Buy Term Invest The Rest (BTIR) – Pros and Cons
Buy Term Invest The Rest (BTIR) or Buy Term Invest The Difference is not a new concept. It means buying a term plan instead of a whole life plan and using the savings to invest.
First of all, what are the differences between term and whole life insurance? These can be summarised by the table below.
How does BTIR work?
Let’s use an example to illustrate how BTIR works. Ben is a male, non-smoker age 35 next birthday. After a Financial Needs Analysis, he concluded that he has a shortfall in coverage.
He needs: $1,000,000 in sum assured as well as $300,000 in Critical Illness cover. He has 2 options to cover his shortfall.
The advantages of Buy Term Invest The Rest (BTIR)
This is the most obvious advantage of BTIR. For the same coverage, it cost $1,363.50 for a term policy vs $6,197.00 for a whole life policy, a difference of $4,833.50!
Flexibility in where to invest (potentially higher returns)
This huge difference of $4,833.50 per year can be invested anywhere that Ben desires.
He has the flexibility to choose what to invest in, unlike a whole life policy’s Par fund. Since this is a long term investment of 30 years, Ben can consider investing in the riskier asset classes. That can potentially generate higher returns. Of course, this is subject to his risk appetite.
Assuming a rate of return of 6% p.a., his investments will grow to $382,127.74 after 30 years. (realistic for an ETF, Index fund, Robo-advisor portfolio, Balanced UT portfolio etc)
BTIR results in better liquidity in times of emergencies
Should Ben find himself in a tight financial situation, he can choose to stop the annual investments of $4,833.50. This comes at little to no financial penalties. He can even liquidate part or all of his investments to meet his financial needs.
This gets more complicated with a whole life policy. Firstly, the surrender values in the first few years are quite low. For example, after paying annual premium of $6,197 for 6 years ($31,182), the guaranteed surrender value of the whole life policy is only $7,000. Secondly, he can only take a policy loan of 90% of the surrender values. Thirdly, he needs to repay the policy loan in the future with interest (as high as >5% p.a.). Fourthly, if he were to surrender it fully, he would totally lose his coverage!
With BTIR, he can liquidate his investments with no such issues. This ensures much better liquidity in times of emergencies.
BTIR results in higher “total sum assured”
Supposing Ben passes away prematurely at age 60, the whole life policy will pay out its death benefit of $1,000,000 to his family.
If he were to BTIR, the term policy will also pay out $1,000,000 to his family. Additionally, his investments would have potentially grown to $265,187.62 at age 60! This makes the “total sum assured” paid to his family $1,265,187.62!
Achieve self insurance
If Ben were to survive to age 65 without making any claims, the term policy will expire. Is this a major disadvantage of BTIR? Not really.
A high death sum assured may no longer be needed at this stage of his life. He would have paid off most of his debts (mortgage etc). He no longer has dependents (children should have grown up, aged parents may have passed on).
But what if a major illness were to strike after age 65? He no longer has Critical Illness (CI) Coverage. If Ben planned well, he should already have a hospitalisation plan to offset his medical bills. On top of that, he should be sitting on quite a substantial investment portfolio (estimated $382,127.74 at age 65). This is called self-insurance.
There is 1 big advantage of having sufficient self-insurance. Have you heard of instances where a CI claim is rejected? It may be due to the illness not fully meeting the conditions set out in the policy contract. An unsuccessful claim is a major fear for both policyholders and financial planners alike.
There is no such problem with self-insurance. You “claim” from yourself. The amount can be used for whatever illnesses or conditions. You can liquidate the investments for any purpose. This includes medical expenses, alternative treatments, income replacement or even to take a break from working.
The investment part of BTIR acts as an ever growing portfolio for self-insurance. This ensures that you will never face a rejected “claim” no matter the condition.
The disadvantages of BTIR
BTIR may have plenty of advantages but it may not be for everyone. Here are some of the cons:
Buy Term but spend the rest
Instead of investing the rest, some people may take the “savings” and splurge it away. This results in not having any coverage when the term plan expires.
The flexibility of the investment portion is a double edged sword. It is easy to stop investing or even liquidating it, causing disruptions to the portfolio.
Lack of investing knowledge
Some people may not have the interest or knowledge to invest. The worst case scenario is overconfidence or careless investments. Such as investing into unregulated products like NFTs, cryptocurrencies or even scams.
The safest way to circumvent this is to talk to an Independent Financial Advisor Representative.
Should I BTIR?
This is a question that only you can answer yourself. You can also contact me to arrange a time for a discussion. You may also start by getting a quotation for a term plan for your age.