Friday, October 26, 2012

A Closer Look at VULs: Philam Life's Family Secure (Part 1)


Dear Investor Juan,

Last night, my aunt (a Philam Life agent) just offered me their latest VUL offering, the Family Secure. I don't know if you're aware of this but let me show you these links for some info:

I read that you are against this type of insurance. But I'm quite convinced by this Family Secure due to its flexibility to turn insurance into investments as we (the parent's-to-be) retire. I don't have a family yet ('cause I'm still 23!).

Maybe I just find it hard to look on the other side of the fence. In your opinion, is this worth a take? Or find an affordable term life insurance and invest in other things?

By the way, I want to take the ETF. It interests me more than of UITF. Thanks!


Dear Azeotrope,

As I briefly discussed in this post about life insurance, the most important drawback of varaible life insurance products is cost: that you can get the same results for cheaper if you just get a low-cost term life policy and investment fund (i.e., mutual fund or UITF). That said, I haven't been able to show how this works, exactly, given the lack of actual information about specific products. That is why I would like to thank you for giving us this opportunity to better understand hybrid insurance-investment products like Philam Life's Family Secure.

For this "desktop analysis," we will use the information and assumptions on Family Secure's brochure and a few things we've learned about time value of money from previous posts (like this one).

So how does Family Secure work? You, the policy holder, pay a premium every year; each year, your premium is allocated between a term life insurance policy and your choice of investment fund (from Philam's mutual fund offerings), depending on your "need." Presumably, when you're younger, you need more life insurance since your dependents have more need of your earning power, so you pay more for higher insurance coverage and only a small portion of your premiums will go to the investment fund. As you get older, this dependence would decrease (as your children grow up and start their own families, for example) and you would need less insurance, therefore you can start investing a bigger portion of your premiums in the investment fund.

Taking a look at this graphic from the brochure, we see how premiums are allocated between the life insurance component and the investment component over the course of the policy holder's coverage. The gray areas indicate Philam Life's proposed life insurance coverage (the policy holder makes the actual decision), high from age 30 to around 50. From age 50 onwards, the part of the premium that goes to life insurance significantly decreases in favor of the investment component, whose value (at an assumed return of 8% per year) is represented by the red area. While Philam Life has actually done a good job clearly making a distinction between the two components of products in this graphic, they have also--perhaps inadvertently but definitely irresponsibly--misled readers that the amount of life insurance coverage and the value of the investment are comparable--in other words, that a peso of life insurance coverage is the same as a peso in the investment account (the graphic clearly implies that the differences in the heights of the bars mean something; another indication is how a red area is stacked on top of a gray area). This is not the case! The value of a life insurance coverage is the amount the policy holder pays for it, not the coverage amount: from the graphic, the insurance coverage of 3,135,000 pesos at age 30, only for that entire year, is worth 30,000 pesos--the premium for that year--and not 3,135,000 pesos! On the other hand, at age 65, the investment value of 2,507,062 pesos is worth exactly that (in that year): 2,507,062!

So how should have Philam Life presented this graphic so that casual readers will not make erroneous conclusions? First, they should not have stacked the investment value on top of the life insurance coverage amount anywhere in the graph. And second, they should have included a separate, clearly defined axis for the investment value on the right.

And in my opinion, they should fire whoever's responsible for this. This is very embarrassing, an amateurish mistake (?) for a company that's as big and established as Philamlife. It would make for a very good example in Statistics class, though, on how not to use graphs in presenting data; or maybe how to effectively misrepresent data?

Sorry, Azeotrope, this... discussion... went on for longer than I had hoped. I know I haven't answered a lot of your questions yet. Unfortunately, my answers would have to wait for Part 2 next week, where I will show things that we can learn about variable life insurance from the Family Secure brochure and discuss some questions that you can ask your aunt about this product.

Have a happy weekend everyone!

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