Starter Guide to Financial Planning
Buy Term And Invest The Rest: Do You Really Know What You Are Doing?
This phrase has been used commonly in financial planning. It is the method where you buy a Term Life insurance policy and then invest in some other preferred investment product.
It is normally an alternative to buying Whole Life insurance. The difference between a Whole life and Term life insurance comes down to the investment element in a Whole Life policy.
Whole Life: Insurance + Investment
Term Life: Insurance
You can click to this article to see the difference between both policies.
Buying Term Life insurance
The main objective of buying life insurance is for you or your beneficiaries to receive a lump sum payment when a certain unfortunate event happens.
As a result, you do not gain from buying insurance but with insurance, you are able to recover or go back to your original financial situation after you and your family are hit with an unfortunate event.
With a Term life policy, you must be aware that what is mentioned above is the only capability of this plan. For example, at the end of that particular period of coverage, you are fortunate to stay alive and healthy; there will be nothing paid to you or there is nothing that you can recover after paying all the premiums for these years.
On a good note, you are still alive. But keep in mind that is indeed the structure of a Term life insurance policy. Consequently, do not expect a return from it. This is the reason why Term life is cheaper than a Whole life policy.
When going for this method of financial planning, do keep in mind of this important piece of information prior to signing up for it.
What does it mean by investing?
Placing your money somewhere and hoping for a good return would be layman terms of what is investing.
But it is not only speculating and hoping for a return. You would also need two things when you want to invest. They are:
- Knowledge
- Time
It is indeed very cliché but it is a matter of fact, it is very true. There is a reason why companies charge you fees when investing with them. They have experts who have qualifications, experience, and knowledge when it comes to investing. And since it is their line of business, they have the dedicated time to assist you in investing your money.
There are online platforms where you are able to manage your investment portfolio on your own. But are you certain that you are managing your money well?
It is quite certain that you know what is investing. And you might know what kind of instrument you are keen in putting your money in.
But…
Are you choosing the right funds? Are you looking onto the stock market regularly? Do you have the time to observe your portfolio performance? Are your funds really doing well?
If for most of the time you are not confident and certain of the way you are investing, ask yourself if you are doing good for yourself. Without a doubt that you will need time to monitor your investments grow but time is equally precious and an underrated asset. You can lose a few bucks and earn it back but with time, once you lose it, you cannot get it back.
Therefore, rethink if you want to invest your own money. If you can manage how you want your money to grow, there is no doubt in following this method. But if you lack the time and knowledge, you would rather ask professional help.
Alternatives
The reason why the method of “Buy Term and Invest The Rest” exist, is due to the fact that people do find that buying a Whole Life policy is expensive and they feel that they are able to get better returns elsewhere.
Another alternative of a Whole Life Plan is an Investment-Linked policy (ILP). It also involves both insurance and investment elements. One main difference is that for ILPs, you are able to select which fund you would want to invest in whereas a Whole life policy, you are just participating into the investment portfolio of the insurance company. But let’s discuss ILP in a different article.
The pros of getting a Whole life policy will be that you are putting money regularly and the insurer will be the one managing the premiums for you. In other words, you do not have to worry about your money allocation.
Same as a Term life policy, it will function as insurance that will give you a payout when a certain unfortunate event occurs but at the same time you will still have a surrender value at a certain period of your policy due to the investment element. Overall you are doing both insurance and savings at the same time when you have a Whole Life policy.
But do not solely take a Whole Life Policy as a savings or investment vehicle. Yes, it does include the function above, but its main purpose is for insurance. It does lack flexibility and liquidity.
Back to you
The decision boils down to you. The method of “Buy Term and invest The Rest” is certainly a brilliant way but considered that you are aware of what you are doing.
Nevertheless, it is wise to always look at your financial situation as a whole. Your short and long-term goals, your personal and family needs and your assets and liabilities should be factored in when making such a decision. Getting an opinion would be useful and seeking professional help will assist you in making a better decision.
Hope that this article was useful. Do share it with your family and friends. Till next time.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
