The One and Only Time You Will Need VUL Insurance


As someone who has no skin in the insurance game, whether life or non-life insurance, take it from me that there's a 99% chance that you won't need variable universal life (VUL) insurance or the life insurance-investment combo.

Or don't listen to me, whatever floats your boat. I'm not gonna earn from this either way. This is pure public service at its rawest. 

If you've been approached by a "financial adviser" a.k.a. insurance agent, then you've probably been regaled with the wonder product that is the VUL insurance. Most insurance agents present VUL insurance as an investment, retirement planning tool, education plan and the solution to all of life's many pressing problems.

I am not exaggerating. It's fascinating listening to insurance agents pitch VUL insurance because with the way they heap praises on it, you'd think it was a wonder drug that can easily cure the pandemic and cancer, while also securing your financial future.

When an insurance agent cold-called me, I tested her by asking her to send me a proposal for TERM insurance. I specifically said that I wanted term insurance not VUL insurance and for her to respect my wishes and to not recommend VUL insurance.

In her defense, she did send me a proposal for term insurance but then she went ahead and sent me 2 proposals for VUL just the same, saying that from what she knew of me and my needs, VUL would be most apt daw.

I did not know her from Eve (or is it Adam?) so she had no basis talking about me and my needs. Needless to say, no agent-client relationship was created between us that day.

Life insurance agents will always try to sell you VUL insurance because they will receive between 30% to 50% of the first premium paid, so of course they're highly incentivized to sell you the biggest policy they can. 

But really, the one and only time you will need VUL insurance is if your heirs will need to pay estate tax to access your assets after your death. *

The basic formula to determine the amount of estate tax to be paid is:

Gross value of estate/ assets - allowed deductions = net estate x 6% = estate tax due

In turn, the allowed deductions are:

1) Standard deduction of Php5,000,000.00 if decedent (a.k.a. dead person) was a Philippine citizen or resident or Php500,000.00 if decedent was a non-resident alien 

2) Claims against the estate

3) Claims of the deceased against insolvent persons

4) Unpaid mortgages, taxes and casualty losses

5) Property previously taxed

6) Transfer for public use

7) The family home (up to Php10,000,000.00)

8) Amount received by heirs under R.A. No. 4917

9) Net share of surviving spouse in the gross estate

I also recommend watching this short video for a primer on estate tax vis-a-vis the TRAIN Law.

Life insurance proceeds are not included in the computation of the gross estate which is why it's a good estate planning tool. In the same vein, VUL insurance is one of the ways to ensure that your heirs will have enough cash to pay off estate tax because it is so designed to provide protection for your entire life, unlike term insurance which only covers a particular period. 

But since the TRAIN law no longer freezes the decedent's bank accounts and allows the heirs to withdraw from the decedent's bank account, subject to the bank withholding 6% as final withholding tax, VUL insurance then becomes unnecessary as an estate planning tool if the decedent has enough cash in his/her bank accounts.

In a nutshell, you'll be liable for estate tax if your net estate is valued at Php200,000.00 above so if you don't have cash in your bank account(s) to answer for estate tax, then that's the one and only time you'll need VUL insurance. If someone says otherwise, then it's simply the commission talking.


* If you have dependents, then get term insurance and continue renewing your coverage while there is still someone depending on your income. If you want to invest, then invest directly and not through the VUL route which is more expensive and has historically lagged behind other investments. If you want to create an educational fund, then create a business or invest early in high yield instruments or equities and/or do not limit your sights to schools within Metro Manila because the capital does not have a monopoly on good and quality education (i.e. Silliman University in Dumaguete and MSU Iligan Institute of Technology). 

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Comments

It's a welcome change that only the tax on the bank balance is required. I encountered an issue back in my private practice days where the heirs couldn't pay the tax as the money was held up in the bank, which refused to release until they could present proof of payment of the estate tax. The problem is circular--how could they pay when the decedent's money was in the bank?

Also, the bank refused to even disclose the bank account balance, citing the bank secrecy law. How could the heirs even pay the tax when they don't know how much will be due? This was years ago but it felt like it's almost as if the bank wanted the cash for itself! Haha. Unfortunately, I had left before seeing that issue get resolved.

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