Last Updated on by Tree of Wealth
There is a lot of debate surrounding the Buying Term & Investing The Rest (BTIR) strategy in the financial industry. Some strongly support it, while others are totally against it. Let’s explore the pros and cons of BTIR as well as whether it’s a suitable strategy for you.
What is Buying Term & Investing The Rest (BTIR)
“Buying term” refers to getting term insurance instead of whole life insurance, while “investing the rest” simply means using the difference in insurance premiums to invest in other financial vehicles like mutual funds or stocks.
But before we explore the whole concept of BTIR, we first need to know the different types of life insurance.
Types Of Life Insurance Plans
Life insurance plans typically cover death and total permanent disability (TPD). The main purpose of life plans is to ensure your dependents are financially well-supported and can continue living without any lifestyle changes in the event that you pass away.
There are two main types of life insurance: whole life and term life.
Term life insurance
Term life plan is a policy that provides coverage for a fixed period of time, or “term.” It pays out a death benefit to your beneficiaries if you die during the policy’s term. If nothing happens, you simply renew your policy or let it expire. There are no cash returns upon the policy lapsing or being cancelled.
Because it’s only valid for a set amount of time, term life insurance is much less expensive than permanent life insurance policies, which don’t expire. That makes it a popular choice for people who want protection but don’t wish to pay for additional features they don’t need, such as accumulating cash values, investment portion, or reversionary bonuses.
Whole life insurance
Whole life insurance is a type of permanent life insurance that provides coverage till 99 years old or your entire lifetime. Unlike term life insurance, whole life policies do not expire, which means certainty of claim.
In addition to death benefits, whole life policies also include a savings component that allows policyholders to accumulate cash value over time. Some examples of whole life insurance include participating, non-participating, or investment-linked policies.
Advantages Of Buying Term And Investing The Rest (BTIR)
Lower insurance premiums
Over 30 years ago, term plans were not cheap as there wasn’t any wide adoption. However, as more people gradually realised the benefits of term life insurance, they got cheaper and cheaper.
Individuals can now cover themselves sufficiently up to the amount they need using term life plans, for a lower cost than whole life plans.
For example, a simple search on Comparefirst, an independent insurance comparison website in Singapore, shows the premium difference for a $200,000 life policy with CI benefit for an individual aged 30 years old in 2022. The cheapest term life policy is roughly $414 annually till aged 65 years old while the cheapest whole life policy is roughly $2,988 annually.
For term life plans, individuals pay less in premiums simply because they are purely paying for the cost of insurance, without extra features or frills. Lower insurance premiums mean a more cost-effective usage of one’s funds.
Flexibility and freedom
As mentioned many times previously, term life insurance is typically cheaper than whole life insurance. This frees up one’s funds that would be “locked up” in a life fund. During emergencies when they need some spare cash, their funds are still accessible, unlike in whole life insurance where early termination of results in a hefty premium or surrender charges.
Individuals can also use their spare cash to flexibly choose the investment options they’d like, such as stocks, mutual funds, unit trusts, and ETFs, or opt for those with lower administrative costs and management fees. With life insurance, however, the invested funds are pre-determined by the insurance company. Individuals have no say in the type of funds they wish to invest in.
Higher future returns
In the past, many may buy whole life insurance as a form of investment due to its cash value that accumulates over time. This was a good alternative to trading shares and unit trusts, which were way more costly and inconvenient. ETFs were also not even created yet.
However, with the easy access to trading markets these days, individuals can easily invest in any types of instruments they like at low costs with higher returns of at least 4 to 5% per annum. In contrast, the rate of returns on whole life plans are unlikely to be above 3% per annum. In fact, you’re better off putting your spare funds into your CPF SA and MA and getting up to a guaranteed 5%* returns instead!
*Extra interest paid on the first $60,000 of a member’s combined CPF balances.
Disadvantages Of Buying Term And Investing The Rest (BTIR)
Lack of insurance protection during older years
Term insurance expires after a certain period of time.
Meanwhile, whole life plans are good as they cover one for life. For example, when one gets a Critical Illness after the age of 70 years old, the payout can be used to cover the non-claimable costs of alternative treatments like Traditional Chinese Medicine and optional care arrangements. In comparison, when one’s term policy expires at age 65 years old, he will no longer receive any payout even if he has a Critical Illness at 70 years old.
Some whole life insurance plans are hybrid. They come with a multiplier effect (2x/3x/4x/5x) designed within. This multiplier effect is basically a term coverage designed on top of the permanent insurance coverage that lasts till age 65 or 70. This gives individuals a larger amount of coverage during the limited period they need the most.
Whole life insurance also means a guaranteed lump sum payout once the policyholder passes away, which is good for legacy or inheritance purposes.
Can only reap the benefits if you invest consistently
The BTIR strategy only works if you consistently invest. Some may simply leave the spare funds idling in their bank account, which earns a meagre 0.05% interest. Or worse, others may spend that money away instead.
If you’re a person who doesn’t have the discipline to invest consistently, cannot stay invested during market downturns, or simply are not sure what funds to invest in, you’re probably better off buying a whole life insurance or an endowment plan instead.
Must be able to invest well enough
Individuals will need to achieve a higher rate of return than their whole life insurance guaranteed returns. The risks taken to achieve a higher rate of return may be higher than the risk one intends to take, or even be more than some can bear to take.
Ask The Four Key Questions Before Getting A Life Insurance
Before buying any life insurance policy, consider the following:
- Purpose of buying: Why are you buying life insurance? Life insurance should be mainly for protection purposes for your dependents should you pass away unexpectedly.
- Amount of coverage needed: How much insurance coverage do you need?
- Protection period: How long would you like your coverage to last?
- The individual: Are you willing to learn how to invest? Can you bear to take some risks in your investment strategies?
There is no right or wrong answer to whether you should get a term life or whole life insurance plan. Ultimately, personal finance is a personal thing – just like your insurance policy.
Alternatively, feel free to get in touch and let our MAS licensed professional financial advisors get in touch with you and compare the best plans according to your needs and concoct a customised portfolio structured to your concerns: