BTID vs VUL and How I See Financial Planning With Respect to Life Insurance

Updated: November 24, 2017

Buy Term, Invest the Difference (BTID) versus getting a Variable Unit-Linked (VUL) life insurance is always a divisive topic, even among us Registered Financial Planners.

There have been many attempts to compare them based on actual figures and both sides can always come up with results that favor their stand.

However, I believe that protection always comes before investing and getting a term insurance is the cheapest option. I’ve met too many people who had to let their policies lapse because they can’t pay their VULs anymore.

Also, it’s important to note that insurance companies are dynamic organizations. Proof to that is the that fact they used to push for whole life, but now it’s VUL.

Because of the many advantages of doing BTID, most companies are now redesigning their VULs to lessen or cope with those advantages – which includes offering term insurance that can be upgraded to a VUL before the end of term.

Some have even increased the cost of their term insurance, to lower the gap between the cost of VUL plans.

So, I will not be surprised if someday, VULs become the better option to plain vanilla term insurance. Or maybe, there will be a new type of insurance that will make VULs obsolete like whole life.

But that’s in the future… for now, I believe BTID is still the better strategy.

Some people got offended when I said that those who get VULs are lazy. For me, that is the truth based on the numerous observation I’ve made through the years of those who mindlessly bought VULs.

They were too lazy to learn about investing, they were too lazy to understand VULs and/or they were too lazy to question the true intentions of their insurance agent.

However, what many people failed to recognize in that post is that I gave two other reasons to get a VUL. And those are to help a friend who needs to reach a sales quota and; if you’re looking for a “second-tier investment” for diversification.

On that latter reason… you are definitely not lazy if you already have pooled funds, stocks, real estate investments, etc. – and yet, you’re still looking for a place to invest; and thus, getting a VUL now makes sense.

Life insurance, whether term or VUL, is simply one of the many tools that a person can use for financial planning. It is not the only solution to the countless life scenarios that may happen.

Cash deposits, life and non-life insurance, short-term and long-term healthcare plans, investment funds, stocks, real estate, memorial plans and many others – these are all tools that are available for you.

Here’s the thing… I’d like to share my own financial strategy with respect to life insurance. So that you may better understand why I am on the side of BTID.

We can just agree to disagree if you believe otherwise.

How I See Life Insurance in Financial Planning

Get term life insurance because it’s the most affordable type that can protect your family financially in the short-term. A must for breadwinners who don’t have a good financial foundation, i.e. no savings, no investments.

Now that your family is protected just in case you die too soon, it’s now time to take care of the possibility that you live too long through investing. Invest to create passive income and grow wealth for retirement.

At this point, you have entered your wealth accumulation phase. Just renew your term life insurance when it expires during this phase.

After the value of your assets have substantially grown – if your net worth is more than P2.5 million in my opinion, as based on the current exemptions when it comes to estate taxes – then it’s time to upgrade the use of life insurance to both protection and a tool for estate planning.

At this phase, term life insurance is still the cheapest option, but VULs can now be included for consideration because:

• You can comfortably afford paying the higher premiums.
• You already have a good financial foundation, i.e. you have investments in various instruments (stocks, mutual funds, etc.) and own several high value assets (real estate, etc.)
• You’re leaving the wealth accumulation phase, and preparing to enter the wealth distribution phase of one’s financial life.

In case you enter this “transition phase” at a time when you can’t get any type of life insurance anymore because no company wants to insure you; or it has become too expensive to get at your age, then all is not lost.

When it comes to estate planning, there are still other tools that one can use depending on your circumstances – you can put up a family corporation, liquidate a portion of your wealth and give them to your heirs to use for estate taxes, etc.

To conclude, I believe that life insurance plays a dynamic role in one’s financial life. Its first use is for protection just in case you die too soon – to which term life insurance is the best answer.

As you go through your wealth stages, life insurance slowly becomes a tool for estate planning, to which VULs (especially Single Pay VULs) become one of several options.

Thus, it’s important to really plan your life well.

As for me, upon reaching the proverbial retirement years, I will slowly liquidate all my assets and enjoy life until all that’s left of it is just enough to pay for my basic living expenses and my funeral.

At this point, paying estate taxes won’t be a big issue nor will it be a burden to my heirs, as I hope to have very few assets left.

In the meantime, while I journey towards that stage – everything I know and will learn about financial planning, I will make sure to pass on to my children, heirs and loved ones.

This is my final goal so that they will have no desire to inherit any money from me because they have learned to create and grow their own wealth.

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Photo credits: jakerust and dhilowitz