Should I use the "Buy Term, Invest the Rest" strategy?
Endowus Insights

Should I use the "Buy Term, Invest the Rest" strategy?

Updated
June 7, 2022
published
February 17, 2022
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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 have probably heard is “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 would deliver a payout that could alleviate the financial stress at that time. 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. 

Differences between term life and whole life protection for insurance policies

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. 

Specifically with FWD Term Life Plus insurance, Ryan can be covered for S$1,000,000 for less than S$37 a month to provide greater financial assurance for his family in the next 5 years. Depending on his priorities 5 years later, Ryan can then decide if he would like to renew his fixed term coverage or make adjustments to coverage amount. Unlike a whole life plan, opting for a term life plan offers the flexibility for adjustments based on changing protection needs, at a lower cost.

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.

Having the 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 them as well.

Low cost

Secondly, 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 investments 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

Thirdly, 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 

Fourthly, 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 to employ, 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?

Regarding personal finances, there is never a one-size-fits-all method. As a rule of thumb, there are 3 main areas that 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 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 if “Buy Term, Invest the Rest” is suitable for you.

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FWD Disclaimer

This is for general information only and does not constitute financial advice.

Buying a life insurance policy is a long-term commitment. You should consider if this policy is suitable for your needs, or you may wish to seek advice from a qualified financial adviser before making a commitment to purchase this policy. Switching from an existing policy to a new one may have potential disadvantages.

This policy is protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact FWD Singapore Pte. Ltd. or visit the GIA/LIA or SDIC web-sites (www.gia.org.sg or www.lia.org.sg or www.sdic.org.sg).

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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Endowus Disclaimer

Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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