In recent years, the “Buy Term Invest the Rest (BTIR)” strategy has been the mantra of many financial advisors and insurance agents.
But why is the BTIR strategy gaining traction in Singapore? Simply put, it is an alternative to regular insurance plans in Singapore where you purchase insurance at lower premiums and use the difference to invest instead.
In this article, we get down to the nitty-gritty of BTIR so that you can decide if it is right for you. From the definition of BTIR to the pros and cons of this strategy, here’s all you need to know.
What “Buy Term Invest the Rest” Means
Before we dive right into the details of a BTIR strategy, it is paramount to understand the distinction between term life and whole life insurance in Singapore. It is because the BTIR strategy is an extension of these two types of life insurance plans.
|Product||What is it|
|Term Life Insurance||The fundamental purpose of term life insurance is protection. Term life insurance provides insurance coverage for a fixed period of time, usually between 10 and 30 years or up to a specific age. |
If you invest in a term life policy of 15 years, you will pay insurance premiums throughout this period. If a claimable event occurs within those 15 years, your family will receive a lump sum payout.
Should you not claim anything during the period, the policy will terminate, and you will not receive any payouts.
Additionally, you will not get any cash returns at the end of the policy. For these reasons, term life insurance is cheaper than whole life insurance.
|Whole Life Insurance||Whole life insurance provides lifelong protection for you. Cash value is built through the investment of part of your premium, allowing you to grow your savings. |
However, it depends on whether you invest in a participating, non-participating, or investment-linked policy. You also have the option of paying your premiums in advance. For these reasons, whole life insurance is typically more expensive than term life insurance.
With a better understanding of term life and whole life insurance, you must wonder, how is it related to the BTIR strategy? BTIR is the idea of purchasing term insurance with the same coverage as whole life insurance and investing the difference in annual premiums.
Term life insurance has lower annual premiums than whole life insurance while offering similar coverage to whole life plans.
With a lower premium, buying term life insurance allows you to use the difference in premiums for investments. Theoretically, you should be able to yield better investment returns if you invest the difference at a higher rate of return.
Thus, the value of the invested difference should surpass the cash value of the whole life plan at the end of the period.
How “Buy Term Invest the Rest” Can Help You
The BTIR strategy offers a myriad of benefits. Some of which include flexibility, lower costs and the ability to grow your savings. Here, we give you a quick rundown of the benefits that you will gain from employing the BTIR strategy.
It Is More Flexible Than Life Insurance
Early termination of whole life insurance policies might result in a loss due to hefty premiums or surrender charges.
Unlike life insurance, you have the flexibility to cease your BTIR coverage anytime you need to. Should you encounter an unexpected financial emergency, the ability to stop your investment and liquidate your funds comes in handy.
You will be able to meet your cash demands at short notice. Best of all, you can keep your insurance coverage and not incur penalties or additional charges.
Cheaper Annual Premiums
Term life insurance is significantly cheaper than whole life insurance plans. For a 35-year-old non-smoking male with a policy term of 20 years and a S$400,000 sum assured, you are looking to pay:
Term Life Insurance
|Singlife with Aviva (MyProtector-Term Plan II)||S$521||Death, TPD & Terminal Illness|
|AIA (AIA Secure Flexi Term)||S$448||Death, TPD & Terminal Cancer|
|TokioMarine (TM Term Assure II)||S$412||Death, TPD & Terminal Illness|
Whole Life Insurance
|Income (Star Assure)||S$10,224||Death, TPD & Terminal Illness|
As seen from the tables, the average annual premium for term life is S$460 for a policy term of 20 years with a sum assured of S$400,000.
With a similar sum assured, you are looking to pay about S$10,000 in annual premiums for whole life insurance.
From this example, you can see that term life insurance is more affordable than whole life insurance. Following the BTIR model, you can then invest the difference between the premiums of both plans.
Grow Your Savings Even More
What should you do with the savings you earn using the BTIR model? You'll need to invest the premiums saved to make the BTIR model potentially worthwhile. For one, you can put the savings into your CPF Special Account. By doing so, your savings will compound at a rate of 4% per annum.
Alternatively, if you are a seasoned investor, you can also invest your premium saved in the stock market for potentially higher returns. By using some of the best online brokerages, you can earn significantly higher returns from the stock market if you invest correctly.
The BTIR model gives you absolute control over your investment strategy as you can choose options that will best suit your personality, lifestyle and risk appetite.
Drawbacks of “Buy Term Invest the Rest”
Undoubtedly, any investment strategy comes with its drawbacks. What are some disadvantages of adopting the BTIR strategy?
BTIR Only Works If You Invest
The main benefit of adopting the BTIR model is that you must actually invest the premiums you save. If you do not do so, the BTIR model renders ineffective. Unfortunately, active investment requires time and effort and is easier said than done as it requires constant market analysis. Understanding the various valuation and investment Strategies can also be challenging.
Moreover, it can be tempting to spend the money saved on premiums instead. Even if you do not end up spending it, you might leave it idle in a bank account. If the bank account offers low-interest rates, the cash might lose value to inflation.
Investments Can Be Risky
Have you heard of the phrase – high risk, high reward? That's right, even though some investments promise high rewards, it usually comes with high risks. There is no guarantee that you will make money on your investments.
In fact, you should be prepared for losses as well. More often than not, behavioural biases lead individuals to make poor investment decisions, such as jumping into the latest "hot stock" or being reluctant to abandon a stock when it is not doing well since they have invested heavily in it.
Additionally, the volatility and unpredictability of the market can also contribute to your losses. Hence, it is imperative that you equip yourself with investing knowledge if you want to adopt the BTIR strategy and invest on your own.
Might Have Inadequate Coverage in the Long Run
The success of the BTIR model lies in your capability to manage your investments over a prolonged period across various market conditions. You will also need to achieve a rate of return that is sufficiently higher than what you will get from whole life insurance.
If you fail to do so, you might find yourself in a vulnerable position without adequate coverage for your retirement. By then, you will not be able to buy term life or whole life insurance at a reasonable cost.
In this scenario, it would have been better for you to purchase a whole life policy when you were younger.
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It Is Time to Start Planning for Your Retirement
Ultimately, it is up to your discretion when choosing an investment strategy for your retirement.
Discovering what works best for you and your personal needs will aid your decision-making. If you can actively invest in the premium difference, the BTIR strategy might be suitable. If not, you might want to stick to term life or whole life insurance.
We hope that we have helped put you in a better position to evaluate the BTIR strategy in determining if it is what's best for you. Looking for insurance quotes from some of the best insurance companies in Singapore? Check it out here.