Dojillo

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