05 Nov Buy Term Invest the Rest Debunked
Buy Term Invest the Rest Debunked
Written By: Ho Shi Lei
Adapted from Insurance Geek
Buy Term Invest the Rest: Buy what? Invest what?
We may have heard of “Buy Term Invest the Rest” (BTIR) as a strategy to approach our insurance coverage planning. For those unfamiliar, the argument behind BTIR comes in two parts.
We “Buy Term” which means that we purchase a term life insurance policy (“term”) to provide coverage for our needs for a specific period of time, usually till retirement age. It’s useful to note here that term life policy is usually compared to whole life insurance policies which cover the insured’s whole lifetime and come with higher premiums. But because we “buy term” and save on premiums, we “Invest the Rest” of the premiums saved and grow our investments to a sizeable sum which can cover our needs when our term coverage ends.
At first glance, it looks like we have lower premium costs, more cash, and potential future returns from an investment if we BTIR. Sounds like a great strategy, but let’s dig deeper into both “Buy Term” and “Invest the Rest” to find out whether BTIR really lives up to its promise. (Spoiler: it may not suit your needs)
Debunking “Buy Term”
Term insurance might not suit our needs for covering critical illness during our retirement years as most term plans may not extend to cover us for an entire lifetime.
We all have short term protection needs which are present when dependents are young or up till retirement, and long term protection needs which span our whole life. For example:
Term-life policies are good for short-term commitments coverage and dependent protection during the term itself, but do not provide coverage beyond the term period. This means that Term policies stop covering our Critical Illness (CI) coverage after the term period ends (e.g. at retirement) while our needs to cover for CI and hospitalization continue for the rest of our lives.
We may think that term-life (or temporary) coverage is sufficient because a retired person has fewer commitments and can do with lower coverage, but CI coverage might actually be more important in retirement. This is because the risk of getting a CI such as cancer, stroke, or heart attack increases as we age, and we continue to need CI coverage for outpatient treatment costs during our retirement years. For example, there are certain costs tied together with getting a CI that isn’t tied to your age such as non-standard drugs or getting a helper. In this case, term life might not be an appropriate solution for our whole life needs because we will likely outlive the term protection period.
Debunking “Invest the Rest”
“Invest the Rest” comes from the idea that we can invest the premiums saved from buying term and grow more of our money. If and when we need additional cash to cover our needs, we’ll have sufficient investments to cover them.
It sounds like a good idea, but only if we are confident that we can achieve consistent good investment returns. The argument also assumes that market conditions are good at the point of exit, which is beyond investors’ control, and we most likely cannot wait for market conditions to improve before liquidating your investments if we urgently need the funds for our short term needs.
It is also important to consider that we need to actually invest the premiums saved from buying term to achieve investment returns. Investing takes dedicated time and effort to research and monitor our investments and ensure that we are consistently growing your money. Besides, there is always a risk in investing and we may end up losing money on our investments.
So . . . Is “Buy Term Invest the Rest” for us?
It depends. BTIR is for us only if we are confident of our ability to generate investment returns and we are willing to accept the risks that come with investing. It also depends on what we intend to use our investments to cover for. For example, the strategy is better suited to cover for our short-term needs such as mortgage coverage and dependent protection.
Buying Term and Invest the rest should be a strategy that we can deploy when we plan for our insurance portfolio – depending on whether it is suitable for us at that stage our lives (considering time on our hands, commitments and priorities at a certain age).
This can form the basis of your decision-making process.