This insurance buying “philosophy” has been preached many many times by some of the top personal finance gurus and authors, especially those from foreign country. What I am talking about is the technique of buy term and invest the difference (BTID).
I haven’t written anything about it, yet. Mooi (a blog reader and a regular forum contributor) actually asked this question in the forum. There is a very interesting discussion. You should really take a look at the forum post about what we’ve discussed so far. In this post, I will share my view about the reality and practical part of making use of this well-known strategy.
Story about Jack and Marry
Jack and Marry are husband and wife. They just got married and felt that they should insure themselves with proper life insurance policies.
Jack told the agent,”I want to pay the lowest premium to get the highest coverage.”
Agent replied,”You should buy a term policy.”
Marry disagreed,”I want something that gives return. I don’t want to pay premium and get back nothing at the end!”
Agent said,”Whole life assurance plan provides some decent saving. So Jack, whole life or term?”
This is a usual dilemma. I won’t say who’s right or wrong. They just have different opinion.
What’s Buy Term and Invest The Difference
Let’s say you can afford to buy a whole life participating policy which requires RM5000 annual premium. In order to get better value out of your money, you can instead buy a term insurance with exactly the same sum assured, and use the extra money to invest.
In other words. You can use RM2000 to buy only term insurance, not whole life plan. And the other RM3000 can be invested to get better return.
This strategy is based on the believe that you can invest better on your own instead of relying on the insurance company to give you mediocre cash bonus return.
BTID emphasize on paying the least amount of insurance premium possible, and use the monetary difference to save and invest. If you are paying too much for insurance, there is not much left for investment.
In long term, say 20-30 years later, you might have invested enough and become wealthy. Then insurance is not an issue anymore because you are already rich! You don’t really need insurance when you are rich right? This is the concept behind BTID.
I don’t agree with this statement completely because I know the richer a person gets, the more insurance he buys. This is a fact, not an opinion. I will share more about this other time.
How do you do it in Malaysia?
The financial industry in Malaysia is still many years behind those developed nations.
Unlike in the developed nations such as US and UK, the term insurance in Malaysia is not really cheap. I checked with some online insurance websites, the term insurance selling in the US and UK is much cheaper. The premium is 20-30% cheaper than a term insurance available to Malaysian.
However, there are some other options to choose from, such as group term insurance, probably offered by unit trust companies, or through some association of private companies which is exclusively for employees and members only. And there are also some disadvantage of insuring yourself under a group term insurance. Some plans premium can be revised. Some may require good health at renewal. And these kind of plans are not easily accessible.
To buy cheap term insurance online, we would still have to wait. I don’t know how long it’s going to take. Until the day you want to buy insurance spontaneously (without agent sale-pitching you), probably insurance companies will cut the premium because they can reduce the commission paid to insurance agents.
When you are able to get sufficient coverage by paying the least amount of premium, the extra money you saved should be invested wisely.
Term insurance or Investment-linked?
Based on the Great Eastern Gelsis quotation software version 5.05, a male life assured aged 30, buying an insurance plan with sum assured of RM250k (Death and Total Permanent Disability benefit only), would need to pay
1. Term Assurance (30 years)
– annual premium – RM1617.50
– cash value after 30 years – NIL
– total premium paid – RM48,525 in 30 years
1. Investment-linked Policy – Greatlife Portfolio
– annual premium – RM1200
– cash value after 30 years – range from zero to RM20k (very much depends on investment return)
– total premium paid – RM36,000 in 30 years
In my opinion, there are no such “cheap” term insurance in Malaysia. The best term insurance you can buy is to package the investment-linked policy in such a way that it gives you maximum coverage on the lowest premium paid.
Yes, it can be done. Of course there is some risks to take on buying an ILP. But it can be overcome by proper strategy, which I shared previously how to avoid investment-linked policy from being lapse.
Pros and Cons of buying term and investing the difference
Pros:
1. When you are able to save insurance premium, you shall have more money to invest
2. You will have more control of your investment.
Cons:
1. It is almost impossible to get total coverage.
Let’s say you earn RM50,000 a year. 20 years down the road, you will be able to earn at least a million ringgit! It makes sense to buy a million ringgit policy now! The premium is RM6470 (30 years old, term 30 years). Can you afford it? If yes, would you buy it?
In practical, some other very useful rider can be added to meet the shortfall, such as the investment-replacement feature and the income-replacement rider. It is not so simple of just buying a term policy. You should ask a trustworthy agent to plan for you.
2. Some people are not disciplined.
Instead of buying term and investing the difference, some people spend the difference!
How about Jack and Marry?
I would say that different plan suits different people with different values.
Jack learns a lot about investment and he can pretty much handle his investment portfolio well. Then for Jack, to buy term and invest the difference totally make the best sense!
But Marry don’t like about investment. She fears losing money. She even trembles when people talk about share trading. She thinks that it is gambling. Furthermore, she can’t see the “money” sitting in the bank because she would most likely spend it. In this case, locking her money in an insurance plan is really beneficial to her.
How about you? Do you think buying term and investing the difference is your cup of tea?
22 replies to "Buy term and invest the difference"
KC Lau,
I am all too familiar with the aunties and uncles born during the 70’s who are still under the delusion that physical real estate and whole-life insurance is the only “safe” investment to turn to. Most people like Mary get their financial advice from their parents who are just as ignorant as their children. It’s a sad case of the blind leading the blind since they end up being taken advantage of by commission-hungry insurance salesmen. It’s not even funny too because practically everyone I’ve spoken to equate stocks with gambling (as if you only have to buy stocks in your portfolio).
I see Mary mistaking insurance with investments because she is lacking in understanding that insurance is for managing risk. And in reality, these investment-linked plans are garbage because of the fees associated with the underlying products that reduce the effect of compounded returns. This is true especially of indexed whole-life plans that allow you to put your cash value into investments of your choice that are available in the sub-accounts. If she is so risk-adverse, she should be at least shown the opportunity cost of not doing BITD.
Or what I would do instead if I were Jack, ask her to pay for whole-life by herself while I BITD. I sure am not co-mingling my finances with my spouse.
I think your article is not relevant nowadays. I always believed insurance and investment should be separated . The premium for term insurance in Malaysia are now affordable.
Example : Male Age 30
The premium is only RM700 for 30 years (not GE) instead of RM 1.617.15 as you quoted in your article. In fact, I know there’s still another company which can gives lower premium than the one I quoted above.
Plus, if you are bumi, you can save it in ASB and your return will be higher than the ILP ( minus the total premium paid for term insurance )
Netmask8,
Agree with what you mentioned about PE ratios. At least you talk some logical sense as compared to some bloggers here.
Cheers to you.
Greetings & G’Day, Christopher
if you got experience on investing in stock market in other countries, definitely we will put RM into stronger currencies like Euro, US/Canada/Australia Dollar. When these currencies gains/loss in long term, it will have drastic returns/loss in term of currencies exchange. M’sia markets generally out of scope because of the high PE ratio.
Gain / Loss in M’sia market ratio = 1:1 .. If US Dollar = 1: 3.24 . Euro = 1:4.01 ..etc.
Special Note :- Investment is about long-term strategies (8-10years or more) in stock market/unit trusts/properties..etc. Only short-term player need to concentrate / worry right timing to enter(buy) or exit(sell).
Extraordinary Note to financial freedom:- To accumulating wealth, we need to invest our “hardwork / extra money” into higher risk investment in order to work hard for us.
Have a great day. Thank you.
I agree with Christophers points. I bought a GE ILP with SM200 because the policy provides me a good courage of sum insured RM100K and RM900K medical courage till 80 years old.
I think ILP is way better in the sense that we consider the medical insurance provided as a rider. (Bear in mind, there is no more standalone medical insurance available in the market) Some people might argue, if we have good health, why should we take up a medical insurance? Well, we are all human, we cant run away from health problem when we get old. Consider the amount you paid for ILP medical insurance is RM200 monthly, thus RM2400 yearly, for a 23 years old guy like me to pay till 80 years old would only cost RM138K (assume no premium increases). RM900K of medical benefits compared with RM136,800 paid is just peanuts! Dont forget, ILP provides ROI. So I have the option not to pay the premium after retire at the age of 55 yeas old. I believe as long I manage my ILP medical insurance investment portfolio well, I can get decent amount of return and the return is enough to cover my premiums during the golden years.
Above are just my thoughts…
Dear Netmask8
Greetings to you…
If you think that by investing in other countries and the dividend will multiply due to currencies exchange, then perhaps you may wish to reconsider because not only you are subjected to investment risk but also currency risk.
By the way, you may wish to know that Asian currencies are now strengthening against US dollars and US dollars are expected to go down further due to their low interest rates and the ‘loosening’ policy of the Chinese Remimbi has some impact on USD as well.
Take Singapore Dollars as another good example. It has been weakening against Malaysian Ringgits since the last many months. SGD do not strengthen all the time. AUD has also weakened against MYR over the last 3 months.
We are not GODs and therefore nobody knows what will happen next.
Ultimately, nobody can deny the fact that diversification is the way to go. You cannot be wrong or correct all the time.
My 2 cents worth.
Dear GrahamBrown,
You mentioned “If you are selling a book it is probably not in your interests to clarifiy any points here rather than in your book.” This statement is so unfair.
Nobody forces you to read his book, and nobody forces you to buy his book.
If you are happy, you buy. If you are not, don’t.
You mentioned about your brother-in-law having a Prudential policy and accused whoever (no fault of KCLau) for selling a poor performing investment with the policy. Well, I think you failed to understand that all kinds of investment involve risk. Even placing a fixed deposit in a bank in some countries is subjected to a certain level of risk (for your info). Investment-link policies carries a portion of investment which is subjected to fluctuations and market volatility.(this is normal in any investment vehicle) The Malaysian Ringgit that you carry everyday is a risk which you may not be aware. So what is a big deal about your brother-in-law’s investment in the ILP. He is not gonna sell the investment now to realise his losses. What comes down, may go up, and what goes up may come down. You should be looking at a longer term and not now or short term.
You accused KCLau that he failed to mention about cash values are not guaranteed. If he had to mention every single terms and conditions in the policy, then this blog will be overwhelming with all the legal terms which bores other bloggers. Hello GrahamBrown, nothing in this world is guaranteed. Lehman Brothers has the longest years in history but yet they tumbled. Nobody expected the Royal Bank of Scotland to pull out from Malaysia, Pakistan and many other countries. Nobody expected the Australian Prime Minister to step down. You know what I mean.
ILPs are just as flexible as term plan, in fact even more flexible than many other policies. You can terminate an ILP the way you terminate a term policy. No issues. In fact, I have terminated my policies several times from Prudential to GE and GE to Prudential. I can do this because I know what I am doing.
You talked about “low allocation of premiums to the policy in the first 5 years of these policies where the selling agents commission is taken first”. Well, this is called commission which is an entitlement of any insurance agent. HELLOOO!!! Nobody works for free. This is the compensation for all the time and fuel spent to acquire a new customer. Simple logics. By the way, do you work for free??? or maybe you are retired.
The additional 1.5% of the value is taken every year in fees are meant for the Fund Managers. Fund Managers need to be paid as well. They don’t manage the funds for free. Gosh!!!!. It is wrong to say that these fee-laden policies never achieve their investment goals. The fact is that they did before. You only feel the pinch these few years due to the sub-prime mortgage crisis which happened once in a golden moon. Do you already make conclusions if Germany ever scored 2 goals in the first half against Argentina. By the way, past performances is never indicative of future performance. Well, if you insist, you can go ahead to buy Term only and spurn these ‘investments’ and nobody will stop you but I can say in USA probably a good idea but not yet in Malaysia. Reasons being mentioned before by KCLau. I dont wish to repeat what he mentioned. Trust me, it will not force the insurance companies of Malaysia to then offer better Term rates because all insurance policy premium rates are governed by Bank Negara and can only be approved by Bank Negara.
By putting the cash saved to buy a few blue chip shares every 3 months (preferably those paying a dividend), is subjecting yourself to even higher risk. Putting your money is a few stocks is definitely high risk that an investment fund that is spread out and diversified into many more stock and sometimes bonds for a more balance portfolio. Trust me, you may not necessary have more money (due to no fees to pay) in 10-20 years and the extra flexibility to get your hands on the cash if you really need it because many investors got burnt (in blue chips) during the recent crisis in 2007-2009. Again, I wish to highlight that nothing is guaranteed. The best option is still diversification. Never put your eggs in one basket. Even a child knows that…
Hope this helps. Sorry if I offended you which was never my intention.
When you seek advice, give thanks to those who give. Likewise, it works both ways.
Dear Netmask8,GrahamBrown and Michael,
I just happened to surf this website today after sometime and was disturbed by your remarks towards KCLau.
I am not a friend or colleague or in anyway related to KCLau but insist that I should defend the good work done by KCLau in this blog. I am neither an insurance agent nor a financial planner but read substantially about insurance.
Michael, you are confused because you do not read enough. KCLau is just trying to share some examples to illustrate to you but you remain confused. Sure, Jack and Mary’s case in not conclusive but merely an example. Because insurance coverage is so wide and the thinking behind choosing a policy is just as complex. Like what KCLau mentioned very well, there is no right or wrong, therefore, how to be conclusive. It all depends on individual needs which require more understanding from an insurance advisor. BTID is good but probably more practical in the west where premiums are more competitive than in local market.
You mentioned ‘Insurance is not an investment vehicle, why you keep on mentioning investment risk in ILP’. This clearly shows how shallow you are in risk management. It is like telling Tune (AirAsia), hotels is not your business, why run Tune Hotels.
From my observation, KCLau does a lot of research and reading before sharing his view and will always refrain from doing so if he is unsure. I think you had misunderstood him all together.
What Bank Negara guidelines are you talking about? I don’t think you know what you are talking, that is why you are always confused.
Good luck to the financial planner that you are going to approach…
By the way, not all financial planners are motivated by sales and commissions. You have got the wrong perception.
If I have offended you, I am sorry but KCLau deserves some justice. It is a waste of his time arguing with you on this blog. At least, he has contributed substantially to bloggers over the years, what have you contributed???
Be fair…
My 2 cents worth.
Hi Chirstopher,
Thanks for taking the trouble to write these comments. You have done great for other readers.
Thanks again.
Firstly, If you are selling a book it is probably not in your interests to clarifiy any points here rather than in your book. (to those confused). My brother-in-law (Malaysian) has a Prudential policy and it seems clear to me that it tries to sell a poor performing investment on the back of a life insurance policy. You fail to mention that any ‘cash value’ of these policies is clearly stated to be ‘not guaranteed’. In addition they are inflexible whilst a term plan could be stopped at any time and switched to a more competitive company. How about the low allocation of premiums to the policy in the first 5 years of these policies where the selling agents commission is taken first thus lowering total achievable returns over the life of the policy. On top of this a typical 1.5% of the value is taken every year in fees. These fee-laden policies never achieve their investment goals. (I know I have had them before) – Better to have Term only and spurn these ‘investments’ it should force the insurance companies of Malaysia to then offer better Term rates. Put the cash saved to buy a few blue chip shares every 3 months (preferably those paying a dividend) and you will have more money (no fees to pay) in 10-20 years and the extra flexibility to get your hands on the cash if you really need it.
G.B
Thanks for your feedback.
Greetings & G’Day,
I agreed that buying term life insurance gave the necessary protection by paying low premium + high payout (death/TPD). With the extra money we have, will invest it in stock market( pick up good bluechips with high divident payout). If you invest in other country stock market, the divident will multiple by the currencies exchange.
Term life insurance(yearly renewable) is even much much cheaper than term life insurance( level term e.g 5,10,15,20,25..etc) as it’s based on the year of the mortality of the insured.
Have a great day. Just a thought of mine.
Welcome
Dear KC,
Yes I am a student and about to buy your new book; but by the sarcastic way of answering me I really feel upset.
I believe the content of your book is not far from this Blog's content.
Is your book designed for self study or I need to hire a tutor to guide me while reading your book?
Upset with your sarcastic remark, maybe you are very rich and successful know. Small people like us should get advice else where.
Thanks
You should definitely contact a financial planner for a better
explanation. Similarly, a student who can't understand by self study
should definitely get a help from teacher or tutor.
http://Kclau.com
Looks very confusing. Your money tips gave lots of example but at the end I am totally confused because your Jack and Marry example is not conclusive. So Term Insurance or Life Insurance, be specific.
What I understand Insurance is not an investment vehicle, it always designed to provide protection, why you keep on mentioning investment risk in ILP. Please check with your product people before you give such an advice. Bank Negara already issue a clear guideline on this matter, please read all BNM circulars before giving advice.
Very Confused.
Maybe I should contact a qualified financial planner to explain this to me.
Hi Michael,
Sorry about the first reply. I should have said that I am sorry to make you confused, which is not my intention at all.
I am sorry that I didn’t check the guideline from BNM before writing this article (I still don’t know which guideline you are referring to).
I am sorry that I get insulted when you said “Maybe I should contact a qualified financial planner to explain this to me.” – because I initially thought that you are implicating that I am not a qualified financial planner to write about this issue. I think you didn’t mean it.
I shouldn’t sounded sarcastic because this had made me lose a potential book buyer and loyal reader.
Any misunderstanding is highly regretted. I hope this reply will delight your day.
fantastic post, I love this a lot. I usually recommend my dummy client to at least buy one whole life policy, then only start the buy term invest diff concept. that way, in case these ppl spent the rest and didn't invest them, at least they still have a whole life policy to fall back on.
Nice article… as a lay person, I'm always confused as to term insurance and investment linked. Thanks for highlighting the pros and cons!
When you buy TPD, the policies will give you death benefit as well
http://Kclau.com
I am one of BTID, but my concern is the quality of investment management team.
I am too young for life / term insurance and endownment
No one is depending on me
So I will not buy and invest all the money
Is it possible to buy only TPD insurance? I heard people seldom sell it seperately