Disclaimer: The author is an independent Registered Financial Planner (RFP) and is not connected to any life insurance provider. This article is an opinion and for information purposes only. Computations may vary.
A life insurance plan has many different purposes. It is primarily used for income continuation, when the primary breadwinner (“insured”) dies, his or her dependents (“beneficiary”) can still survive with the money from the life insurance plan.
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How much you need for income continuation varies per individual. You can compute this from your family’s annual expense, then look at the individual situations and determine how many years you need this income for your dependents to be financially stable.
For example, in a middle-income family of 3 (a husband, wife, and 1 offspring). The wife is a housewife with no income, and the son or daughter (no intention of having a family yet) will graduate from college and ready for employment next year. In this case, you only need 1 year plus a few more years buffer for the family to be “earning” when the father dies. In this example, 5 years’ worth of annual expense should be sufficient for income continuation.
If the family’s annual expense is P700,000 x 5 years, then the insurance coverage can be as low as P3,500,000. This serves the purpose of life insurance which is income continuation. Of course, if the household has a lot more surplus money then they can opt for higher insurance coverage. There is no one-size-fits-all formula for this. An insurance agent who tells you it should be 10 years’ worth of your expenses even if the annual premium is way too much for you already is either ignorant or too lazy to analyze and match what you need to what you can afford.
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Life insurance plans can have add-ons (“riders”). For an additional payment (“premium”), you can get Total Disability Benefit as a supplemental benefit. This means that when the insured suffers from a disability where he or she is no longer capable of earning money, he or she gets a specific sum. Read the footnotes of your insurance policy to see which situations are classified as total disability.
The other primary purpose of a life insurance plan is for estate planning. This is simply the transfer of estate (or assets) from the owner to its beneficiaries. When a person dies, the family cannot simply take ownership of the assets even if they are the legitimate heir. The family needs to pay an estate tax.
In the Philippines, the TRAIN law simplifies estate and donor tax. It is now 6% of the total asset value, less P5 million standard deduction. Meaning if you have a total asset value of P11 million, less P5 million standard deduction, and other deductions, the total taxable amount is approximately P6 million. 6% of that is P360,000 to be paid as estate tax before the assets are legally yours. Click here for more information. Consult a professional for more information about estate planning in the Philippines. Going back to the topic, you can use life insurance death benefits to pay off the estate tax when needed.
SunLife Philippines offers many different products. In this article, let’s look at Sun Safer Life a term insurance plan, and Sun Maxilink 100 a VUL or Variable Universal Life insurance plan.
Sun Safer Life (Term)
SUN Safer Life is a standard term life insurance with no investment side. You pay a fixed amount per year until renewal which is every 5 years. Below is a sample computation for a 36-year-old, male, non-smoker. Computations may vary.
Getting a term life insurance means you pay P36,800 every year for the next 5 years and you get a total of P10,000,000 death benefits with an additional P5,000,000 if death is due to an accident. On the 6th to 10th year, you renew your plan and you now pay P45,400 yearly. Annual premium increases every five years or every renewal. On the 36th year (72 years old if 36 this 2020), you will pay P335,100 annual premium.
If you compute the present value today considering 4% yearly inflation at year 36, it is like paying P81,653 per annum in today’s money. Insurance premiums increase because as you get older, the likelihood of dying increases. Remember that the insurance business survives due to probability. The younger a person is the less chances of death.
The thing with term insurance is the moment you stop paying your premium, your coverage stops instantly.
Here you can see the advantages and disadvantages of getting term insurance. On the positive side, you pay a smaller amount for a huge life insurance coverage but the moment you stop paying, you do not get anything back and your coverage stops instantly.
Sun MaxiLink 100 (VUL)
For the same insurance coverage of P10,000,000 + P5,000,000 accidental death benefit, below is what you will pay if you get the MaxiLink 100, a VUL (Variable Universal Life) insurance plan. A VUL is an insurance product with an investment side in it. Remember the definition, it is still a life insurance plan (with investment).
Using the same profile, 36-year-old male, non-smoker, you need to pay P230,500 annual premium for a P10m + P5m death benefit. See sample computation below. The benefit amount is 200% of P5,000,000 for a total of P10,000,000 + Accidental death benefit.
The reason why you are paying a much higher annual premium for the same coverage is because you are also paying for the investment part of the life insurance plan. You also pay the commissions received by insurance agents which is the highest when they sell VUL plans to clients. Where else will the insurance companies get the money to pay commissions to their agents? No, not from their investments, but from the premiums you and other clients pay.
Below is an example of a commission structure insurance companies give to their agents. NOTE that the below commission structure is not from Sun Life but the point still remains, the commission structure is the highest in VUL products compared with term insurance plans.
- 45% of the total annual premium paid by the client for the VUL plan goes to the agent on the first year, 20% on the second year, 5% on the third, and 5% on the fourth year.
- That’s a total of 75% of one annual premium going as a commission to the insurance agent.
- To illustrate, say you are paying P100,000 annually, a total of P75,000 goes to the agent in the course of 4 years.
- If you are paying P250,000 annually, a total of P187,000 goes to the agent in the course of 4 years.
- Again, this is not the structure for Sun Life but the fact remains, life insurance agents get the highest commissions from VUL products regardless of the insurance company.
Hey, insurance agents need to earn! That’s their job and they should get compensated for it. There is nothing wrong with commissions. Agents need to earn right, correct. They facilitate your paper works so it is just right that you pay them something. But…
Here’s where it gets wrong…
A lot of insurance agents (not all) forget their role as “financial advisors” when selling to customers. A lot of them (not all) prioritize their roles as “insurance agents” rather than “financial advisors”. They sell VUL plans like its a one size fits all product. They forget the “advisory” part and just focus on the “financial” side – how much will I earn from commissions from you.
A true financial advisor should analyze your needs based on your financial status, financial goals, the status of dependents, age (not only because of the risk to the company but because your age will dictate how much coverage you will need), also consider the lifestyle, spending habits, surplus money, family background, among many other things. A financial advisor looks at all these variables, and from there advises you on what product fits you.
The bad part is, insurance agents (I do not call most of them “Financial Advisors” unless proven) force their products on their clients because they will commissions. Insurance in itself is a need – a necessary expense if you are a breadwinner. Unfortunately, Filipinos have already developed a negative bias towards these products because of the selfishness of some (or should I say, a lot) of agents.
Think about it… When was the last time you heard an insurance agent sell you a term insurance? Almost never. Why? Because – walang pera dyan.
To give you an example. An insurance agent tried to sell a VUL plan to my 59-year-old aunt (with no dependents). The agent was fronting the VUL plan as an investment plan where my aunt can “earn money”! How lame is that? 59-years of age, with no dependents and you are selling a VUL insurance plan? Either the agent is totally ignorant or just plain selfish.
The agent knows that the primary goal of the client was to grow the money. The insurance agent does not care that it will take approximately 16 years just to break even with the investment! She gets to enjoy the fruits of her investments when she is 75. That’s if she can still walk or worse if she is still alive. The agent did not even analyze her life expectancy. Remember, this is just to breakeven, not even earn anything significant yet.
There is a total disconnect between the client’s needs and goals with what the life insurance agent is proposing. One of the selling points of MaxiLink 100 is you are insured until you are 100. The truth is, who needs to get insured until 100? If your purpose is for investment and to grow your money, you would want to withdraw that money and enjoy it before you die, isn’t it? Also by late your 50’s, your children would be working adults already, by this time you technically do not need life insurance. If your purpose is for “pamana”, well you can also do that when you do BTID (Buy Term, Invest the Difference).
Now, the purpose of this article is not to demonize the profession of being a life insurance agent. Rather, this is to emphasize the need for a true financial advisor who is genuinely concerned with the needs of his or her clients.
Some insurance agents will argue they are “ignorant” of other investment vehicles and alternatives to their VUL that is why they just propose VUL because their “superiors” said so. Yes, this happens a number of times already. This is coming from insurance agents with 5 or more years in the industry. They thought this is the best option that their clients have. Well, if that is the case, do not call yourselves financial advisors. You are simple insurance agents. Stop sugarcoating your title because it is misleading to people.
What to look for in an insurance agent?
Look for a true financial advisor. If your insurance agent advises that you do not need VUL but instead term insurance after analyzing your situation, then that is a very good sign. It means he or she is not only after commissions but really tries to match what you can afford with what you need.
Take good care of these kinds of agents and refer as many relatives and friends as you can to them. These kinds of agents are real financial advisors, they know their stuff and have the client’s best interest in mind. It is worth having a long and strong relationship with this agent.
Of course, he or she also needs to display an understanding of the concept of the time value of money, alternative investment vehicles, personal balance, and cash flow analysis. Best if you look for his or her RFP (Registered Financial Planner) certificate – that’s the start.
The best financial advisors would advise you when you should transfer funds from balanced, bonds, and equity funds for your investments depending on market conditions. If your financial advisor does not know how to read the market dynamics, then do not call him or her financial advisor, call them insurance commissioners instead.
Here are the numbers (BTID vs. VUL)
In the below calculations, we take the payment for annual premiums (PMT) and compare the numbers between BTID (Buy Term, Invest the Difference) vs. VUL.
Here are some assumptions:
- Assume investment return of 4% for both VUL and BTID
- Assume 37 years old as year 1 of PMT
- Compare both continuous regular payment and 10-year payment for both BTID and VUL
- VUL fund values are from Sun Life computation
From the above calculation, you’d see the following:
- On the 10th year, the fund value of VUL = P1,897,450 vs. BTID = P2,370,162
- On the 15th year, the fund value of VUL = P3,399,863 vs. BTID = P3,844,650
- Only on the 19th year will the fund value of VUL be greater than the fund value of BTID (assume both at a 4% growth rate per annum).
- If you are asking how is this even possible when both (BTID and VUL) will be growing at 4%? That’s the biggest question, as I mentioned, the calculation for VUL fund value was obtained from Sun Life’s own calculation. They indicated that on the 19th year your fund value will be P5,176,131. How it arrived from P4,382,752 on the 18th year is a big mystery to me. Maybe they will do some rebates and adjustments or something.
- If you have a 5-year-old daughter today and you have allotted the VUL plan for her college education 13 years from now, guess what, you are almost P500,000 short if you invest in a VUL versus doing BTID.
- If you are 59 years old, you’ll reach a break-even point 16 years from now or when you are 75 years old. Remember, break-even point, you have not earned anything yet.
- If you are 59 years old, your VUL plan will only be greater in value compared to when you invest yourself (BTID) 19 years from now or when you are 78 years old.
- From the above calculation and examples, you’d see that VUL is not for everyone.
Below is another interesting calculation. If you opt for a 10-year payment only and just let your fund value pay for the insurance policy, you’d get a net negative (-P39,956) on your investment versus a positive P708,525 when you do BTID even if you will be paying for term insurance until you are 65 years old. Your 10-year investment doing BTID will generate a net profit of P708,525. See computation below:
When do you need Term insurance and when do you need VUL?
If you have dependents and have extra cash to buy the more expensive VUL plan, go for VUL. If you have zero time to invest and monitor, go for VUL. If you don’t have much spare cash, get term insurance, and learn to invest the difference (BTID – Buy Term, Invest the Difference yourself). You can invest in Sun Life mutual funds yourself (same investment vehicle as VUL plans) using COL financial.
You can allocate 5-8% of your annual income for insurance payments. If you are paying 20-30% of your annual income for a VUL plan, you are bleeding money, and the insurance agent never bothered to check your cash flow. You got scammed.
If you have dependents but don’t have spare money, go for term insurance. If you want some investment, do it yourself this is called BTID (Buy Term, Invest the Difference). BTID is the most efficient way to invest as you do not pay a heft commission for your agents, and you don’t pay for a life insurance plan you do not need.
As mentioned, if you have spare money and absolutely don’t have time to learn (or don’t want to learn) about investing, go for VUL. Unfortunately, a lot of people have this mentality. The truth is, it is your money, you should devote at least a small amount of time to understand how to invest. If you are not willing to learn, somebody is already robbing you and you don’t even know it. In today’s connected world, you only need 1 day to learn all these investment vehicles and a few hours to actually invest.
If you do not have dependents (no kids, no spouse, no partner, no parents to support), you do not need life insurance at all.
If you are a senior citizen, your sons and daughters already working, you do not need insurance. Invest your savings in money market funds or high-interest savings account (eg. ING online banking). You need liquidity at that age.
If you are an OFW, do not buy a VUL plan in the country you do not intend to stay in forever or at least for a very long time. Remember, VULs take time to breakeven. If you are not intending to stay long, you will incur losses when you pull it out early.
If you are young, less than 25 years old, have plans of having a family, with spare cash, and no time to research and monitor your investments, you can go for VUL. Remember you should choose a responsible financial advisor and not just an insurance commissioner.
If you do not have dependents and your primary goal is an investment, learn bond investing, stock market, mutual funds, and UITF. Read this article for more information about investments. A VUL is still an insurance plan which again is primarily for income continuation or estate planning.
If your primary goal is for the college education of your children remember the only time a VUL will outperform BTID is on the 19th year of continuous payment. If you get a 7 or 10-year payment, a VUL will never outperform BTID. You simply wasted money buying a life insurance plan you do not need. You got scammed!
Why will you insure your 3-year-old son when the chances of untimely demise are very low? Does he already have dependents? When they get older and the chances of death increase then that’s the time you will take out the insurance plan? It does not make sense.
Again, you can invest in Sun Life mutual funds using COL Financial directly yourself. If your primary goal is for investment (for education, retirement, life milestones), then why will you buy an insurance plan? Even if they say it’s hybrid, that’s foolish. You are wasting a lot of money paying for the commissions and insurance plan when you don’t need it at all.
The bottom line is, if you do not need life insurance, don’t buy one! As simple as that. Do not just listen to someone who calls themselves a financial advisor, in a lot of cases, they only care about their products and commission. Study time value of money, be responsible, IT’S YOUR MONEY anyway.
