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Knowing the importance of "Buy term, invest the difference 

I am sure that some of us has heard of the saying "Buy term, invest the difference" when buying insurance and investment products. However do we really understand what this means? So why do most financial planners recommend that we should "buy term and invest the difference" while some insurance agents keep on bugging you to get their recommended product ?
The majority of whole life insurance products available today is tantamount to "rip offs." In fact, these kinds of products has already been phased out in the United States. When we talk about "term insurance", this refers to insurance with life coverage only. On the other hand whole life insurance is a term policy coupled with investments. Your insurance agent will always present whole life insurance as something that will "force" you to save for your retirement. This is actually good, but the problem with this setup is that most insurance companies do not usually give a good rate of return for the "investment" component. Sad to say, whole life insurance products are still actively sold in the Philippines. People still buy these products because of lack of financial know-how.
In order to fully understand this, let me give you an illustration. My mother asked me if she should continue paying an insurance product that she bought for my sister. The insurance product was worth about P 400,000.00 (Philippine Peso) She already paid half of it so the balance left is P 200,000.00.
According to her, the benefits of the insurance product are as follows; After 20 years, my sister who is still 18 years old will receive P 40,000.00 per annum until she reaches 65 years of age; At the age of 65 she can either choose to receive P400,000.00 lump sum or continue receiving P 40,000.00 until she dies, plus she is also insured for two million pesos for as long as she lives.
To determine whether she should pay the remaining balance of P200,000.00, the benefits of the insurance product must be pittied against the benefits of the "Buy term, invest the difference" strategy.
Under the insurance scheme, the total benefits my sister will be receiving is as follows; she will get a total of P1,520,000.00 at age 65. Plus she is insured for P2,000,000.00 giving total benefits of P 3,520,000.00.
On the other hand, if we follow the buy term invest the difference scheme, if her insurance company will allow her, she will convert what she has already paid into "term insurance" which usually runs for only 20 years and then invest the P 200,000.00. If she will invest the P 200,000.00 at a vehicle of investment that gives about 10 % return per annum and also re-invest the returns of the investment taking full advantage of compounded interest at age 65 she will get a whooping P 17,639,497.05.
Can you see the big difference? What is P 1,500,000.00 plus P2,000,000.00 insrance vs. P 17,000,000.00+.
Insurance protection is no problem. Term insurance is very cheap. In order to be protected if ever her investments will suffer losses, she will just buy term insurance an renew it every now and then.
But where do you get 10 % return per annum? There are lots of them. Examples of these are mutual funds and directly investing in the stock market. The returns here are not guaranted though. However historical data will show that the rate of return for mutual fund companies is always above 10 % per annum especially if invested in equities. Investing in the stock market always proves profitable. Even the most conservative investors here gets a return of not less than 10 % per annum.
Buying term and investing the difference certainly does make sense !!!

Article Source: http://www.uberarticles.com/articles

Zigfred Diaz blogs on making money online, SEO, investing, financial management, and other great topics. He has joined the Busby SEO Test contest. Visit his blog today at www.zdiaz.com

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