Buy term insurance and invest the rest

This post is part of a series of posts that discuss about the buying term insurance and invest the rest in detail. To access the other posts in this series, click here.

The above title is more commonly known as buy term and invest the rest or in short, BTITR. This is a topic which has been widely discussed before. As compared to the BTITR approach, the other alternative is to buy whole life insurance and this has been a more popular approach for Singaporeans. However, the more popular approach need not be the better approach and in this post, I will attempt to show why is this the case.

As taken from the guide to life insurance from the Life Insurance Association of Singapore or LIA in short, whole life insurance offers life-long protection. Premiums will be paid throughout your life although this can be changed to a limited period and this policy will pay out the sum insured and any bonuses you have built up when you die or become totally and permanently disabled.

In contrast, term insurance only offers protection for a set period of time and it will pay the sum insured when you die or become totally and permanently disabled.

The BTITR can be a better approach as the returns from investing the difference in the premiums between the whole life insurance and term insurance can be potentially higher than the sum assured from the life insurance policy when the coverage for the term insurance has ended.

As a rule of thumb, the premiums for term insurance is around ten times cheaper than the premiums for the life insurance. As such, we can use the difference in the premiums to invest. The table below, which is taken from Tan Kin Lian’s blog, who is the ex-CEO of NTUC Income, shows a comparison of the premiums for the difference type of policies and the link can be found here.

For the returns of the life insurance, the returns is likely to be around 3% and this is taken from a article on Tan Kin Lian’s website. The poor yield of life insurance policy is due to the expenses and marketing costs incurred by the insurance companies and these costs can be up to 4.5%. More details can be further found here in this article on Tan Kin Lian’s website. As such, if you are investing in the same type of investment portfolio exactly by the insurance companies, your potential returns would be around 3% + 4.5% = 7.5%. The difference when compounded over a long period of time can affect the overall returns significantly.