There has always been a debate about whether buying term life insurance and investing the difference in premiums between term and permanent life insurance policies is really prudent advice.
Proponents of buy term, invest the difference (or BTID for short) claim that there will be a lot of savings at the start of the strategy and more money deployed for investing all throughout. This means that the growth in the wealth of a person will be far greater than if he bought the higher cost permanent life insurance plans.
On the other hand, proponents of buying permanent life insurance say that this type of insurance can be kept up to 100 years old whereas term life insurance cannot. Permanent life insurance also accumulates cash or surrender value that can be borrowed against at lower than market rates (with principal payable when able). Finally, permanent life insurance can provide accelerated benefits for critical or terminal illness.
From where I am “sitting”, there seems to be no argument. BTID is arguing from an investment standpoint while proponents of permanent life insurance are arguing primarily from the standpoint of coverage against the perils to life, with a side argument on loan benefits. It’s like comparing santols to durians.
Prudence in personal finance dictates that a person needs to create an investment and life insurance portfolio.
When it comes to covering against the perils to life, permanent life insurance is better especially for those who are raising their own family as coverage is guaranteed past the contestability period, provided premiums are paid. Supporting a family takes a toll on one’s health much more than maintaining just a one-person household.
Single people may be better off with term life insurance initially. However, they should buy term policies that are convertible to permanent life insurance and convert the former once they start raising their own family.
What is better than the traditional permanent life insurance is a regular pay variable life policybecause the equivalent of the “cash value” is made to grow according to the risk preference of the policyholder.
And for the investment component of the portfolio, a person can invest directly in the capital markets or indirectly through managed funds.
But if a person wants to invest and secure a bit of insurance in one fell swoop, he should get the single pay variable life policy that pays out 125% of the face amount or the fund value of the policy, whichever is higher. This is the closest to BTID as term life insurance is many times the one packaged with the investment.
So before taking sides with the BTID or not debate, it is really best to find out what a person’s objectives are. Investing per se and life insurance are two different things that serve very different purposes. Variable life policies package the two with the regular pay kind being more of insurance than investment and the single premium kind being more investment than insurance.
To me, there is really no argument.
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(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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