Buy Term insurance and invest the difference! ARE YOU KIDDING ME?

July 27, 2014 — Leave a comment

you will regret if you don’t read the entire article!

 

do-not-ignore

 

How was the idea come about?

This idea was made popular by two financial guru in the united states Dave Ramsey and Suze Orman. They often ask people to buy the cheap term life insurance instead of the expensive whole life insurance and invest the rest of the money in equity market to get a higher return on investment.

in this article i would like to make my stand why such idea is not necessary true.

 

how it works?

here is a situation for you guys to look for

Mr John is a 25 years old teacher, He got a wife and 1 daughter to take care of. At the moment he only can fork out RM3700/ year for insurance purpose. He also need a health insurance. Two Insurance Agent approach him and present the following proposal.

 

  • Agent A from XXX company. (by implementing the philosophy of but term and invest the difference)

Death Benefit: RM130,000 ———-> cost per month RM40

Standalone Medical card: RM100,000 ———–> cost per year RM56

Total monthly Premium RM96

*no cash value at the end of policy term

The agent also encourage the client to invest the rest of the money in unit trust.

 

  • Agent B from Prudential Propose him a universal life 

Death Benefit: RM130,000

Medical Card: RM75,000

Total monthly Premium RM301.00

* comes with cash value

 

by looking into both scenario most people will go for Agent A.

1) The first proposal is cheaper by 68%. A whooping difference of RM205/month

2) The client can use the difference (in this case RM205) to invest in somewhere else for higher return.

 

Theoretically this sound like a wise idea. But lets do a detail analysis.

 

term life vs whole life

 

This is a spreadsheet i created to show the actual projection over the lifespan of Mr John.

Here are 7 important points i would like to highlight why the theory buy term and invest the difference is not the best choice one should make.

 

term vs wholelife the 7 points

 

some people will ask why proposal 1 even with 7% rate of return but the cash return is less then proposal 2?

The answer is this. Starting from age 66 until age 70 the cost of the medical card (column F red box) is higher then the annual budget (column A) so in order to renew his medical card he need to take out some cash form his investment thus resulting less return.

 

one last thing. do yo believe by investing the difference in the stock market or unit trust can always give you a positive return? Think about it.

But for Prudential Universal life insurance the return is always positive. you can enjoy while the market going up with no downside risk! 

 

it is not that I’m against stock market or unit trust, i do put aside part of my money in stock and unit trust, just that for this case study i would highly recommended getting whole life instead of term insurance or any standalone medical product.

 

if you still thinking of NOT buying a whole life universal insurance policy, you must be out of your mind. i am sorry but i have to say that.

 

Please leave me a massage should yo need any assistance i will get back to your shortly.

 

cheers.

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