“Why did you get that VUL? They are inefficient! Just buy Term Insurance and invest the difference!“. This was me years ago after I found out that a friend just purchased a Variable Universal Life Insurance from a big insurance company. I then went on a tirade about the insurance fees, agent commission, and managed fund expenses. I continued on about why it is a bad idea to mix insurance and investments.
Was I trying to help? My intentions were good: I wanted my friend to have the best insurance and investment set up. Paying unnecessary fees is a big no-no from my perspective.
Was I able to help my friend? That part leaves much to be desired.
Not for everyone
Often, the response to my explanations are either bewilderment or indifference. They understood the general concept, but it doesn’t seem to interest them.
Not all people are excited with regards to the subject of finance, including personal finance. Everyone seems eager to be rich and be financially independent. However, most do not have the inclination to dive deep and explore how to attain that independence. Their attention is already occupied by family, work, relationships, and other personal objectives.
And that should be fine!
If they chose to get a managed fund from an agent, we should not be quick to say that they are getting the short end of the deal. Even if we teach them to invest in index funds instead, can we guarantee that they will stick to it in the long term? Can we teach them to stay on the plan even though their portfolio drops 30% due to a recession? Most people would fear the worst. They would pull out their investments and never touch the stock market again if that happens.
In this case, their investments eventually go down to nothing. From a pragmatic perspective, a managed fund with a 4% expense ratio beats an index fund with a 0.1% expense ratio if that person eventually stops investing due to fear or disinformation.
Advantages of managed products
Managed financial products have their own advantages. Most notably are the following:
When you avail of a managed financial product, such as a VUL, the agent can offer you an Automatic Debit Arrangement (ADA) with your bank account. This means that the insurance/investment premiums can be deducted automatically from your account on a regular schedule, such as monthly, quarterly or annually.
This can be a good thing especially for people who tend to procrastinate or forget about investing on a regular schedule. In addition to that, it also keeps the savings “sticky”. This means that you cannot conveniently withdraw your money from this account like a normal savings account. To get the cash value of your account, you will need to contact the agent or the company first before you get your money. This added inconvenience is actually a good thing as it keeps people who normally can’t save on their own to stay invested.
As the payment is automatically deducted, the mental overhead of an ADA is basically zero! This can result in a sizeable investment in the long term as additional money is guaranteed to be invested over time. Compare this to a more manual method where it falls on the individual to invest. In most cases, life will find a way to occupy that person’s thoughts or time, and investments eventually take a back seat in their priority list.
Having a managed fund with automatic payments put your investments on auto-pilot. You don’t need to think about it until you are ready to retire, which (hopefully) by then grows into a significant nest egg. In the end it is up to you to determine if that is already enough, or if it is worth putting in more effort into (possibly) higher returns.
Having an insurance agent or a company as one of the stakeholders in your premium payments can also work wonders for some people. If your premium date is near, your agent may call and remind you about the upcoming bill. The company may also send you emails, SMS, or snail mail regarding your payment due date. This eliminates the need to spend time setting up manual reminders or targets for investments.
Optimization is also personal
While having a good handle of your own finances is a good virtue, not everyone is setting a high priority for managing their own money. I would even say that most people are like that. For those of us who think differently, we should not judge them by how they handle their lives. What is important to one may not be that important to another. Each of us prioritize differently. In the end, we are all trying to live our lives the best way we know and can.
Photo by Jp Valery on Unsplash