What Does ‘Buy Term and Invest the Rest’ Mean
A common belief is that investment and insurance don’t go together. Investing is about delaying spending for future financial gain, while insurance is about spending money now to prevent financial loss in the future.
This mindset gave rise to the BTIR idea. The idea is to avoid whole life or investment-linked life insurance plans (ILPs) and instead stick to “pure” life insurance, often known as term insurance. After that, you ought to invest the premiums you avoided paying by purchasing the less expensive term plans.
The concept is that by using term life insurance to safeguard your downside, you would ultimately gain a bigger upside from investing the premiums you saved. This makes natural sense, which clarifies the global popularity of BTIR.
But is it what you should do? We cannot say since personal finance is private. While BTIR has benefits, it also has drawbacks, which are frequently less talked about.
For this reason, we will discuss the benefits and drawbacks of BTIR in this post, along with several situations in which it might or might not be the best choice for a certain individual.
Contact our advisor at Sure Insurance for a consultation to ensure you make the best insurance decision.
Buy Term and Invest the Rest
“Buy term and invest the rest” is a financial strategy that entails acquiring term life insurance, which is often less expensive, and then investing the money saved by not purchasing a more expensive permanent life insurance policy, such as whole life insurance. The goal is to produce greater financial growth through strategic investments.
Pros of Buy Term, Invest the Rest (BTIR)
1. Lower premium costs
Term life insurance is significantly less expensive than life insurance or life insurance with an investment component. According to Compare First, a completely independent life insurance comparison website that has been authorized by the government, for a non-smoking male aged thirty:
- Until the age of 65, the highest annual premium for term life insurance is S$365, with a S$200,000 sum assured.
- The lowest annual premium for whole life insurance with a comparable value assured is S$2,032 for coverage up to age 85 (the maximum is S$3,222).
On our website, compare the top-term life insurance policies. Just $1.49 a day can get you S$1 million in coverage!
2. Higher future returns (most likely)
Since there are no guarantees when it comes to investments, the word “most likely” is used. However, to make things easier, let’s assume that there is an annual premium difference of roughly S$2,000. In such case, for a 30-year-old:
- At age 65, you would have $147,304 based on the current guaranteed interest rate of 4% on your CPF Special Account.
- The annualized total return of the Straits Times Index from 2009 to the end of 2018 was 9.2%, meaning that at 65 years old, you would have $451,450.
- You would have S$253,481 at 65 years old if you invested at the midpoint of the two, or 6.6% annual rate of return.
To those who have never used a compound interest calculator before, these figures (from S$2,000 per year to nearly S$400,000?) do seem incredible. That, however, is the real benefit of long-term compounding.
3. A higher ‘cash buffer’ for times of need
To fully reap the rewards of compounding, you must hang onto your investments for an extended period. But things happen, and you could have to deal with unforeseen financial obligations. The good news is that you should be able to quickly convert your investments into cash because they are typically liquid.
Furthermore, there is no requirement that you invest the entire amount of premium savings. If you don’t already have an emergency fund, you can decide to invest the majority of it and put the remainder there.
In either case, choosing the BTIR path can increase your liquidity during difficult times.
4. More variety in investment options
Though you will have some options when it comes to the assets and funds you can invest in, your options will be restricted if you are leaning toward an ILP. You won’t have the choice to use an ILP, for instance, if you like to spend a small portion of your portfolio—let’s say 5 to 10%—as “fun investment money” for items like hot stocks or cryptocurrency.
But once more, fees are what set this apart. Investing yourself allows for lower fees, potentially resulting in significant savings over time. Open the compound interest calculator and make your own determination.
To know more about these benefits and how you can apply them contact us here
Cons of Buy Term, Invest the Rest (BTIR)
1. You need actually to invest the rest
The essential component of BTIR is that the premiums you save must be invested. Although it seems clear, it’s not always easy to implement, just like most financial advice for individuals. Because of deep-rooted behavioural biases, most people are their own worst enemies when it comes to money.
Mental accounting is one type of bias. Here, money is put into “buckets” and spent appropriately. For example, tax refunds are frequently regarded as “free money,” meaning they are frequently squandered carelessly. Additionally, people might not truly follow BTIR and invest in it because “premiums saved” are not officially anything you receive.
2. You may end up losing money on investments
Naturally, there is no assurance that your investments will result in a profit (but bear in mind that most ILPs also have no guarantees).
This goes beyond simple fluctuations in the market because, as we previously mentioned, certain investments, like the CPF Special Account, have guaranteed returns. Instead, it all boils down to behavioural biases that cause emotional, and frequently bad, decision-making.
This bad investment decision-making might appear in a variety of ways. Purchasing pricey unit trusts with exorbitant up-front sales fees from cunning, quick-talking “advisors” could be the cause. Alternatively, it may be giving in to herd mentality and purchasing the newest “hot stock” (after it has already increased dramatically) to panic and sell it when it begins to decline, ending up buying high and selling low.
4. Having insufficient coverage in your old age
Prudent investments can grow your retirement account beyond the guaranteed amount of any life insurance policy. However, if you didn’t, you might discover that in your later years, you are uninsured and exposed. Term life insurance would no longer be available to you, and whole life insurance would be prohibitively expensive (the lowest premium for a man non-smoker 60 years of age would be S$5,546 per year for a S$200,000 sum assured).
It would have been far better in this case if you had simply obtained a full-life policy when you were younger. The cash value would still be there in addition to your total, albeit not much as compared to annual returns.
If you have any questions or need personalized advice, please contact our advisors at Sure Insurance. We are here to understand your needs and provide solutions to ensure your peace of mind.
What Is Term Life Insurance?
Term life insurance offers a death benefit that covers the policyholder’s beneficiaries for a certain amount of time. The policyholder has three options when the term ends: they can let the term life insurance policy lapse, convert it to permanent coverage, or renew it for a new term.
What is Whole Life Insurance?
Throughout the insured person’s life, whole life insurance offers coverage. Whole life insurance offers not only a tax-free death payout but also a savings component with potential cash value accumulation. Interest is paid out on a postponed basis.
One kind of permanent life insurance that covers you for the duration of your life is whole life insurance. The others are variable universal life, indexed universal life, and universal life. One of these top life insurance providers can provide you with a full life insurance coverage that suits your needs.
What is Universal Life Insurance?
As long as you pay your payments, universal life (UL) insurance, a kind of permanent life insurance, provides lifetime coverage and contains a cash value component similar to other permanent life insurance. In contrast to whole life insurance, universal life insurance has adjustable premiums, up to a particular amount, and can be less expensive than whole life insurance. But, if you underpay for an extended period or your assets underperform, it may have an impact on your death benefit or cause your policy to lapse.
Why buy term life?
Since term life insurance doesn’t accrue capital value like permanent life insurance, one of its main advantages is having reduced premium payments. This makes it a desirable choice for anyone searching for reasonably priced life insurance coverage because it implies that there are no extra expenses added to the payment.
In general, if you outlast the term of your policy, you will not receive any benefit or return on investment from the policy, while there are a few possibilities for the return of premium term insurance, which returns your money at the end of your level-term period.
