Should you use the "buy term, invest the rest" strategy?

When it comes to investment and insurance strategies, there are different routes that people believe in and opt for. The final decision is often influenced by individual circumstances and factors such as income, financial goals and needs.

One common strategy you may have heard of is to "buy term, invest the rest". 

Keeping cost of wealth protection low — "buying term"

Essentially, insurance is for wealth protection. In the unfortunate event of your death, disability or terminal illnesses that would deprive your family of a source of income or create an additional financial burden, insurance protection delivers a payout to alleviate financial stress. This would protect your current wealth and the future wellbeing of your loved ones. 

In the market, there are two main types of plans which provide such coverage, generally known as term life and whole life plans. 

Term life insurance is a more affordable plan than whole life insurance due to the difference in the duration of coverage. Term life plans have a fixed period of coverage, whereas whole life coverage can go up to 100 years of age, or until death, depending on the plan.

There is no cash value attached to your term life insurance coverage, but it offers financial protection when you need it. As for whole life plans, there are both guaranteed and non-guaranteed cash values that can serve multiple purposes.

In both cases, there is a payout of the sum insured upon death or disability to support your loved ones financially.

The concept of "buying term" is as literal as choosing to buy term life insurance, over other options of life insurance coverage. By doing so, you pay less in premiums for your life insurance coverage.

Taking the scenario of Ryan, a 35-year-old sole breadwinner of his family, who has recently taken out a loan for the purchase of a condominium. In addition to other financial obligations, such as repaying his renovation and car loans, Ryan wants to ensure that his family do not have to face additional financial pressures if something were to happen to him, especially in this critical period of the next 5 years. 

After spending some time comparing the features and premiums for whole life and term insurance, Ryan decides to take up a fixed term life insurance plan. A fixed term life insurance plan offers him a cost-efficient blanket of protection for his loved ones while balancing his family’s living expenses during this critical period of about 5 years. Ryan can then use the savings in premiums between a term life insurance plan and a whole life plan for investments, or to fund any other life goals.

Flexibility of funds for wealth growth — "invest the rest" 

The key differentiator between term life and whole life insurance products lies in its investment function. For term life, there are no returns besides its coverage. For whole life insurance, returns can come in the form of cash value or sometimes dividend payouts, subjected to the performance of the insurer’s investments. These policies have a guaranteed and non-guaranteed component that is stated in the policy details.

Whole life insurance products are hence commonly recognised as a hybrid insurance-investment product. If you decide to get a whole life insurance policy, you should be expecting that the cash value growing over the years will be greater than the total amount of premiums paid over the years. As there is no free lunch, this cash value is funded by the additional premiums paid for whole life insurance. To better manage their wealth, more retail investors are trying to get the same coverage at lower cost, which makes “Buy Term, Invest the Rest” a popular option. 

Investments are essentially for wealth growth. The investment objective is to reach financial goals at various stages of your life and help you plan for retirement. With more money available from the premiums saved by buying term insurance, you are able to start investing earlier. The earlier you start, coupled with the power of compounding interest, you can enjoy a longer time horizon for your portfolio to grow. 

Instead of combining your investment with insurance through whole life policies, separately investing also gives you more flexibility when growing your money. 

No lock in period

Firstly, the investment period is at your own discretion. Unlike whole life insurance where you have to commit to the entire policy duration, term insurance has no lock in period. As long as you’re paying, you will be covered.

Similarly, investing separately gives you the flexibility to decide if you want to stay invested. Anytime you wish to invest more money, you can. Anytime you wish to stop your investment, you can liquidate it as well.

Low cost

Next, the built-in cost of investing into a whole-life policy is likely to be higher than that of a "buy term invest the rest" strategy.

An insurance company has to price in distribution, agent’s commission and investment cost into the whole life policy. These costs are often high and may not be obvious to you. Compared to buying a term insurance policy online and/or investing yourself, the cost of having a whole life policy is higher.

Moreover, whole life insurance often charges a fee to manage the investment for you. Since it is combined with insurance coverage, it becomes complicated and difficult to account for the investment expenses you spend on whole life insurance. 

Hence, by buying term insurance and investing the premiums saved, you can opt for low-cost investment options, such as investing in unit trusts or ETFs. This puts you in a better position to reap the best potential returns.

No penalties upon withdrawal

Your financial circumstances may change anytime. Whenever there is a financial emergency, you can stop your investment and liquidate your funds without losing to penalties or termination charges, while keeping your insurance coverage.

Unlike whole life insurance where you may have to take premium holidays to escape the hefty premiums or surrender chargers, you have the flexibility to cease your investments anytime you need. 

Similarly, renewable term life insurance allows you to cease your coverage anytime and renew if you wish to be covered thereafter.

Choosing your investment strategy 

You can choose the investment strategy that suits your personality and lifestyle. With various platforms such as online brokerages or a digital advisory platform, you can decide if you have the time to take investments into your own hands or leave them to a wealth platform.

Choosing between depositing a lump sum or setting up a fixed amount to deposit every month — also known as dollar-cost averaging (DCA) — also depends on your financial circumstances and preferences.  

Regardless of the investment strategy you choose, it is encouraged to give yourself exposure to different asset classes and diversify to reduce risks.

Hence, instead of investing through the insurer from a whole life policy, getting term life insurance and investing the rest allows you to diversify your investment portfolio. 

Is this the best strategy for everyone?

When it comes to personal finances, there is never a one-size-fits-all method. Still, there are three main areas you can look at to decide if the “buy term, invest the rest” strategy will best serve you for years to come. 

Protection needs

If you’re concerned about coverage at old age — like 99 years old, you’ll have to consider a renewable term life plan or whole life plan.

However, if you’re looking for protection over a fixed duration due to your priorities, having a fixed term instead of whole life coverage could be more suitable for you. Buying term insurance at the lowest premium leaves you more money available for investment, while maintaining suitable protection at various stages of your life. 

Financial goals

Everyone has different financial goals. On top of wealth protection, it is important to generate investment returns for wealth growth to reach your goals. With the amount you save from getting term life instead of whole life, it can significantly generate more available cash for investment. 

Investment risk appetite and knowledge

Assuming you have bought a term life plan and bagged some savings, the next big question is then how you can have those savings work harder for you.

Accessing your own investment risk appetite and knowledge will certainly help you here. If you prefer lower but guaranteed returns for your investment, you may explore options such as topping up your CPF or buying Singapore Savings Bonds.

On the other hand, if you are able to take up some level of risk to grow your money even more, investing with wealth platforms would be a great option. It offers convenience, expert advice on portfolio management and access to world class funds. You can simply choose your portfolio and risk level that best suits you while still having your funds managed for you. 

Now, you can decide for yourself whether "buy term, invest the rest" is suitable for you.

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