Monday, October 29, 2012

A Closer Look at VULs: Philam Life's Family Secure (Part 2)


Dear Azeotrope,

First, let me clarify. The point of these past two posts is neither to encourage nor dissuade readers from buying the product. My main objective is to help you and other readers/potential buyers make an informed decision whether to buy the product or not.

Okay, now we end the dilly-dallying and go straight to the heart of the matter.

What is Family Secure? As Philam Life clearly illustrates in its brochure, Family Secure is a combination of a term life insurance policy and a mutual fund. It follows, therefore, that getting these two products separately from any provider should produce the same, or at least comparable, results.

One way to choose between Family Secure and a "do-it-yourself VUL" is to have an idea how much each alternative costs and make a comparison. Fortunately, Philam Life provides us with enough information that could serve as basis for such an analysis.

From the example in the brochure, we see how an annual premium of 30,000 pesos could be allocated between the insurance component and the investment component; according to the graphic, if you make the proposed allocation, you will have accumulated 2,507,062 pesos over 35 years, at an assumed annual return of 8%. One way to estimate the cost/value of the term life policy is to subtract the aforementioned value from the future value of the premiums if the entire amount is to be allocated to the investment component. Using the "FV" function of Excel (or Google Spreadsheets), and entering the following arguments: rate = 8%, NPER = 35 (number of payments from age 30 to 65), PMT = 30000 (payment at the end of every year), we get 5,169,504 (ignore the negative sign). This number tells us that as per Philam Life's proposed allocation, 5,169,504 - 2,507,062 = 2,662,442 pesos or more than half of the value of your premiums will go to insurance coverag. But remember that this is the value of your premiums after 35 years; to make better sense of it, we have to can convert it to present terms. This time using the "PV" function of Excel, enter rate = 8%, NPER = 35, PMT = 0, and FV = 2,662,442, and you'll get 180,073 pesos--the cost, in today's peso, of getting the same insurance coverage as the one indicated by the gray areas in the brochure example.

So how can we use these results in making a decision? Go to a term life insurance agent (even one from Philam Life such as your aunt) and ask for a quotation for the coverage in the example. If the present value of quoted premiums is greater than 180,073 pesos, then Family Secure is a good deal; if it's less, then maybe you'd want to consider the cheaper option.

Of course, Family Secure does have qualitative advantages that you may also want to consider. Well, to me one advantage: convenience. So even if this product is more expensive, but you don't want the headache of reading posts like this or using Excel or shopping around for the cheapest deal, then it may well be worth it.

There is one important disadvantage to getting Family Secure, of course: you lose flexibility since the plan is essentially a long-term commitment. While you are free to allocate your premiums from time to time, you do have to make regular premium payments for a predefined number of years, which implies penalties if you fail to make payment (I'm not sure about this, so you might want to ask your aunt). You're also limited to choosing a Philam Life mutual fund, and I don't think you can change the kind of fund after your initial choice.

So these are the things that you have to consider in deciding whether to get Family Secure or other Variable Life Insurance products. Whatever alternative you're leaning towards, don't hesitate to ask your agent questions, such as the points raised in the past two posts. Good luck, and I hope you find these posts helpful. :)

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