Why do people hate VUL so much?
**NOTE**: Thanks to everyone who gave their insights. I got bashed quite a bit (since people seem to think that I'm an insurance agent lol), but I also learned a lot. Just to make it clear, I don't work in insurance - but I do work in the finance industry. Also, I'm crossing out the addendum since it no longer applies (but I won't delete it).
As promised in the comments, here's the TL;DR on why people hate VUL:
- it's not marketed properly. Insurance agents seem to promise the sun, moon, and stars - but in reality, the funds underperform. In a lot of cases, they actually seem to lose money. It's erroneously pitched as an investment, when it should really be thought of as an insurance policy. (this is pretty much what most people said).
- Even if they do make money, you're hobbled straight out of the gate since you have a 3.5% management fee.
- Even if you think of it as just a life insurance policy, it's very expensive for what it is. You can get more coverage at the same price by getting term insurance. While it's convenient (kasi you theoretically hit two birds with one stone), it's like paying tuition to go to AMA instead of going to UP for free just because it's easier to graduate in AMA (thanks for this analogy u/ Jetztachtundvierzigz no hate for our friends in AMA though).
- As pointed out by u/ ilikecoffiiblack, investments only start on year 3 of the policy. Everything before that is pretty much used to pay the commissions of the agents. This works against you given the time value of money.
- u/ kanskipatpat noted that some people don't really want to be covered until age [xx]. They just want to make sure that they have enough for income replacement in the event of your death. So it's easier to get term insurance since they'll just be covering the years where they're exposed. Theoretically, they wouldn't need coverage when their kids are grown up, so they're paying for coverage you don't need.
If you're here because you used the search bar (or because I linked it in a comment), I hope this was quite helpful. I do apologize for the long post.
On a side note, even with all the posts here, personally, I'm quite happy with the policies I got - I mainly got them for the critical illness coverage, not for the life insurance component. I found that getting critical illness through a VUL made sense for me. From what I saw, it was cheaper than the traditional life insurance policy by 30% (probably because I was absorbing the market risk; but I saw that the fund is self-sustaining as long as I get at least a 4% CAGR). Term insurance just didn't make sense for me since I want it for critical illness. But again - *PLEASE DO YOUR OWN RESEARCH*. Get multiple quotes and compare what you get in each plan.
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So I’ve been on this subreddit for quite a while – most people have come to the consensus that VUL is bad, and that people should just buy term insurance.
From what I understand, term insurance is pretty much what it says on the box – it’s insurance that covers you for a specific term. It’s cheaper since it’s just that – it covers you for the specific term. If you don’t use it, then wala na siya (parang auto insurance). If you’ve been paying for 10 years, the only advantage you have is that you get is that you’ve locked in your insurability. You’re still exposed to the increasing cost of insurance. Since that’s the case, you might as well get it later on in life since buying it early on is essentially hedging for a risk that probably wouldn’t materialize anytime soon (so it’s like throwing away money talaga).
On the other hand, a fixed term VUL policy makes you pay for a number of years and then you’re covered until age xx. As long as you don’t look at the investment value (meaning you consider the policy as insurance lang talaga, and the fund value will be used to ensure the policy remains active), then you’ll be fine. In fact, it makes sense to get it as early as possible since you lock in your cost of insurance early on. And a nice bonus would be that the fund value might actually increase (so you might have even higher coverage than expected; but at the very least, you’ll have your coverage amount).
Obviously, it’s more expensive at the beginning – but you can think of this as hedging cost. The insurance company absorbs more of the risk, so you need to pay them more. However it gets split up (between the company and the agent) is immaterial, since you’re covered anyway.
Even from an opportunity cost point of view (assuming you do BTID), it still doesn’t make sense. Unless you have some god-tier ability in portfolio management, you’re unlikely to beat a good institutional fund manager (who have much more information, access to a broader world of financial products, and better broker coverage). You can buy foreign indices, but your friction costs would pretty much eat into those returns (and you’re directly exposed to timing risk). And let’s not talk about the local index na, since it’s pretty shit (around 3% CAGR since the Asian Financial Crisis).
Is there something I’m missing?
Full disclosure: the insights I got were from my dad, who does deal in insurance products. But I don’t live in the same house, and I don’t take a single peso from him. Also, he focuses on the HNW/UHNW market (minimum net worth of USD10m, with a minimum preliminary ticket of USD1m). So his clients face very different problems to what most people would face.
**Addendum: it seems that a lot of people have issues with the way it’s marketed (i.e., na yayaman ka talaga), and the commissions to the sales agents. But again – if you treat it like an insurance product, then why would it matter?
It’s like saying “oh I won’t go to a Big 4 school since they say na yayaman ka after you graduate, but 20k lang din naman sweldo ng mga graduate nila – also, 200k yung sweldo ng mga professor nila”. People still go to UP/DLSU/ADMU/UST since you still get what you pay for (i.e., quality of education and network). In the same way, you’d still get insurance coverage diba?