Buying Term And Investing The Difference
Some of us has probably heard of the saying “Buy term, invest the difference” when it comes to buying insurance and considering investments. But do we really understand what this means? And if we do understand what this means, why do financial planners recommend that you buy term and invest the difference while your insurance agent is pushing you to buy their recommended product instead.
The majority of whole life insurance products available today is tantamount to “rip offs.” In fact, these kinds of products has already been phased out in the United States. When we talk about “term insurance”, this refers to insurance with life coverage only. On the other hand whole life insurance is a term policy coupled with investments. Your insurance agent will always present whole life insurance as something that will “force” you to save for your retirement. This is actually good, but the problem with this setup is that most insurance companies do not usually give a good rate of return for the “investment” component. Sad to say, whole life insurance products are still actively sold in the Philippines. People still buy these products because of lack of financial know-how.
To drive home the point, let me give you an actual situation. Sometime last week, my mother asked me if she should continue paying an insurance product she got for my sister. The total price for it was about P 400,000.00 (Philippine Peso). Half of it is already been paid leaving a balance of P200,000.00.
I asked her what the benefits of the insurance product were. She said that after 20 years, my sister who is still 18 years old will receive P 40,000.00 per year until she reaches the age of 65. At the age of 65 she can choose to receive P400,000.00 lump sum. If she chooses not to receive the P 400,000.00 lump sum, she can choose to continue receiving P 40,000.00 for the rest of her life. Plus she is also insured for two million pesos for the rest of her life.
To evaluate whether or not she should continue paying the P200,000.00 we will evaluate the benefits of the insurance product versus the “Buy term, invest the difference” option.
If you add the total money that my sister will be receiving, she will get a total of P1,520,000.00 at age 65, that is if she opts to get the lump sum at age 65, plus she is insured for two million pesos.
Under the “buy term invest the difference scheme” since she has already paid partially for the insurance product she will convert what she has already paid into “term insurance” (That is if the insurance company allows it) This is usually good for only 20 years. The P 200,000.00 will then be invested at a vehicle of investment that gives about 10 %+ return per annum. The profits derived from the investment will also be re-invested in order to take full advantage of compounded interest. If she faithfully does this until she reaches the age of 65, she will get an estimated P17,639,497.05.
Now see the difference !!! Under the insurance scheme you only get P1,500,000.00 and P 2,000,0000.00 worth of insurance. But in the “buy terms invest the difference strategy you get P 17,000,000.00+ !!! The benefits of the insurance product cannot be compared to the benefits under the buy term invest the difference strategy.
You might ask what about insurance protection? Take note that pure term insurance is very cheap. She can just buy term insurance and renew it every 20 years.
But where do you get 10 % return per annum? There are lots of them. Examples of these are mutual funds and directly investing in the stock market. The returns here are not guaranteed though. However historical data will show that the rate of return for mutual fund companies is always above 10 % per annum especially if invested in equities. Investing in the stock market always proves profitable. Even the most conservative investors here gets a return of not less than 10 % per annum.
Buy term invest the difference? It certainly does make sense!!!
Would you like to know more about investment strategies ? Visit the blog of Zigfred Diaz where he blogs about several interesting topics such as investments, money management, business, making money online and Stock market investing
Related Articles:
- Buy Term Life Insurance And Invest The Rest Term life insurance generally provides a death benefit and does...
- Reasons For Investing In The Stock Market – Part 2 In my previous article, the first part on the advantages...
- Why Term Life Insurance Vs Whole? While shopping, you will see that you have a choice...
- Stock Trading Market- Short Term or Long Term? Are you new to the Stock trading market? Are you...
- Buying Life Insurance Life insurance is great for individuals that have a family,...
