Term or VUL plan: Making the choice

In insurance planning, nothing has been more hotly contested than the term plan against the variable universal life (VUL) plan.

Advocates of the term plan believe this is better because of two reasons: One, it is cheaper than a variable plan, and two, you can manage your own investments and save up on costs. Thus, the saying, “buy term and invest the difference.”

On the other hand, proponents of the VUL plan subscribes to the idea of the convenience of having both insurance and investment in one. In this case, the policyholder allows the fund managers control over their investments.

Which is better then? Just like any facet of financial planning, this one has no definitive answer. What works wonders for one maybe a complete disaster for another.

A term plan’s primary advantage is its low premium. A P1 million coverage will cost only P5,600 ($127.88) for a 30-year-old male. The same coverage fetches P23,100 ($527.52) for a VUL plan. That is a difference of P17,500 ($399.63). Although the premium increases every year, a term plan still costs less than a VUL. The term plan, after all, is designed to provide maximum protection at a minimal amount. For someone who has limited funds but wishes to be adequately insured, then term plan is perfect!

On the investment side of it, assuming the policy holder will be able to invest the difference for the next 30 years without fail, the difference will grow up to P3 million ($68,508.79) assuming a 10% average annual return. With the VUL, however, the fund value 30 years later will grow to P2.9 million ($66,225.17).

However, the bitter reality is that investing the difference is harder than it actually is. We are prone to spending rather saving, much less investing because that is the knee-jerk reaction to any money we have. Even if the policyholder successfully saved that up, he should be able to generate returns better than what fund managers provide.

The best way to consistently do that is to automate it. VUL is a form of automation because part of the premium is being invested. The philosophy dictates that you “invest the difference,” not “spend the difference.”  Only if the difference is consistently invested will buying a term plan prove better.

Supposed the policyholder managed to invest the difference consistently over the years, and even outperformed the returns produced by fund managers, the fund becomes part of his estate. In his death, beneficiaries would not be able to touch it until the estate tax has been properly settled.

With a VUL policy, whatever amount the fund value is will be paid out to the beneficiaries together with the insurance coverage tax free, provided the beneficiaries are designated as irrevocable. This provides the beneficiaries instant liquidity which is invaluable in settling other obligations.

Another risk for term plan is in the event the policyholder fails to pay the premium on the due date (or after the grace period), the policy automatically lapses. Then he goes through the process of having it reinstated. Was there an instance in your life that you missed a due date? Chances are, the answer is a “yes.” Even the most due date-conscious of us forget to pay a due once in a while.

With a VUL policy, the charges are automatically deducted from the fund value in case the policy holder misses the payment. But it would not lapse, at least not just yet.

So, going back to the question, which is better then? Some will find term plan more advantageous for them. Others will see that VUL better fits them.

It does not matter which plan you choose as long as it will help you achieve your financial goals. – Rappler.com

Kendrick Chua is a registered financial planner of RFP Philippines. He writes regularly about personal finance. He is also a Chinese language instructor, TV host, free runner, and violinist. To learn more about RFP, you may email info@rfp.ph.

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