Term Life Insurance - Buy Term and Invest the Difference!

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)

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