Buy term invest the difference, or BTID is now making rounds on the social media platforms. Many financial experts, as they call themselves, endorse the idea of doing the strategy with a promise of higher returns. But can it keep its promise? Often these so-called experts will only highlight the good and neglect the bad when trying to win your trust. Want to know if BTID is for you?
What is BTID?
The main concept of BTID is to buy term life insurance instead of purchasing whole life insurance. The amount you saved (difference) from buying the term plan will be invested in stocks, mutual funds, UITFs, etc. Term life insurance is cheaper because the coverage is limited to a specific period (1 year, 5 years, and 10 years), unlike whole life insurance that covers up to age 88 (some even up to age 100).
Seem nice and easy, right? But that’s because everyone, financial guru, is quoting it as such without disclosing the challenges you might face afterward.
Don’t worry. I will help you decide if BTID is for you or not, and I will be as transparent as I could.
Let’s first discuss the beauty of BTID and see the advantages of it in your financial goals.
5 Advantages of BTID Strategy
1. Term Life Insurance is CHEAPER
Compared to the whole life insurance that covers until age 88 or up to age 100, term life insurance is relatively cheaper. Term life insurance usually comes in 1 year, 5, years, and 10 years term. You can get a term life insurance with the same life coverage for only a fraction of the cost of whole life insurance. It is best understood with an example. Yes, I know you need one.
Whole life insurance for a male age 25 with a life coverage of Php 1 Million, TDB, and ADDD will cost around Php 25,000 a year while it is only around Php 10,000 for term insurance. The difference of Php 15,000 is invested in a mutual fund (or any other investment funds), thus leveraging your investment portfolio.
2. You Don’t Need Life Insurance When You’re Old
According to Dave Ramsey and Suze Orman, you don’t need life insurance when your kids are already financially independent of you. Most life insurance is purchased to protect the future of their dependents (i.e., spouse and kids), and the protection they need decreases with time. As they grow, the less income replacement you will need as they can already stand on their own.
3. Enjoy Higher Investment Returns
You have the option to invest the difference in the stock market, which generally yields higher compared to the banks. You can open an account to buy shares from most stockbrokers (like COL Financial) for as low as Php 5,000 only. If you’re still not ready yet to brave the stock market, you can still enjoy its benefits through a mutual fund. You can start buying units in a mutual fund from COL or Sun Life for only Php 5,000.
4. Build Financial Discipline
BTID will help you build financial discipline by allocating a portion of your salary to your insurance and investments regularly. Personal finance leans mostly on behavior more than your skill. It will help you shape your financial behavior as it teaches you the importance of dividing your money into what is essential regularly until you get the grasp of your cash flow.
5. No Management Fee
Another thing that most BTID followers would agree is that there’s no management fee is being paid as you will do all the work; thus, more money remains in your fund.
The management fee is the amount of money you pay to compensate for the professional work done by fund managers in making your investment grow.
Now, you know about the advantage of going BTID, we can now proceed in discussing its disadvantages, and they are as follows:
5 Disadvantages of BTID
1. Premium Increases Every Five Years
While it is true that term is relatively cheaper to get than whole life insurance like a VUL plan, it gets pricier for long-term coverage. Typically, premium charges of a term life insurance increase every 5 years. As time goes, the total premiums you paid for the term insurance will exceed that of a 10-years-to-pay VUL plan.
Term insurance doesn’t have cash values nor fund values upon maturity. Meaning, when coverage ceases, your money is good as gone. Unlike term, VUL has fund values that you can withdraw when an emergency arises.
2. What Happens After Age 65
Term insurance coverage usually ceases at age 65 without anything given to you upon maturity. And you should be okay with it as long as you stick to the strategy. Most importantly, if the market gave you the desired result.
This part might get a bit tricky because it is more of a personal choice whether to have insurance after age 65. But do you like the idea of a hassle-free wealth transfer? Life insurance proceeds may not be subjected to estate tax as it will not form as part of your estate, which means that the money is liquid. Thus, you can pay the estate tax using the insurance proceeds.
Term insurance lapses when the premium is not paid after the 30-days grace from the due date. VUL, on the other hand, can remain in force even after the due date for as long as the fund value is enough to cover the insurance charges.
3. Invest the Difference Becomes Spend the Difference
In BTID, you need to split what will go to your insurance and investment every single time. The paying medium for your insurance may be different from where you place your investments, and this can be a problem in the future. After paying your insurance, the money you will invest may seem to your eyes as extra money you can dispose of buying your wants instead of adding it to your investment.
4. No Forced Saving Mechanism
Term insurance only keeps you from paying the premium because you know that it will lapse when it’s not paid. Your investment in stocks, UITF’s, or mutual funds, however, will remain intact even when you skipped putting money—thus giving you an idea of skipping the investment part from time to time, and this where the third disadvantage comes in again.
5. Investment is DIY
Everything in BTID is DIY or do-it-yourself, from insurance to investment. You need to give yourself ample time to learn the basics. It will provide you with confidence before investing. Your knowledge is a crucial determinant of your success in BTID. Do not ever try to enter the market without knowledge as it will look more like a gamble than investing.
If you’re a first-timer, you can still follow the strategy for as long as you keep yourself knowledgeable about the market and disciplined enough, not fall into the temptation of spending the difference. Stay informed and know the consequences before diving into the strategy.
If you’re an existing whole life policyholder, don’t switch yet just because of the sugar-coated advantages. Converting your whole life policy to term insurance may do more harm than good as the difference between what you’ll earn from BTID may not be enough to cover the losses incurred when the policy is converted.
Would you go BTID or VUL? Share your thoughts in the comment box below. Happy investing!
Federico is an electronics engineer, financial blogger, insurance agent, and a certified investment solicitor. A multi-awarded financial advisor with clients ranging from lawyers, doctors, engineers, accountants, business owners, company directors, and OFWs to minimum wage earners had sought advice from him in achieving lifetime financial freedom.