Should You Buy Term and Invest the Difference (BTID) or Buy VUL?

Should You Buy Term and Invest the Difference (BTID) or Buy VUL?

I’ve always been a huge advocate for getting insurance.

It strengthened even more when I was in the midst of watching One Tree Hill and Brooke got so broke that she begged to get accepted for a job even if it were only to pay for her car’s insurance. It was THAT important to her.

And I realized that too, when I became a mom and was able to save around Php12,000 on maternity-related expenses and around Php24,000 on my daughter’s hospitalization expenses. Considering how little I paid for my HMO (through my former employer), it was a huge bargain!

So, when an agent introduced me to life insurance, there was really no need of convincing. I knew I was going to avail it one way or the other. I wasn’t the breadwinner of the family then and I was just around three months into my new job.

But there I was, signing up for everything. Haha! I had 2 million in coverage and multiple riders in my policy.

My Biggest Mistake

While I knew what life insurance was for, I had no idea what I signed up for. Okay, maybe I did a bit.

My agent probably did a great job at explaining things to me but I was probably on information overload. I signed up for a huge coverage and multiple riders which ended up with me paying Php3,000 per month. At the start, I was probably only earning less than Php20,000 after taxes.

A few months later, I found out that I was pregnant and gave birth to our daughter…and that was when all our priorities shifted.

At Php3,000 per month, I could no longer afford to pay for my policy and although I was the one with the higher income, I also could not NOT get the partner a policy of his own.

After computing our expenses – diapers, formula, bills, and other expenses – there was nothing left.

And so I ended up having to wait for my policy to lapse. Ten months later, my Php30,000 went down the drain…

How to Choose Life Insurance

And that was the time I realized, there are multiple ways to go about shopping for life insurance.

I learned it from countless personal finance blogs and books that I’ve read over the years and I hope to share it with you guys.

Getting a VUL

Should You Buy Term and Invest the Difference (BTID) or Buy VUL? | Budgetarian Home

Different insurance companies offer different kinds of products with various names and benefits. VUL is one of them.

According to Investopedia, VUL (or Variable Universal Life) is a permanent life insurance policy that comes with a savings component. That means that each premium you pay to the company are divided into: your insurance and your investment.

Ultimately though, this type of policy is mainly insurance so while you might get *some* return on investment from it after around 10-15 years, it’s main purpose is to provide protection in case something happens to you. The investment part is just an added benefit but not its main component.

Thus, you also have to keep in mind that in most policies, the first 3-5 years of premium-paying is mostly allocated to the insurance component. After that, most of the premium already goes to the investment component.

I could be fuzzy on the details so make sure to discuss this thoroughly with your insurance agent or financial advisor.

Some of the things I learned along the way is that a VUL policy is best for:

  • those who don’t want to see their insurance premiums go down the drain (they actually go the same way, only the VUL has a savings component tied to it so you are able to get some chunk of money still)
  • those who cannot discipline themselves to set aside money for investments
  • those who cannot be bothered to find out where to invest
  • those who just want to set it and forget it

Advantages of a VUL policy:

  • Both insurance and investments get taken care of
  • There’s money you can withdraw because of the savings component
  • Your policy can pay for itself if you have enough funds in your account (especially helpful if you miss payments)
  • The monthly premiums stay the same

Disadvantages of a VUL policy:

  • You get bigger returns when you invest directly in mutual funds or the stock market
  • It’s more expensive than the traditional term life insurance

If you’re interested in exploring VULs, you can check out these products.

Buy Term, Invest the Difference

Should You Buy Term and Invest the Difference (BTID) or Buy VUL? | Budgetarian Home

Fortunately, about a year after losing my first VUL, we were able to find another agent who *nearly* helped us get what we wanted, which was a term life insurance policy.

For some reason, we failed in the medical exams, so we ended up with a VUL with zero riders (we know better now; but also we WILL get them added once we have additional funds eventually). Thus, what we paid for in one month for my previous policy was equal to a quarter’s worth of premiums in this new policy.

We were now able to get two policies and also still have a bit more left to invest directly to mutual funds or in the stock market.

Update: My second policy lapsed (again lol) when we transitioned to a one-income freelancing household but I’ve already signed a term life insurance policy via Sun Life’s Sun Safer Life and have paid for it for one year. Yay! Also, my annual premiums for the first five years is only at Php7,850. Double yay!

This means, compared to my first VUL, I’d have saved Php28,150 which I could invest into mutual funds or stock market for retirement or for the kids’ education.

Some of the things I learned along the way is that the BTID approach is best for:

  • those who already have discipline to set aside money for insurance AND investments
  • those who want full control of their investments
  • those who want to periodically reallocate and balance their investment portfolio

Advantages of the BTID approach:

  • You have lower monthly premiums on your insurance policy
  • You have a higher earning potential on your investments
  • You have full control over where your money is invested (or partially, if you go for mutual funds)

Disadvantages of the BTID approach:

  • Insurance premiums get recalculated every five years – and thus go higher the older you get
  • You get nothing out of your insurance policy
  • Your policy could lapse if you miss a payment

You can totally do a BTID approach with Sun Life: check out their income protection plans here and their mutual funds here.

Which one’s for you?

Ultimately, the decision is all up to you.

Whichever approach you decide to go for, always keep in mind that insurance is for your peace of mind and investments is for growing your money.

If you are unsure which path to take, discuss it with your insurance agent or financial advisor – and make sure to talk with a trusted one who aren’t just after the commissions! 😉

The Family Financial Road Map

The Family Financial Road Map

One of the biggest reasons I wanted to push a blog that talk about money is because, as a young family, we’ve gone through a whole lot of financial successes and failures and we want to be able to share the journey with you.

Why so? Because really, there are nuggets of gold when you learn from the mistake of others instead of going through everything your way and then realizing 20 years later, that you are in such a huge financial mess. Right? Of course, you still get to make financial mistakes of your own but at least, you eliminate – or prepare yourself – for the biggest ones.

Our family’s story

Our little family started 2012, with me giving birth to our daughter in February 2013. Months prior, I had been in the denial – I was just starting out my corporate career and felt I had so much to accomplish – and, lo and behold, our daughter came as a surprise.

Then came our first financial success: saving up around Php50,000 in cash in just 3 months, in preparation for giving birth.

In the Philippines, childbirth is not *usually* covered by insurance so unless you have those executive plans, enrolled in a hospital’s maternity package, or have a very small hospital bill, everything is covered by Philhealth, you have to prepare paying for it out of pocket. (I had a *regular* HMO plan, was too late to avail of a maternity package and thus, my Philhealth insurance could only cover so much. We ended up paying around the same amount for a private doctor and *privately-priced* hospital facilities.)

But having a baby turned out to be a blessing, because it helped set our priorities right. We learning more about managing money – savings, investments, purchasing a house, and so on. We opened up a mutual funds and stock market account, and also started looking into affordable houses, which we finally started paying for in 2015 (we found one the year before but ran into problems; but that’s for another blog post haha).

We made A LOT of financial mistakes along the way despite reading on a bunch of blogs and books. Thank goodness we learned to put a stop to it right away (but we’re still paying for it argh).

In 2017 came another surprise, which is baby #2, which helped us get the ball rolling on our house (we finally moved) and my business (check out my first year journey here).

Setting Priorities Right

While we are still paying for our mistakes, I have to admit that those things helped bring us where we are right now.

Thankfully, our financial mess is not THAT big – it could have been worse. And, with me still in my late 20s, there’s still plenty of time to make up for the wrong decisions.

Which is why I wanted to share with you a financial road map especially made for new families.

Because really, it’s a whole different situation when you’re planning your finances around another person and a little human (or more).

Keep in mind though that everyone’s financial journey is never the same. It’s called personal finance for a reason. Nevertheless, it’s good to create some guidelines and road maps to keep your goals in check.

The Family Financial Road Map

1. Provide for the basics

There’s no question about this. Once you have a family, you need to prioritize the basics: food, shelter, clothing, basic health and safety.

You can’t forego food and other basic needs – but you can control how much you spend for each of these things.

2. Pay for all the bills

This means paying for all your utility bills on time: electricity bills, water bills, phone bills and so on. Doing so will help prevent your financial situation from going haywire.

In some countries, this could even help you maintain a good credit standing – in the Philippines, companies are not that strict although I’ve heard of certain situations where outstanding balances can affect your employment.

If you can get rid of certain bills (eg. gym memberships) or lessen them (eg. electricity and water bills), then that will help you tame your budget.

3. Create a budget

The Family Financial Road Map | Budgetarian Home

We started tracking our cash flow in 2016, when we stayed on the road for 21 days with our daughter. Little did we know, it was in preparation for living on our own – because we moved out of our house seven months later!

Tracking our incoming and outgoing money did help us get a bigger picture of our income and expenses, and helped the partner master his grocery budgeting. It also helped me figure out how much we truly needed in order to have a more comfortable lifestyle.

In October 2017, I decided to run a service-based business to increase our household income, because there is only so much you can reduce in your budget.

When we started out, we used a plain old Google Spreadsheet (I love that you can access it anytime, anywhere), but now we use YNAB to keep track of our budget.

4. Secure health insurance

We’re talking about HMO here, which, if you are employed, is something you no longer have to worry about.

If you have dependents, you might notice that this takes up a slightly bigger chunk of your payroll compared to your single peers, but at least you have the peace of mind knowing that everyone stays protected in case of hospitalization and other medical emergencies.

From personal experience, I was able to save around Php12,000 in personal expenses (related to pregnancy – OB consultations, lab tests, and a 3D echo for my heart, etc) and around Php24,000 for my daughter’s hospital expenses when she was admitted 3 days in the hospital for gastroenteritis.

If you are self-employed like we are now, you may have to find a good company that provides ample coverage within your budget. (I will update you once we find one!)

5. Build your baby emergency fund

I’m following Dave Ramsey’s advice here, to save for a smaller emergency fund before doing anything else, and I’m giving you three-ish options:

  • Dave says to save $1,000
  • Since we’re in the Philippines, you save Php50,000 (regardless of current exchange rate)
  • Or save one month’s worth of expenses

That way, if TRUE EMERGENCIES happen, you have funds that you can use instead of pulling out your credit card, or taking a loan from your family, relatives, friends, banks or loan sharks.

Ideally, your emergency funds should be somewhere liquid and easy to get such as a savings account. If you can get a high-yield savings account, then all the better.

6. Secure life insurance

Filipinos are not believers of life insurance, by nature. You see, it’s something that you pay for regularly but never really get to use (God forbid you have to use it) – but it gives you the peace of mind knowing that your family has funds they can use just in case the worse happens to you.

There are two main ways you can go about purchasing life insurance but regardless, you need to make sure you have this once you have dependents relying upon you and your income.

I have a whole other story to write about my life insurance purchases but I’ve now secured term life insurance with Sun Life. Yay!

7. Pay down debts

Confession time: we still have a five-figure consumer debt we need to tackle. It’s something that is already ruining my credit history but also something that we are fully aware of – so we hope to get rid of it ideally by the end of 2018, but realistically, maybe somewhere mid 2019.

Earlier this year, we had already paid off debts we have incurred from borrowing money from friends and we plan to stay away from doing that again (and hopefully, not have to borrow from my parents again hahaha).

However, since I’ve lost access to my credit cards (only had two, really), we’ve realized how powerful cash can be and how possible it is to make all your purchases done through cash. We’ve lived our cash-basis lifestyle for maybe two years now and we hope this will continue until…hopefully forever!

If you have don’t have credit cards, then good for you! Better stay away before it consumes you!

If you do have them, just make sure you are able to pay off the entire balance – and not just the minimum – to prevent yourself from incurring huge fees on interest alone.

8. Save for big purchases

The Family Financial Road Map | Budgetarian Home

Time to save up for the big purchases!

In the Philippines, you don’t usually need a huge chunk of money to get started on your dream house or car, unless you build them from scratch or buy them second-hand.

With car sales plummeting lately, you might just be able to see zero downpayment cars left and right! (Yikes, but be careful – that means HUGEEEE monthly payments.) For real estate, you usually just need as low as Php10,000 to reserve your slot and then you can start paying for your downpayment the month after and until the next three years, usually.

When we bought our house in 2015, we made zero plans prior. In fact, we paid for both downpayment (equity) and loan (mortgage) starting on the 4th month because we had no idea what we were getting ourselves into.

Thus, a few tips before you take the plunge:

  • make sure you save up for the downpayment (equity) first – ideally, this should be around 20% of the total contract price for your house and lot or your car
  • make sure you have emergency funds – in case you lost a job (we transitioned to a one-income freelancing household late 2015), you have some backup funds you can use
  • shop around for options – ideally, get a house or condo unit that is still in pre-selling mode (AND from a RELIABLE developer) because this is the cheapest that they can go; if buying cars, second-hand is a great option

You can open up a Money Market Fund or Bond Fund to help you save your money for downpayment!

For the next few steps, you can choose whatever order you like but I would suggest checking out each item the way it is ordered below:

9. Continue building your emergency fund

There are multiple ways that you can compute your emergency fund.

For some, it means saving around 6-12 months’ worth of expenses. Others, they add in multiple expenses such as the most expensive surgery/operation you can avail (or something along these lines).

I suggest going for the former to keep things simple. You also do not want to have a huge chunk of your fortune in your emergency funds alone because you could be missing out in letting your money work for you.

10. Secure long-term health insurance

For those in the sandwich generation like we are, there are two groups of people you need to secure this with: your parents and yourself.

We’ve come to realize that because the partner’s mom isn’t financially secured (we also aren’t, really, and I’m not sure what my parents’ status are as well), any real emergency could topple the still-fragile foundation that we are trying to build. Thus, we have to think about securing a senior citizen and two nearly senior citizens – and also ourselves. Whew. That sounds like such a huge burden.

So far, I’ve only seen Kaiser provide health insurance for seniors although they can be really costly and I’m not quite sure about their policy for pre-existing conditions.

11. Start saving for retirement

You’re never too young to save up for retirement.

Truth be told, we didn’t quite follow this road map – which is why I’m laying it all out here so you learn from our mistakes, and also as a reminder to ourselves so we stay focused on our goals.

We still aren’t clear whether our mutual funds account or our stock market account is for retirement but nevertheless, we will continue to religiously save up money and build our funds there.

Open up an equity or index fund to get started on your retirement fund!

12. Start saving for kids’ education

This might be something you can interchange with your retirement funds but keep this in mind:

  • you have a shorter time to save up for college BUT you also need less
  • you have a much longer time to save up for retirement BUT you need a lot more (thus the reason why I’m putting retirement first)

Plus your kids can always apply for a scholarship or work on the side to help pay for their tuition, right?

You can look into getting a Balanced Fund to help build your kids’ college fund.

13. Start saving for leisure

And…finally!

I do have one tiny objection here: don’t wait for your retirement to enjoy your money!

Right now, we’re doing our best to put in some fun and leisure while the kids are still young. We don’t want to put off traveling when we’re gray and old and the kids no longer want to join us. Where’s the fun in that?

But definitely, think about the leisure activities you can enjoy during retirement and save up for it!

Investing for Beginners: Everything You Need to Know About Mutual Funds

Investing for Beginners: Everything You Need to Know About Mutual Funds

We started learning more about investing back in 2013.

What was our motivation? Our daughter was born in February 2013 and, as cliche as it may sound, welcoming a baby in your life can truly change perspectives.

Plus, another huge goal we had back then was to drop everything and go. It meant letting go of jobs and whatever was holding us back, to give way to traveling full-time. Crazy as it may sound, but it was our ultimate dream, and building our travel funds to allow us to travel for (at least) a year was only possible through mutual funds.

Now, before you go and leave the blog to find out how and where to invest in mutual funds, there are some things you ought to know first.

After all, you bring in a lot of risk if you get yourself into something you have no idea about. The biggest investment you should make is KNOWLEDGE.

What are mutual funds?

Basically, mutual funds is a type of investment where investors pool their money together to create a larger fund.

This fund is then invested into different types of securities (stocks, bonds, deposits and many others) so that it can generate returns.

The returns can come from interest from borrowing (such as in bonds) or from company growth and dividends (such as in stocks).

A portion of the returns are then given back (after management fees and taxes) to the investors which they can choose to withdraw and spend or invest back into the fund.

The cycle is as shown below (I created it from an old post I wrote 4 years ago – but I don’t think I did such a great job at explaining the whole thing – so here I am again).

Investing for Beginners: Everything You Need to Know About Mutual Funds | Budgetarian Home

Where are mutual funds invested?

Mutual funds are often categorized into three ways (although they may have different names, depending on the company you get it from), depending on where the money is invested in:

Aggressive funds

This is typically what is suggested for the younger people. These types of funds have a higher appetite for risk – and this is because there’s a lot more time to make up for any losses that might be incurred along the way. The major advantage to having a higher appetite for risk is that you have a much higher potential of getting big returns for your money.

Aggressive funds are usually invested in the stock market.

Conservative funds

These types of funds are often suggested for capital preservation, and thus, for those who do not have a lot of time left to make up for losses. Think those nearing their retirement age. Conservative funds have a much lower appetite for risk – therefore, they cannot expect very huge returns but they can be assured that their money stays protected with some interest (much higher than the bank offers).

Conservative funds are invested in low risk securities such as bonds, treasury bills, deposit accounts such as time deposits and money market funds.

Balanced funds

Of course, there are those who would like to stay on the safe side but still be able to take on a bit of risk. Balanced funds are, as the name suggests, a mix of both funds mentioned above.

Why choose mutual funds?

Although we did end up opening a stock market account of our own, we chose to set up our mutual funds account for many reasons:

  • because we had zero knowledge on stock trading (and had no time to learn it)
  • because we wanted our money to be in the best hands – mutual funds are managed by fund manager whose sole job is to study and analyze the market so the money is able to generate the highest possible returns at the lowest possible risk
  • because we wanted to lessen ourselves the headache of choosing which stocks to put our money in
  • because we wanted to get into the habit of setting aside some money for our future, and not worry about the rest
  • because it provides higher returns compared to what banks are giving us

Of course, because mutual funds are managed by a company, you incur fees such as entry and exit fees, which pays for the management of the funds.

Which mutual fund should I choose?

Investing for Beginners: Everything You Need to Know About Mutual Funds | Budgetarian Home

There are many factors to determine which type of mutual fund to invest on.

For example, some companies will have to assess on whether you are an aggressive or a conservative investor or somewhere in between.

This can be determined by:

  • learning your risk appetite, or how much risk can you take: 10% loss? 20% loss?
  • your investment horizon, or the time you can do without having that money with you: will you use the money in 5 years? 10 years?
  • your age: young people are often recommended aggressive funds because there’s still a lot of time to get back any losses and possible doubling the returns; obviously, if you are much older and plan to invest your retirement money, you will be recommended with a conservative fund

Ultimately though, the decision will always be up to the investor.

How often should I top-up my mutual funds account?

It generally depends upon the investor.

Personally, we use the cost averaging method, which means that we put in an amount every month (sometimes more frequently, when there is extra money to add) because then, it is able to ride along the highs and lows of the market. You have to remember that the stock market is very volatile and can change every so often, so you have to be flexible enough to go along with it.

For some people, investing a lump sum – and then forgetting about it – is the best way to go. Obviously, we did not go this route because we did not have any lump sum to add to our mutual funds account, and we’d probably spend a bulk of that money somewhere else, as we are still building our family and our finances.

A common question I get asked: is topping up MANDATORY? NO. You have full control over how much (a minimum of Php1,000) or how often you add money into your funds. You can just open an account and forget it, really. But, if you want to maximize your savings and returns, I suggest doing it regularly.

How long should I stay invested in mutual funds?

While mutual funds are designed for long term investing, how long you place it in there still depends upon you, the investor.

According to some, staying invested for at least a year is okay – but I personally recommend going three to five, or even more.

You might also have to check out the policies for your mutual funds: ours waive the exit fee for money that is six months old (which only encourages the investor to have their money invested for the long term).

We also found out that the 6-month-old rule is not for your account but for every amount you put in. For example, if you decide to withdraw money from your mutual funds account on August, the funds that you put in between February and July will incur an exit fee. Of course, you have the option to withdraw the funds that you invested in January and earlier.

Our personal experience investing in mutual funds

Investing for Beginners: Everything You Need to Know About Mutual Funds | Budgetarian Home

From our five-year experience being invested in mutual funds, we started at a rather high value, which went down on year 2 and 3, and then slowly making its way back up year 5.

We’ve made several wrong moves along the way as well, such as withdrawing a huge bulk of that money to 1) make a huge purchase for a WANT, and 2) pay off a NEED. In total, we probably incurred a loss of around Php6,000.

A few things to consider before you start investing in mutual funds:

  • make sure you have the discipline to set aside some amount of money on a regular basis to invest (the earlier you start investing, the bigger your returns can become – this is the rule of compounding!; and yes, even Php1,000 a month is already something!)
  • make sure you have already set aside some money for emergency funds (I’d suggest building your baby EFund – or a month’s worth of expenses – to make sure you don’t withdraw your investments in times of REAL EMERGENCIES like we did)
  • make sure you have the discipline to stay away from NON-EMERGENCIES (of course, you can still buy things for leisure, but make sure to keep this a separate budget from your investment or emergency money)

Now that you know everything that we know about mutual funds, it’s time to put it into action!

Are you ready?

Where to open a mutual funds account?

There are a number of mutual funds companies here in the Philippines. You can check out PIFA to see if a company is legit, and also see their past fund performance.

Most companies require at least Php5,000 to open an account, which we think is the biggest hurdle to get over.

Fortunately, Sun Life’s Prosperity Funds allow you to jumpstart your investments for just Php1,000 – and then top it up for Php1,000.

*I am not a Sun Life advisor so if you are planning to open one up, make sure to visit their website and contact them to talk to an advisor.*

What’s your next move?

Hey, if you’ve decided on opening up a mutual funds account or have already opened up on after reading this post, make sure to comment below and let us in on your journey. Happy investing!