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By YS Koh
The phrase “BUY TERM AND INVEST THE DIFFERENCE” evolves around the concept of
term life policy which is a basic protection policy and the endowment/ whole
life policy which has protection and investment/saving features. To put it
simply, the phrase means that instead of taking up the endowment/whole life
policy, an individual should buy a term policy for protection and the
difference between the premiums of the two policies is to be invested by the
individual himself to earn some dividend on the investment.
To agree with the phrase "Buy Term and Invest the Difference", one need to
have the conviction and will-power to invest the difference in the premium in
an investment vehicle that can pay a return higher than that declared by an
insurance company. Unfortunately, most of us do not have the capability to
achieve the desired return over time. At times, one is lucky to reap a good
return from the equity market but this is all short-lived when the downturn
occurs, all gains will be wiped out and may even heavy losses.
However, investment-linked life insurance have been pioneered and offered for
sale by insurance companies around the world as one way where it is possible
to have both protection and investment at the same time. In the United States
of America, investment-linked life insurance is known as "variable life
insurance". It was pioneered by the Equitable Life Assurance Society and was
offered for sale in 1976. This type of product is recommended if one agrees
with the phrase "Buy Term and Invest the Difference".
Investment-linked life insurance policies offer more flexibility to the policy
owners and they can choose when to top up or how much, or on what portion of
their policy that is linked directly to investment performance. Considering
the wide range of investment tools available, investment-linked insurance
products may be linked to stocks and shares, property or real estate, cash
deposits, fixed income securities, government bonds, corporate bonds, unit
trusts, investment trusts, other life insurance and annuities. Investment-
linked funds have been created to suit the client`s various investment
objectives, risk-reward profiles and investment preferences.
With several insurers offering a variety of investment-linked insurance
products, it is now possible for an insurance policy holder to enjoy
protection and at the same time to invest solely in one fund or a combination
of funds, subject to certain limitations, such as a minimum of 20% of his
investment in each fund selected. An insurance policy holder may switch his
investment between funds when his investment objectives change.
As an example, an Income Fund which is managed by a company`s in-house fixed-
income investment team comprising individuals with more than 20 years of
experience in the financial sector. This fund is suitable for policy owners
seeking stability of principal and a higher return compared to bank deposits
but with acceptable risk to capital invested. The fund is principally
invested in fixed-income securities, treasury products, money market
instruments, collective investment schemes, and any other permissible
instruments or investments prescribed by the relevant regulatory bodies to
provide a steady return to policy owners through accumulation of capital over
the long-term.
Without the existence of investment-linked products, one may disagree with the
phrase and may not "buy term and invest the difference" but instead to take
up a traditional participating life insurance product that provides life
protection with an element for investment. The premium may be higher but it
leads to wealth creation for the future.
YS Koh is an independent Certified Financial Planner and a licensed financial
investment broker by practice. She writes often and provides insights and
viewpoints for her blog "Life Insurance Information Portal" (http://get-term-
life-insurance-info.blogspot.com)
This Life Insurance Information Portal is designed to provide you with
unbiased information and useful tips, free from http://www.get-term-life-
insurance.info
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