101. Are VULs really better than bank deposits? It depends on the "context" on how it is presented

 

The staple pitch among financial advisors is comparing the "rates of return" of a savings account with the projected returns of a VUL, how the low interest rate of a savings account is not overcoming the negative effects of inflation over time leading to significant losses in purchasing power.

While data has shown the outperformance of funds over a savings account, this must be presented in the proper context.

First is that the nature of the returns is not comparable.

A savings account is categorized as a "lending" type of vehicle, that by depositing the money in a bank, we are effectively lending the money to the bank in return for compensation in the form of interest. This rate is normally fixed and the funds are withdrawable anytime.

The liquidity (withdrawable anytime) of a savings account is the reason why rates are normally very low.

A VUL (or mutual funds/UIT) is categorized as "owning" vehicles, that money invested is replaced by ownership (units/share) in the fund at the price the investment is made, for example funds are invested in ABC equity fund selling for Php 2/unit, a Php 10K investment will now be converted to 5,000 units of the fund (Php10k/Php2/unit) assuming zero transaction costs (entry fees, COI, etc), how much the returns would be going forward will be dependent on how the fund is invested. So if the fund is an equity fund (predominantly invested in the stock market), the price of the fund will be how the stock market behaves going forward.

If the market goes up, the price of the fund will follow resulting in some gains for the investor, but if the market went down, the price of the fund will also drop. The best way to handle this volatility (ups and downs) is to hold on to it for longer periods of time.

It is not withdrawable anytime because to cash in, you have to sell your ownership (units/shares) at the prevailing price, which could be lower than your purchase price.

Having said these, are VULs better than bank deposits?

It really depends on the timing and intent of your investment decision.

• If your current excess funds are meant to act as buffer for any income shortfall, you need liquidity so a savings account is better.
• If your current excess funds are meant to finance a "financial goal" happening years into the future, then a fund (whether a VUL, MF or UIT) may be a better option.

All the best my friends!

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