”Buy term, invest the rest” is a common saying in the financial industry. How can you benefit financially from using this strategy in your financial portfolio?
Here is a guide to the “buy term, invest the rest” strategy for your better understanding.
What is Buy Term, Invest the Rest?
Let us get started by understanding the term first. To ‘buy term’ means simply to purchase a term life insurance policy rather than a whole life insurance policy. To ‘invest the rest’ is essential to make use of the savings gained from choosing the former to invest in various investment vehicles so that wealth can be generated.
Why Buy Term first?
Now you may be wondering: why do we choose to purchase a term life insurance instead of whole life insurance? How does it affect my savings and wealth management?
Term life insurance is a more affordable plan than whole life insurance due to the difference in the duration of coverage. Comparing Etiqa Term Life and Etiqa Whole Life plans, the total premium for a 30-year term life policy would be $88.56 per year. In contrast, a whole life plan could set you back $3,370 per year. This data is for a policyholder that is male, non-smoker, 35 years, coverage amount of $50,000. Therefore, by choosing to purchase term life insurance rather than whole life insurance, you can use the difference saved to be set aside for your investments.
To add on, the purpose of term life insurance is to provide coverage for a specific period of time for your dependents, unlike whole life insurance which spans the lifetime of the insured.
If you have your children as your dependents then a 30-year period will be sufficient time for them to become financially independent.
The importance of insurance is to ensure that your liabilities are well taken care of in the event of your demise. As you grow older and your liabilities are reduced, you may not require such a large coverage amount as when you are younger.
“Invest the rest”
After setting aside money for emergency savings, insurance needs, the next step to building a comprehensive financial plan is to save for retirement. Saving for retirement early gives you a timeline from as long as 50 years. The longer the time horizon, the better it is for your portfolio to grow over time.
Starting your investment journey can be as simple as setting up a regular savings plan with a local bank/brokerage or a digital advisory platform and depositing a lump sum or setting up a fixed amount to deposit every month (also known as dollar-cost averaging).
Regardless of your investment strategy, starting your investment as soon as possible with any amount is better than starting later. The same applies for insurance coverage, the younger you are when you get insured, the cheaper your premiums will be.
How do you decide for yourself?
If you are someone who is looking forward to starting a family or growing your wealth while ensuring your dependents are protected, then the "buy term, invest the rest" strategy is great for you.
You can download the PolicyPal App from the Google Play Store or the App store and compare from over 20 insurers, to find a suitable term life insurance policy for your needs.
Click here to get a limited time offer on your term insurance policy.