Don’t get me wrong, I still love VUL (Variable linked-unit) insurance plans but some things are not as enticing as I first encountered them.
With what happened in the past few years in the economy, I still see financial advisors positioning VUL plans as an all-in-one plan solving all financial problems:
Retirement Plan
Long-term medical coverage
Medical Plan
Income Protection Plan
Estate Plan
Education Fund Plan
Is it bad?
Not necessarily.
But here’s one thing that might change your mind.
(PLEASE TAKE NOTE, THIS IS MY WAY OF FINANCIAL ADVISING AND PLANNING)
Maybe you have already encountered this kind of image posted:
Invest for just 2,500 per month and you’ll achieve almost P10M by 65 yo at 10% interest rate.
But can we really achieve a 10% average interest rate?
Here’s the annual average growth rate of the Philippine stock market index from 1988 to 2021.
Based on this data, most millennials already experienced a much worse market crash during their childhood compared to how COVID-19 in 2020 affected our economy.
And this historical data also shows how unpredictable the stock market can be!
But still, the actual market rate of return is 9.06%! Which is still good but we're not yet including the 2022 to present rate.
And also, 9.06% is still much better than the average Philippine inflation rate from the same duration:
Based here, the inflation roughly averaged 6% to 7% from 1988 to 2021 with the current inflation rate of 3.4% (March 2024).
But that average compared to the 9% average return on investment is not that big, agree?
So why is it not advisable to tandem a VUL plan intended for a retirement plan with insurance that’s heavy with rider benefits (additional benefits)?
The cost of Insurance increases as we age
Most VUL plans are positioned for a 5-year to 15-year investment period ONLY. However, the insurance costs do not stop after the payment period of the plan. There will still be charges needed to sustain the plan and these charges will be deducted from your fund value (I hope your advisors tell you this). How much more if the plan is heavy on rider benefits just like the example above? (critical illness coverage, accident coverage, etc)
2. Your plan may lapse after withdrawing for your retirement
Maybe you already heard from your advisor that you can withdraw from your plan as long as you leave a minimum fund value.
But as mentioned in the 1st reason, you are continuously charged as long as your VUL insurance plan is effective. This will lead to your plan to lapse sooner or later.
Let’s say you withdraw at age 60, your plan together with the rider benefits might lapse by 65. This might affect your financial plans when you get critically ill after 65 yo when most HMOs in the Philippines do not cover anymore.
That’s why after what had happened to my financial investments due to Covid-19, I started to implement to my portfolio and also to my clients the following:
Rank your financial goals and priorities If your top priority is RETIREMENT and MEDICAL coverage, I usually recommend getting 2 different plans with a different focus. So if you withdraw from your RETIREMENT plan, your MEDICAL coverage will not be affected. And vice versa. That’s why I recommend going deep with Proper Financial Planning through our Triple A method. ✨️Aspirations in your life. What are your real financial goals in life? ✨️Awareness about your current financial situation. For us to know how big or small your financial goals gap is. ✨️Actionable steps. We'll design ways that your goals will bite size and will help you progress slowly but surely.
Utilize Guaranteed payout insurance plans (endowment) With the market volatility affecting our financial investments, nothing beats guaranteed plans that will give you peace of mind that you’ll receive your money despite market conditions. Edowment plans such as A+ Signature from AIA Philippines give you guaranteed payouts every other year starting on the 5th or 6th year even if you are not yet done paying for it.
Get a separate plan for MEDICAL-related plans. What would you feel if you knew that when you withdraw from your retirement plan, your long-term medical coverage is still intact and fully effective? Yes! Peace of mind that you can be independent even if you're living your life to the fullest enjoying your retirement! So separate your medical plans and retirement plans!
Don’t get me wrong, I still love VUL plans but some things are not as enticing as I first encountered them.
I still offer them to my clients because VUL plans are still one of the budget options (next to term plans). It's one of the surest ways to preserve your wealth and take advantage of the investment returns.
As long as there are no RIDER benefits attached to it.
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