INSURANCE: VUL or Buy Term Invest Difference

Life insurance secures your family's finances in the event of your untimely demise. Insurance companies offer a wide array of products to cater your every need. Clients who prefer a Life insurance that with a cash value are usually presented with a Variable Universal Life Insurance proposal. A VUL is basically a Life Insurance and Mutual Fund packaged into one.

So how does VUL differ from buying each product separately? ( Buying Term and Investing the Difference ) Both methods have similar goals but have different end results. In order to understand the advantages and disadvantages of both methods, we shall examine how each method allocate funds for insurance and investment.

I made a comparison based on my term insurance and my wife's VUL with similar factors. We both acquired our insurance at age 30 and both policies have a death benefit of Php 1,000,000. I have a 5 year renewable term insurance, while my wife's has a 10 year VUL. Since market performance can't be predicted, we will use a 10% annual rate for the investment portion of both method.

Total Cost

BTID wins when it comes to building enough funds to cover the annual cost of a Php 1,000,000 life insurance. It takes 5 years for BTID to earn enough gains from its investment to cover the cost for maintaining a term life insurance policy. It takes the VUL 8 years for the funds to recoup the total premium cost.

Investment Returns

When it comes to total gains, VUL outperforms BTID in the long run. Returns for BTID are better for the first few years since premiums are cheaper and majority of the remaining funds are invested. Returns for VUL eventually surpasses BTID after 17 years. All of the funds are invested once the policy is fully paid, this enables the VUL strategy to catch up with BTID returns.

Insurance Cost

The total premiums of the VUL may look higher compared with BTID for the first 10 years, but upon close examination, the premiums for the VUL includes the investment portion of the product. Once you deduct the cost of the investment portion of the VUL from the total premiums, the difference of insurance cost for the VUL and Term Insurance is not that significant. After the the 10 year mark the cost of term insurance surpasses the total insurance cost of VUL.

Investment Withdrawal

BTID has the advantage over VUL when it comes to investment withdrawal. Since the insurance and investment are separate in BTID, withdrawing you investments won't affect your life insurance benefit, provide you continue to pay the insurance premium. VUL death benefit are affected when funds are withdrawn. Once all the funds are withdrawn from your VUL, the policy is terminated.

Reasons to Buy Variable Universal Life Insurance

  • Fix payment period. Premiums are payable in a specific number of years.
  • Convenience of paying a single premium for both insurance and investment
  • Premium holidays, insurance will continue to be in forced even if payment has been missed, so long as there is enough fund in the cash value.
  • Force savings. for people who have a hard time setting aside a portion of their income for retirement
  • Safe guard investment against estate tax provided your beneficiaries are irrevocable.

Reasons to Buy Term & the Invest Difference

  • Control on investment allocation. You control the diversity of security of your portfolio.
  • Great for short term financial security.
  • Cheaper if you don't intend to be protected more than 20 years.
  • Lesser premiums, charges, and fees for the first few years.
  • If you have limited funds and want to fit your life insurance need and still have spare cash to invest.

Before deciding which path to choose I suggest you ask your insurance agent for a complete proposal for a Term Insurance and VUL with the death benefit. Ask your agent the policy details such as charges, maturity date, and percent of premiums invested. Make sure to compare proposals from various insurance companies to ensure you get the best out of your money. 

Disclaimer: The comparison above is based on the insurance data that I currently own. Premium cost, charges and benefits from other insurance companies may vary. This study only serves to illustrate the difference in cost, benefits, and returns between VUL and BTID. Both methods have its advantages and disadvantages. I am not endorsing which method is best for you.