Most of us in Hong Kong have probably been approached by salespeople to make regular monthly payments into an insurance-linked investment plan, also known as Insurance Linked Assurance Schemes (ILAS).
They are often touted as an all-in-one solution, satisfying both your investment and insurance needs. But ILAS in recent years have faced criticisms and scrutiny around the lack of fee transparency, high fees and lacklustre returns not meeting initial expectations.
Increasingly, many are looking to adopt a"buy term, invest the rest" strategy instead, whereby you unbundle the two needs: insurance and investments.
Let's take a closer look to why it might be a sound strategy for you to consider.
Keeping cost of wealth protection low — "buying term"
Essentially, insurance is for wealth protection and income replacement. In the unfortunate event of your death, disability or terminal illnesses, the policy delivers a payout to alleviate financial stress on you and 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 covers a fixed period say 10 or 20 years, whereas whole life coverage can go up to 100 years of age, or until death, depending on the plan.
The key difference between the two is that a term life policy has no investment or savings feature. For whole life insurance, the savings function include both guaranteed and non-guaranteed returns, which can come in the form of cash value or sometimes dividend payouts.
The concept of "buying term" is as literal as choosing to buy term life insurance and not co-mingling with other objectives such as investments or healtchare, and as a result you pay less in premiums for your life insurance coverage.
Flexibility of funds for wealth growth — "invest the rest"
Another common type of insurance-linked investment plan in Hong Kong are Insurance Linked Assurance Schemes (ILAS). An ILAS is a life insurance policy with investment elements that provides both insurance protection and investment options but are generally more complicated than whole life in structure.
However, as with all hybrid insurance-investment products, there are key considerations of long lock-up periods, double layer of fees (both on policy and investment fund levels), high early surrender charges etc.
Hence, increasingly more people are looking at “Buy Term, Invest the Rest” as an alternative strategy - i.e. unbundling your insurance and investments needs.
Advantages of "Buy Term, Invest the Rest"
Instead of combining your investment with insurance through whole life policies, separately investing also gives you more flexibility when growing your money and lower cost. Let's take a look at the advantages of this strategy:
1. No lock up 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.
2. Lower cost
Next, the built-in cost of investing into a investment-linked insurance 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 as they are embedded in the policy.
Hence, by buying term insurance and investing the premiums saved, you can opt for low-cost investment options at your own choice, such as investing in mutual funds or ETFs. This puts you in a better position to reap the best potential returns.
3. No penalties upon early withdrawal or surrender
Your financial circumstances may change anytime. Unlike investment-linked insurance where you may have to pay hefty early surrender charges, you can stop your investment and liquidate your investments in stocks or funds without losing to penalties or termination charges.
4. Choosing your investment strategy
Finally, you can choose the investment strategy that suits your personality and lifestyle.
You can choose to invest a lump sum or setting up a fixed amount to deposit every month — also known as dollar-cost averaging (DCA). 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. Below are three factors to consider 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 knowledge and expertise
For some, the downside to utilising "buy Term, invest the rest" might be the burden to have to research and monitor your investments as opposed to relying on your insurance plan to do so.
The good news is, with digital wealth platforms such as Endowus, you can easily build your investment portfolios, leveraging our already templated Endowus model portfolios. You may also choose to DIY using over 200 Best-in-Class funds curated by our Investment Office through our Fund Smart platform.
Click here to get started with Endowus or schedule a 1-on-1 appointment with our SFC-licensed financial advisors at any time if you have any questions. on how to get started have your personalised investment portfolio when you choose to implement "Buy term, Invest the rest".
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