Buy Term, Invest the Rest? (BTIR) – The Ultimate Insurance Guide for Beginners (Part 1)

Click here to access Buy Term, Invest the Rest? (BTIR) – The Ultimate Insurance Guide for Beginners (Part 2)!

Earlier this year, I met up with my financial consultant (a.k.a insurance agent) on the various insurance coverage that I needed. The only protection that I had was a H&S plan. She recommended that everyone should at least have a whole life plan which will allow you to take back part of your paid premiums.

Before committing to anything, I continued to do more reading regarding the importance of insurance and the types of insurance that were available on the market. There are a few websites that compare the different insurance plans and their prices so that consumers can make an informed choice based on their needs. It is needless to say that through my research, I have also learnt about the concept of “Buy Term, Invest the Rest” and how everyone seems to be raving about it. My real concern was if this was a feasible approach and was it really that easy to implement.

Let me do a quick summary about my findings.

Basically, there are two main types of insurance, namely life insurance and term insurance.

Within life insurance, there are a few types of insurance plans. Whole life, endowment plans and Investment-Linked Policies (ILPs) are all part of life insurance. All of them work similarly but for this article, I’ll focus only on whole life. Whole life insurance plans come with two components.

The first component would be a guaranteed sum of benefit for a certain purpose (e.g. Death, Total Permanent Disability (TPD), Critical Illness, etc.) up to a specified age. Usually, this age is minimally 65, because this is the expected age that you will no longer have too many financial liabilities in your life and therefore require less insurance protection. As the policy holder, you would have to pay for your premiums until that age.

The second component of your life insurance steps in after you have crossed the age in the first component. Now, your life insurance will have both a guaranteed sum and a non-guaranteed sum. However, take note that this new guaranteed sum will be an amount that is much lesser than your initial coverage. The non-guaranteed sum, on the other hand, is subjected to investment risk and pays out typically 3% to 5% in terms of returns. This means that you can take back part of the premiums that you have paid for.

Term insurance is easier to understand. To put it simply, it is actually just whole life insurance but without the second component that is mentioned in the previous paragraph. Term insurance purely consists of insurance coverage. There is no money used in your premiums for investment purposes. Therefore, for the same amount of coverage, it is most likely that you pay much lesser premiums than what you would pay for whole life insurance.

Here is a flow chart for easy visualization:

types of insurance.JPG

That’s all you need to know about insurance for now. Simple, isn’t it? 😉

Now, back to BTIR.

The idea of Buy Term, Invest the Rest is to buy a term plan that would be able to provide the same coverage as a whole life plan, and use the difference in the premiums to do your own investment that may eventually generate better returns over the entire period of your insurance plan.

Let’s see how this pans out in reality.

Assumptions:

1. I am a female and non-smoker.

2. I am 30 years old this year.

3. For Whole Life insurance:

My premium term is up to Age 65. Since I am 30 years old, I will pay an annual premium of $5,500 for 35 years.

I have a Death/TPD benefit of $300,000 until I am 65.

Upon crossing the Age of 65, I am assured a guaranteed sum of $50,000 and a non-guaranteed sum of $162,000 with a projected annual return of 4.75%.

4. For Term insurance:

My premium term is up to Age 65. Since I am 30 years old, I will pay an annual premium of $800 for 35 years.

I have a Death/TPD benefit of $300,000 until I am 65.

From the above comparison between the two insurance plans, your goal is to make sure that by Age 65, you are able to get a return of at least $212,000 ($50,000 + $162,000) from your own investments using the difference in the premiums paid. Keep this number in mind.

Here are the calculations. Access the free spreadsheet here.

The cell highlighted in yellow is the final amount that needs to be more than $212,000.

Buy term invest the rest.png

Wait wait wait, scroll up again. What did you see? An investment portfolio which yields 1.37% annually?!

Nope, you don’t need new glasses, if that’s what you’re wondering.

That’s right. You only need a compounded annual yield of 1.37% should you choose to get term insurance instead.

Do you know what does 1.37% mean? You can essentially take the difference and dump it into Singapore Savings Bonds for 2+% annualized returns, with higher liquidity. Or even just voluntary contribute the money to your CPF OA account at 2.5%, get tax relief for it, and still get a higher return!

This is when you’ll be beside me exclaiming, “HUH!? What happened to the 4.75%?!”

Well, you know insurance agents get a commission from your premiums, right? There are also distribution costs involved. If the insurance company takes your funds to invest in their own mutual funds, then another part of it will go to the fund manager. All these expenses eat into your final profits, therefore giving you much lesser returns than 4.75%.

You should bear in mind that this is a simple analysis. There are other things that I did not consider, and the assumptions may not necessary fit your situation. One example is that since my starting age is 30 years old, I have more time to compound my returns. The results will be drastically different if you started the plan when you are Age 40 – the annualized yield would change from 1.37% to 4.29%. In this case, buying the whole life plan may not seem to be such a bad idea.

Remember, the more time you have, the more advantageous this strategy will be.

Take note that there are both whole life and term plans existing now in the market that allow you to extend the coverage up to Age 99. For whole life, you can also decide on how long you would want to pay the premiums for. Of course, if you opt for a shorter period of time, then your monthly/yearly premiums will also increase as accordingly.

Additional riders such as Critical Illness coverage may also be cheaper if you bundle it together with a whole life plan. It seems that riders for term plans tend to be more expensive; sometimes the premiums for the riders may be even more costly than the original premiums.

If you are still interested on this topic, try reading these articles to gain some more insight:

Life vs Term Insurance Part 2 – Buy Term and Invest the Rest?

How to BTIR (Buy Term and Invest the Rest)?

For a continuation of this topic and what I did get for my insurance coverage, stay tuned for Part 2 that would be published in tomorrow’s daily blog post!

Thanks for reading!

Miss Niao xoxo

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Author: Miss Niao

Hello! I blog about financial matters and things that average people can do to have a better retirement. I want to inspire people to take control of their money and have a better understanding about it. If you are interested to know more, follow me @ missniao.wordpress.com! :)

17 thoughts on “Buy Term, Invest the Rest? (BTIR) – The Ultimate Insurance Guide for Beginners (Part 1)”

      1. Hi, it says to leave you a comment and I’d love to leave you one.

        This article by far was one of the most misleading I’ve ever seen. I’ve been appalled by financial bloggers before, but this was actually the worst its ever been.

        Lets begin real quick.

        First of all, which clown would buy WL that you need to pay for 35 years? All limited-pay policies cap at 25 years for every company since 2015. You wrote this in 2017. I’m curious.

        Then there’s the non-account for CI, which everyone typically gets because CI rates are better than Life rates when comparing WL vs Term. You’d be extremely hard pressed to find a joker who decides to buy Whole Life without the CI component, or this WL standalone and get CI term for some reason. Wrong.

        Again, after paying $192,500, your guaranteed Sum is $50,000 after paying $5500 a year for 35 years. Really. Even the crappiest policy in the world 30 years ago will not give you such a horrible rate. Ergo – this example you used is made up and does not exist. I will make a formal apology to you if you can privately send me this particular policy for the outstanding 35 year term. This is just wrong.

        Distribution costs also have caps. These typically begin to cap off after the 6th year, which is when agents have their recurring income, as well as a fixed number of years supplementary fees, etc. While you cited management fees which is true and fair, at a 4.75% rate – while you pay premiums and investments roll, the Net Sum at Risk cost becomes smaller and smaller. You should be looking at 3.5 – 3.9% yields for the par fund towards the end of the policy. Either way, your rationale for its poor performance is also wrong.

        This is all of the top of my head. If I did a thorough analysis, it would be far worse.

        This article is misleading and inane. I’d be happy to have you prove otherwise.

        Like

      2. Hello, Luke.
        Firstly, thanks for your comment.
        I am glad that you are appalled by my post. It might provide room for improvement and if you read my blog further, I am open to critique, so long as it is valuable.
        You said that you would like to prove it. I am hoping that you are able to send me a policy so that I can perform the calculations. If the returns are indeed as what you have mentioned, I will be more than glad to agree with your comment, and even introduce it to others. However, many of my readers have sent me their plans and NONE of them, literally, has shown me your returns nor proven that BTIR is worse off.
        I hope that you haven’t taken me out of context, but just in case that you did, the aim of this post is to show simply how the strategy of BTIR can produce much better returns than buying WL plans if you have any intention of investing, and not for protection. EVEN with the same projected returns, and EVEN with a guaranteed payout at the end of your WL. I mean it is kinda a no-brainer, what say you?
        In fact, I made a more comprehensive spreadsheet last November, with the numbers based on an actual policy that a reader sent me as enquiry. If you wish to play with it, drop me a mail at xmissniaox@gmail.com.
        In the meantime, please also email me your policy so that I can also do a thorough calculation on my end. Unless the numbers prove otherwise, it would also be difficult to bring justice to your words. 🙂
        Cheers!

        Like

  1. Hi..if you have a certain level of knowledge of insurance and intend to buy a very basic term insurance (death and TPD), I would recommend you consider buying DPI (direct purchase insurance). It’s a term insurance sold directly from the company, which means no commission is paid, which translates into lower premium for the customer.

    For eg, from comparefirst, a 30 FNS with 300k SA, death+TPD cover to age 65 costs $237/year (much lower compared to the example you used in your post)

    Like

    1. Hello passerby! Ah, a bit too late because I already got an insurance plan, but I’m not sure if it’s cheaper than a DPI and if the same plan is available as a DPI. Do you know where I can get more information?

      Like

      1. I see, thank you for the information. Perhaps I could translate it into a blog post one day :). Anyway, the term insurance that is offered by DPI is pretty limited. For the plan that I took up, it has death coverage of $1 million up to Age 99 which is not covered in DPI.
        I’ll keep that in mind and refer this to anyone who wants to get something that DPI encompasses.

        Like

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