Question: My husband purchased a VULl (Variable Universal Life Insurance). The value is P1,250,000 and he paid P1,000,000 as one time premium. I do not want to wait for more than two years but the penalty for early withdrawal is hefty. Please advise us on how we can reinvest the rest of the money should we decide to withdraw? – Guest via www.RaisingPinoyBoys.com website
Answer: The main purpose of buying a life insurance is to protect your dependents in the event of an untimely death. The best way to do this is to buy term insurance because it gives you the best coverage at the least cost. Ideally, you supplement this by investing on your own for your other needs like building a house, your children’s education, going on trips, retirement, etc. If one does this and reaches the ripe old age with no more dependents, life insurance is not a necessity anymore. Strictly speaking you can do away with life insurance if you’ve fulfilled all your obligations to your dependents. And this is also the time when insurance costs become high.
Now before you cancel your existing VULI, ask yourself and your husband: What was our purpose in buying this product in the first place? Is this my husband’s main life insurance or does he have other existing life insurance in place? Do not cancel until you replace his life insurance, especially if he is the breadwinner of the family.
You said that he paid P1,000,000 as one-time premium. That means you’re already out by that much. Please check carefully the terms and conditions of your plan. Since this is a VULI it should have a prospectus wherein everything is disclosed including all fees, expenses and other charges – both the regular ones that they charge while the plan is in place and the additional ones in the event of pre-termination or cancellation.
Ideally, a thorough examination of all the terms and conditions should be done as part of your due diligence before you put in your money. However, the usual story I hear is that no such thorough assessment was made because the product was sold by a friend, or a financial planner who, by the way, earns commissions from products sold. There is nothing absolutely wrong about earning commissions from sales closed. But always remember caveat emptor (buyer beware). You, as the buyer, should always beware of the conflict of interest in the advice that you’re getting.
Usually, you are given these reasons why you should buy this product: “You get much more than what you get from a term life insurance.” “The money in the policy grows tax deferred.” “You get to choose what you invest in - stocks, bonds, etc.” “When you need money after you retire, you can first withdraw what you put in, then borrow from it, all tax free.” “When you die, your beneficiaries receive money tax free.”
The aspects that you don’t usually hear, and the reason why you should ask and research, are: “Of the total amount of premium I paid how much goes directly to my insurance/investments?” “How much fees are charged on my plan?” “What are the other expenses that you charge me in managing my investments?” “If I terminate now how much will I stand to lose?” “If I invested in other financial instruments how much would I earn?” “How do the fees and expenses of these other instruments compare with those of the VULI?”
Some very important questions to ask your agent or financial adviser are: “Do you have your own VULI?” “May I see your contract?” “Where else do you invest your money?” “What returns have you realized so far?” “How much have your assets grown over the years?” If he hesitates to answer you while he gathers financial data from you, then you can have a fair assessment whether the advice he’s giving you is worthwhile or not.
So I guess you and your husband should sit down with the one who sold you the VULI. Ask all the questions in your mind. Make a thorough analysis of what you stand to gain by keeping the plan and what you stand to lose by withdrawing it. Given that you’ve already paid the one time premium, are you better off holding on to the plan? Ask your agent about the details of all the options that you’re considering.
If after all your assessment and pencil pushing you still decide to terminate the plan and invest on your own, here are some guiding principles in investing:
1. Understand your needs and dreams – Know your short term and long term requirements. Do you already have a reserve or emergency fund? You should have an amount equivalent to at least six months of your expenses. And since this amount is something that you might need anytime, you are not willing to take risks here and you value preservation of principal and liquidity more than anything else. Fortunately, you don’t have to park your entire reserve fund in your current or savings account and earn nothing. You can invest in fixed income placements which earn a little interest and can be terminated with ease when you need it. Now for your medium to long term needs, you can afford to take calculated and manageable risks in order to at least beat inflation and grow your funds. You should invest in higher yielding instruments but consider the next two principles.
2. Understand first before investing your money. There’s a lot of information available these days. You can read books or search the internet. Be patient in learning, the fruits will be all worth it. Most common options are bonds, stocks, real estate. Study these very well. If you have expertise in areas like gold trading, jewelry, art and other businesses, you may also consider them. Try to diversify a bit.
3. If it’s too good to be true, it is too good to be true. Please do not touch any investment which promises ridiculously high returns. You will be able to discern this as you do number 2. Remember even if you hear of or know people who actually earned from this and that super investment, don’t! It saddens me to hear the Aman scam just a few months after the Birkin scam. I tell you, they come in all sizes and shapes but they’re all like a game of musical chairs, and you wouldn’t want to be the one left without a chair when the music stops.
4. Learn from your mistakes and move on.
5. Monitor your investments regularly. Investment climate in the various options change and so do your needs. See if your short term and long term needs are still properly met.
And as I always say, see to it that what you do with your money agrees with your core values; otherwise, no amount of money in the world will make you happy.
Wishing you financial happiness,
Rose
(Rose Fres Fausto is the author of the book Raising Pinoy Boys. She was an investment banker before she became a full-time mother to Martin, Enrique and Anton. She is married to Marvin. Send your questions to maryrose_fausto@yahoo.com or log on to www.RaisingPinoyBoys.com. You may also send text to 0927-5159011.)
This article is also published in www.RaisingPinoyBoys.com.