Buy Term Insurance and Invest the Difference

Most of our personal financial gurus for over years advised us – “Buy Term and Invest the Difference”(BTID). It is a concept came into existence in 1980s and still many arguments are going strong on this subject of life insurance and finally the end decision is often made in favor of BTID.

BTID represents a better alternative way of taking insurance and doing investment. This popular investment strategy is based on the belief that you can invest better on your own instead of relying on the insurance company for the cash value of the insurance. After all insurance is for risk mitigation but not for saving money.

Therefore, ‘Buy Term and Invest the Difference’ emphasize on paying the least premium possible and use the difference amount (extra cash) to save or invest. In this article we will discuss on why term insurance is considered as best life insurance product when compared to money-back insurance policies and how it covers the financial needs of your dependents.

Term insurance – a need-based policy :
Term insurance is an insurance policy taken for a specified period of life. This insurance is best suitable for a young earning individual who just starts his career at an age between 23-28 years (by saying this we don’t mean that others should not take this insurance). Every earning individual must take term insurance at early stages of his life. Because, the premiums at the early age with good health are half the premium after 10 years.

Thus an insurance policy, with low and affordable premium, that offers a high sum assured is the right for every breadwinner of the family. This protection tool covers immediate financial needs of your dependents (family members) in case of your death. The policy pays cash benefits to the beneficiary for the loss of income, outstanding debts, children’s education etc. Simply, we can say that your family can live with same standard of living even when you are not around.

Money-back insurance is a rip-off :
As we all know that rip-off products may not offer the promised benefit, in the same way money-back policies may not offer the guaranteed cash benefits. When you buy money-back policies, you pay for two things – insurance and savings. But in the event of claim you will get only the face value of the policy (i.e. sum insured) while the cash-back of the insurance (savings) is not guaranteed by the insurer.

For instance, if a person at 25 years of age, buy money-back policy with a coverage of Rs 10 lakh in insurance for his family, he will spend Rs 40,000 per annum. He thinks to continue paying premiums for a term of 20 years as this money-back policy is perceived to build up savings for retirement. But later after a few years, he, like many people who take money-back policies will stop paying premiums as it will be financial strain for him to pay those huge premiums. Thus, the person not only lose his high premiums, but also the insurance cover for closing the policy.

However, if another person of same age, purchases a 20-year-level-term insurance with a coverage of Rs 10 lakh, the cost will be only Rs 2,000 per annum. The extra money i.e., Rs 38,000 per year if invested in a long-term investment plan (mutual funds, bonds, stocks etc) gives better returns for 20 years, he will save more than Rs 7,60,000 (this is the summation amount calculated without earning any interest – Rs 38,000*20 = Rs 7,60,000). He will be self-insured for 20 years along with this big saving amount. That means, when his 20-year term is up, he shouldn’t need life insurance at all as he has saved enough for retirement.

Thus, if you take money-back policies for a period of 20 years, the savings of first three years are eaten up by the insurance agent as commissions and fees and at last you would have only 17 years of savings. But, if you invest that extra amount in long term investments, you will have better savings as well as bigger life insurance during the time you need it. At your retirement age, your savings/investments will leave you self-insured and you may not need any insurance as you will have enough savings.

Insure for cash-flow but not for cash-back
Insurance and investments are two different things. Keep investments and insurance separate. Make sensible decisions while taking insurance. Don’t go with insurance agent’s advice. Agents may mis-sell because of low incentive structure not being aligned with what is good and suitable for the customer. Also, the cost of service or operating cost for investing your premium by the insurer can be saved.

Get peace of mind with cheap term insurance
The real problem relies in the poor decisions made in haste and taking a wrong life insurance product that distracts your personal financial plans and goals. Why should you pay higher commissions (administrative charges and sales charges) associated with a money-back policy when you can avoid those charges by simply purchasing term insurance. The ability to control your own personal assets invested or saved is worth for which you should consider. Buy cheap, affordable insurance with extensive cover and invest the difference.

Term insurance coupled with investment of the difference, therefore is the solution to all your unforeseen financial hardship.