Disclaimer: This article is not for anyone. Not everyone will appreciate “Buy Term and Invest the Difference”, however, if you are someone that has the confidence to manage your personal finance and investment, you may benefit from the following article.
The Current State of Insurance Planning
Professionally, I have reviewed more than 2,000 insurance policies. More than 90% of the policies that I went through are investment-linked policies (ILP); Whole-Life policies and Endowment plans forms the majority of the remaining 10%.
There are only a handful of Term-Life policies.
What is a Term-Life policy?
Term-Life policies are a type of insurance that provides protection for a pre-determined period. The shorter the pre-determined period, the cheaper it is to be protected. For example, ILP or Whole-Life policy may provide a coverage till the age of 100; a Term-Life policy on the other hand, may provide a coverage of only 10 years or till the age of retirement (some insurance companies allow you to freely choose the predetermine period).
Moreover, unlike ILPs or Whole-Life Policies, most of the Term-Life policies provides zero savings, i.e. you will get nothing in return when the policy expires.
The Common (yet understandable) Misconception
Most Term-Life policies have a shorter protection period and provides nothing in return if no claims are made. To make matters worse, as pointed out by KCLau in his blog, the Term-Life policies in Malaysia were more expensive than other developed nations such as US and UK.
It is no wonder that I do not see many of these policies throughout my professional practice. The general public are not attracted to buy a Term-Life insurance due to the reasons above.
This is about to change: The 2019 Update
Frankly, prior to the new initiative initiated by Bank Negara Malaysia (BNM), I too, seldom recommend my clients to get a Term-life policy. However, BNM introduce Direct Insurance through the Life Insurance and Family Takaful Framework. The aim is to reduce the friction for Malaysians to get an insurance without having to go through any intermediaries. As a result, the premium for Direct Insurance is much lower as you do not pay commission to the intermediaries.
How to Buy Term and Invest the Difference (BTID)?
Now that you can purchase a Term-Life policy at a lower premium, is this enough to overcome the fear of not getting anything in return if there are no claims?
First you may want to understand how BTID works.
The main idea of BTID is to buy a Term-Life policy instead of an ILP or Whole-Life policy. As Term-Life policy is cheaper, the amount you saved (the “Difference”) from buying the term plan will be invested in stocks, mutual funds, REITs, etc…
The key here is to “invest the difference” and you are confident that you will get better returns than relying on the insurance company. Overtime, your DIY investment will grow and exceed the surrender value of the ILP or Whole-Life policy.
However, as mentioned in the disclaimer above, this strategy is not for everyone. Without a proper investment strategy and discipline, instead of investing the difference, one may just “Spend the difference”.
What are your options?
Since you can purchase a term insurance directly from the insurance company, you do not need an agent. However, it is still important to know what you are doing before committing into BTID.
Here’s my step by step guide for BTID:
1. Determine how long do you need to be covered.
The shorter the term, the cheaper the premium. However, bear in mind that the premium is not guaranteed upon renewal. This means that you should be prepared for the increase in premium if you want to renew the policy near the end of the term. My practice is to get Term-Life policy that renews every 10 years to include some sense of stability on the premium.
However, there are also some of my clients that may not feel comfortable for the premium to increase every 10 years, so for these clients, I will scout for a policy that covers them till their retirement age. This means that they will not worry if the premium will increase beyond their expectation.
2. Determine how much do you need to be covered.
There are many reasons why you want to buy insurance. However, as a rule of thumb and for simplicity sake (hint: you may hire me to have a detailed look at your insurance portfolio 😉), you may need a protection of at least 10 years of your annual income.
This means, if you have a take home pay of RM5,000, you should have at least RM600,000 protection (RM5,000 x 12 months x 10 years). The logic behind this is rather simple: due to any unfortunate event, your financial dependents have about 10 years to get back on their feet.
If your children are young, you may want to increase the number of years till they can be financially dependent.
3. Choose the correct plan that suits you
Here comes the important step. This is where you can start to compare all the term plans that is available for you in the market. As mentioned, I had already compared all the direct Term-Life insurance in Malaysia for your convenience .
However, do note that the maximum sum assured (coverage) that you can get from direct Term-Life is only RM500,000. If this figure is too low for you, you will need to purchase a second term-life insurance from another insurance company.
I notice some Malaysians choose to take a trip to Singapore to purchase a term plan from Singapore. As I do not have the licensed to advice on the Singaporean insurance, please do your research at your own risk. And as a Malaysian residing in Malaysia, you must work with a licensed financial adviser from Singapore.
4. (Optional) Compare your premium against ILP/Whole-Life policies
You may take a step further by getting quotations for different ILPs and Whole-Life insurance to figure out how much can you save. This requires you to talk to different insurance agents, or if you want to save time, you can engage me to provide you with the comparisons.
5. Start investing
If you are reading this, it is likely that you may choose to embark on the BTID journey. Remember, the key is to “invest the rest”. This is not a strategy to cut cost and improve your short-term lifestyle.
Here are some common pitfalls of BTID that you may want to be aware, and ways to overcome it:
- Premium will increase if you want to renew your Term-Life policy – Choose a term that you are comfortable paying, go to each individual insurance company’s website to get a projection of the premium.
- No more protection (Death/TPD/Critical Illness) after retirement – Have a proper retirement plan and start investing to achieve that retirement goal.
- No discipline to invest consistently – Set up a process to automate your investments (perhaps I shall cover this topic in a future article).
I see finance as an art, every financial planner has different strategies and thoughts towards an ideal plan. This doesn’t make one right or wrong. Personally, I prefer to separate protection from investments. BTID has many advantages such as saving money on fees and commission. It will benefit most to the DIY readers here.
However, as a professional, I must maintain my objectivity. As mentioned in the disclaimer above, the BTID strategy will not work for everyone. If I foresee that BTID will not work for you, I will recommend that you get an ILP or Whole-Life policy.
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