Home | Automotive | Insurance

Understanding what "buy term, invest the difference" means

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 ?

Most financial planners would tell us to stay away from whole life insurance products as they are considered rip offs. These kinds of products are not so popular anymore in the United States. In order to fully understand "whole life" versus "term" they are differentiated as follows: Term insurance refers to life coverage only while "whole life" refers to term policy with an investment scheme. Insurance agents usually present whole life insurance as something that will help you save for your retirement. Forcing you to save is probably something that is good for you, however the bad thing about this is that the returns for the investment in whole life insurance is very low. It is a pity that these type of products are still sold in the Philippines. Sadly, people still buy them because of inadequacy of financial knowledge.

To fully understand this, let me give you an example. The other week, my mom asked me if she should continue paying a certain type of insurance product that she bought for my sister. It was worth about P 400,000.00 (Philippine Peso) the balance left is P 200,000.00 as she has already paid half of it.

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 evaluate whether or not she should continue paying the P200,000.00 we will evaluate the benefits of the insurance product versus the "Buy term, invest the difference" option.

If you add the total money that my sister will be receiving, she will get a total of P1,520,000.00 at age 65, that is if she opts to get the lump sum at age 65, plus she is insured for two million pesos.

Under the "buy term invest the difference scheme" since she has already paid partially for the insurance product she will convert what she has already paid into "term insurance" (That is if the insurance company allows it) This is usually good for only 20 years. The P 200,000.00 will then be invested at a vehicle of investment that gives about 10 %+ return per annum. The profits derived from the ivnestment will also be re-invested in order to take full advantage of compounded interest. If she faithfully does this until she reaches the age of 65, she will get an estiamted P17,639,497.05.

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+.

You might ask what about insurance protection? Take note that pure term insurance is very cheap. She can just buy term insurance and renew it every 20 years.

You might be wondering what investment vehicle would give you 10 % return per annum? There are several of them out there. You can invest in mutual funds where returns can run from 10 % to 70 % or more. However these returns are not guaranted but historically the rate of return does not fall below 10 % per annum. (that is if they are invested in equities) You can also invest in the stock market. In the Philippines, a bullish stock market gives a high rate of return that even the most conservative investors in the stock market earns more than 10 % per annum.

Buy term invest the difference? It certainly does make sense!!!

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

Zigfred Diaz is Vice president for operations for a group of family owned corporations. He is also a Financial & Real estate broker, lawyer, law professor & writer. He regularly blogs about several topics including finances and investment strategies Know more !!! Visit his blog today !!! Get a totally unique version of this article from our article submission service

This article is licensed under a Creative Commons Attribution-No Derivative Works 3.0 Unported License, which means you may freely reprint it, in its entiretly, provided you include the author's resource box along with LIVE VISIBLE links (without "nofollow" tags).