Buy term and invest the rest: A flaw in its own might
It is no stranger to most people now looking for coverage to revel on the concept of buy term and invest the rest. If this concept seems alien to you, buy term and invest the rest is a classic financial planning philosophy to tell you not to buy “Whole Life” or “Investment Linked Policies” for one’s life insurance protection needs.
The reason for not buying whole life or investment linked policies is because you are effectively paying too much for coverage and investments that you do not have control over. Categorically, you could have bought a term life insurance for the same type of coverage at a much lower premium.
While I am a firm advocator of the buy term and invest the rest strategy, in this piece, I will use my 13 years’ experience in the financial service industry to explain some flaws which I’ve observed as to why this concept may be detrimental to some client’s financial planning.
Misconception 1. You will invest the rest.
Buying term and investing the rest assumes you will invest the difference in premium between buying the term insurance and whole life insurance. This looks like a much better strategy on face value, however there are some flaws in this strategy
First, you may burn this surplus on something else instead of investing the difference, which then defeats the purpose
Second, you may not even achieve the said investment returns or lose part of your monies with flawed decision making or geting trapped during adverse market conditions on the 25th year.
Misconception 2. You do not need coverage during retirement.
Most Singaporeans will have the mindset that 65 years old is the appropriate retirement age when they can start withdrawing their CPF Life. Buying term and investing the rest assumes that you will not require insurance after retirement or you can self-insure thereafter with the monies saved from investing the difference, IMHO this can be premature thinking.
While it is true that most people will need higher insurance coverage during their active years, many discount the fact that medical conditions and health complications may occur soon after or right before retirement, the lack of planning to mitigate these situations may cause financial shocks where retirees may need to drawdown their retirement war chest thereby causing destruction to their retirement plannings. Having a whole life insurance provides options to maintain your coverage or to cash out during retirement age, by maintaining your coverage, the pay-out may provide financial cushion against unforeseen medical cost upon diagnosis of illnesses and disability during retirement. It can also provide financial relief to your family members upon your death for your final expenses that may encompass your remaining liabilities such as your mortgage.
Misconception 3. Term plan is easier to maintain
Though it seems like a term insurance is easier to maintain when it comes to affording the premium, it will be easier to take it away as well. Over the years, I’ve experienced a higher probability of my customers lapsing on their term insurance policies than the whole life insurance policies which I’ve sold. Customers are more prone to get disillusioned over a plan that they will get nothing back on and must pay for a longer term even when they are faced with temporary financial issues. Customers who have bought both term and whole life insurance will choose to keep their whole life policies over their term policies when it comes to deciding one to withdraw even though the premium difference can be stark.
The reason is because, whole life insurance has cash value which makes it harder to forego even though there may be an affordability issue faced by the policy owner. Whole life insurance also has the limited premium payment term feature such that at that point, client only need to pay for a few more years to finish paying for the policies and gets to keep it for a lifetime.
Psychologically, the whole life insurance portrays a much higher value than term insurance mainly because of the cash value feature of the plan and clients will be more inclined to maintain and pay for even if there are changes to their financial situation and objectives.
Misconception 4 and Conclusion. I will pay to the end
While this applies to misconception 3 as well, it should be another category on its own on why this misconception is the strongest one yet. It is known that most term insurance plan requires you to pay throughout the policy term. This means, if you are looking to get insured for a term insurance till age 65, you will have to pay till 65 years old whilst if you are looking to get insured till 99 you will have to pay till 99 years old. This can be easier said than done and it may not be the fault of anyone to think that they will pay till the end of the policy term when they sign up for the coverage.
However, memories tend to erode as time passes, the longer since you’ve bought, the harder it is to remember. For example, its easier to remember something a decade ago than two decades ago (obviously). Although it is easy to set up recurring payment with any insurers these days especially through GIRO arrangements, there can be instances where the customers either forget that they have such policies a few decades or even a few years later that they discontinued this payment arrangement when they close and reopen another bank account or they simply forgot to have sufficient funds deposited in their bank account to be debited for the next premium payment. Such is the risk when you buy a term insurance policy that will have to be paid for a few decades or even until age 99. By 60 or even 70, certain illnesses may undermine your memory and the gift you once known to bequest to your loved ones might have been the worst financial decision you ever made.
A Whole life insurance on the other hand can be structured to defray such circumstances as premium payment term can be as short as single premium or flexible enough to be customized to your preferred term.
This is purely my own opinion, and I am not recommending anyone to get a whole life insurance or term insurance before sitting down with me to understand your financial objectives, budget, and goals.