The VUL vs BTID Insurance Smackdown: Can We Settle this Already?
In life, we will always come across two great, absolute forces that go head-to-head: Ali vs. Frasier, Pacquiao vs. Marquez, Ateneo vs La Salle, Ginebra vs. SMB, Coke vs. Pepsi, Jollibee vs. McDonalds, Jobs vs Gates, Apple vs. Samsung, DC vs. Marvel….
In the financial arena, it is no different. In the red corner, one of the most subscribed policies today with its whole life insurance mixed with investments; and knocking out traditional insurance cold, we have the current, defending champion of the world, VUL (Variable life insurance).
And on the yellow corner, currently rising to the ranks and becoming the preferred choice of protection for millennials who want to have complete control of their investment portfolios, the challenger, Term Insurance with investment on the side (or more famously known as the BTID strategy)
Once and for all, between an unstoppable force and immovable object, who’s the best!
(Okay, we’re not really about to comment on a fight, it just happens that two insurance agents in a coffee shop are arguing which is best. The VUL agent is wearing a red tie, the BTID advocate sports a yellow tie).
Tale of the Tape
VUL (Variable Unit Linked or Variable Universal Life) Insurance. This is a cash-value life insurance that contains two major benefits: sum assured upon the death of the policy owner and an investment component (or part of the insurance money that is placed in growth funds like stocks). The premium for VULs can be adjusted according to the needs and the financial capabilities of the policy owner. On top of that, a VUL can shoulder emergency costs such as accidental health, hospitalization and critical illnesses.
BTID (Buy Term Insurance, Invest the Difference) strategy. Term Insurance was conceived as an alternative to the rising premiums of whole life insurance—one that will be cheaper, but offering roughly the same sum assurance. The catch is that the policy owner only buys a certain number of years to be insured—maybe a 5, 10, or 15 year term. If the policy owner is still alive after the term ends, he gets nothing. The deal may be disadvantageous but think about the money he can set aside for growth investment, where at the end of 5, 10 or 15 year term, he could get equal or more money than one assured by whole life insurance at a cheaper rate.
Okay, with that…
Let’s Get Ready to RUMBLE!
Round 1: Price
BTID Advocate: Term Insurance only costs between 10%-12% of a whole life insurance plan, making it very affordable to the average Juan.
VUL Agent: But you’re still going to invest in the market anyhow by “buying the difference”. So buying term and investing the difference costs roughly the same as purchasing a policy by yourself.
BTID Advocate: Since we’re talking about insurance here, Term Insurance is a good entry point for newbies and would-be investors, unlike VUL premiums that can scare people away. I’d rather make people become insured at soonest, rather than wait until they can afford it.
VUL Agent: Sure, Term Insurance is cheaper, but VUL is not at all expensive if you think about the extent of its protection. We’re talking about protecting lives here—your loved ones—not just making money for yourself.
BTID Advocate: Then let’s buy all individual family members a term insurance—a person can buy 9 term insurances for his family at the price of one VUL policy. At least in BTID, the investor does not need to pay half of his first year premium to third party agents.
Round 2: Coverage
VUL Agent: At the end of the day, Term insurance is limited by its term. Once the term expires, the policy owner gets nothing. All payments made to term goes down the drain. You can’t make any claim after that.
BTID Advocate: Yes, that is an expense in exchange to the freedom to invest in growth stocks that could potentially give the investor a better return. So you’re paying for your protection and peace of mind within your growth years.
VUL Agent: Yes, you said it, term insurance works for your protection, your peace of mind, your growth. VUL can do much better than that. VUL will put your kids to college, provide your family pension for years to come; it can pay off debts and mortgages; it can extend coverage for loan payments; it will pay for hospital bills. Term insurance only thinks about your death, not when you become disabled (knock on wood).
BTID Advocate: This is how I see VUL. The investor will pay a lot of money to cover a range of potential circumstance, which will not necessarily apply to him. In other words, he is paying insurance coverage he will not really need. Sure, he may need coverage for hospital expenses, why not just allot his excess savings to a healthcare plan, invest in the market directly for his child’s educational plan?
VUL Agent: Don’t you think that’s a lot of work. In the end, you’re working and paying too much to meet the same goals. Why not delegate these things to VUL? Right?
Round 3: Control
BTID Advocate: The great thing about BTID is that it promotes financial literacy and makes Filipinos become savers-and-investors. With this strategy, investors take complete control of their portfolio without having to depend on the long-term investment of the insurance company.
VUL Agent: The great thing about VUL is that it promotes protection across the board. You get temporarily or permanently disabled, you get paid. You get an accident, you will be compensated. You get hospitalized, they shoulder your bills. If that’s not what taking control of your life means, I don’t know what is.
BTID Advocate: You misunderstood. Taking charge of your portfolio, including investments for protection, is what control really means. Not relying on others.
Round 4: Returns/Risks
VUL Agent: The problem with BTID is that the strategy requires a long and winding learning curve. It is for people who want to take charge of their investments, but that doesn’t necessarily translate to better returns. Investing with less experience comes with higher risks. A financial literacy program does not convert investors into great fund managers.
BTID Advocate: Everything comes with risks. Investing the difference will have risks to the investor, but we can also say the same with the investment components of VUL. What the VUL can’t do is give better returns than what a BTID strategy can.
BTID Advocate: In an ideal investing world, everyone would buy term and invest the difference. After all, isn’t this our goal—to make each and every Filipino investment-literate? The most successful investors do not put their eggs in one basket. They diversify. If the average Juan puts majority of his savings in a VUL premium, oftentimes he would stop there, risking his fate under one life insurance company.
VUL Agent: In a perfect world, everyone should be protected from emergencies. After all, isn’t this our goal—to shield each and every Filipino from financial ruin? And since we’re putting our imagining this, I see a perfect world where every Filipino’s net worth go higher. Yes, buying a VUL policy quickly shoots your net worth up to 7 digits.
Now, we go to the Scorecards
DRAW? Not again!
Oh, I forgot to mention that you be the judge. Besides, we could all agree that no one really wins at arguments, if one is strongly convinced of his side. So between two loyal fans of their respective insurance, their arguments can go on days.
One is better than the other depending on how you frame your question. What are you buying insurance for?
If you want a cheaper insurance… Go Term, but don’t forget to invest the difference.
If you want better and wider coverage… Go ahead with VUL.
It all depends on your goal.
What is your personal strategy? What is your belief system? Is Pacquiao really better than Mayweather? Is Michael Jordan the GOAT, or is it Lebron?.
At the end of the day, you decide what’s best for you.
But whatever it is, for God’s sake, start saving and investing now.