If you read personal finance blogs or books long enough, you will surely encounter the "Buy term, invest the difference" phrase. This basically means to buy basic, no-frills insurance and invest the difference of what you would have spent on non-term life insurance (i.e. whole life, universal and their many permutations) in mutual funds or stocks, since that will usually guarantee a better yield than "investing" with non-term insurance.
At first glance this does seem like the correct move, but is it the right move for me? If there's anything I've learned from my Registered Financial Planning (RFP) class is that there is no cookie cutter solution for everyone. Needs are different and so it follows that solutions will likewise differ as well.
For example, I've been thinking of getting life insurance for my husband and so I looked at term insurance with daily hospital income from PruLife. Here's the table of payments sent to me (this was sent last year, but let's just assume that the price is the same or if there is an increase that it is only minimal):
If I get term insurance of Php1,000,000 (Package 3) for my husband until he turns 65, this is how much we'll be spending:
Years 7-11 = 51 y.o. to 55 y.o. = Php114,855
Years 12-16 = 56 y.o. to 60 y.o. = Php178,145
Years 17-20 = 61 y.o. to 64 y.o. = Php220,172
Total premiums paid for 20 years= Php597,459
On the other hand, the quotation I got from the same company for basic whole life insurance for the same amount of Php1,000,000, excluding daily hospital income, for my husband is Php34,690 per year. If we avail of that policy and pay for the same 20 year period, the total premiums paid will be: Php693,800 (Php34,690 x 20 years).
That's a difference of Php96,341 between the premiums paid for term and basic whole life, which is honestly quite a negligible amount when spread out over a 20 year period.
Furthermore, a basic whole life policy has a built-in savings component which you can access if you need cash. Term insurance does not have the same advantage and whatever you pay for the year is considered gone if you don't kick the bucket within that year.
I realize though that my analogy isn't exactly apples to apples, because my example for whole life insurance does not have a daily hospital income rider and if it did have the same rider as the term insurance, then the premium will most definitely be higher. But my point is, do not discount non-term insurance right away by chanting "Buy term, invest the difference" like an automaton. See for yourself first if it will indeed be to your benefit to buy term.
From what I see, these are the people who will get the most from term insurance:
1. Those at the start of their careers or married lives, because it's exactly those people who are just starting out in life who need protection more (i.e. mortgages, car loans, young children);
2. Those who cannot afford the higher premiums of a basic or variable life insurance, but want the same degree of protection for their beneficiaries; and
3. Those who will actually invest the difference in stocks or mutual funds.
As always, buy insurance because you want to insure your earning capacity for your family's sake. Never do so for investment purposes. Investing should only be a secondary consideration when it comes to taking out a life insurance policy, because let's be real, there are other vehicles that outpace the returns of insurance funds year in and out, despite what your insurance agent might hint at.
If you have dependents and you want to secure their future, protect them by taking out life insurance on yourself or your spouse. There are no ifs and buts about it.
I do not claim to be an insurance expert by any means, neither am I affiliated with any insurance company. These are just the ramblings of an ordinary person who takes insurance coverage seriously.
Saturday, April 12, 2014
Even the fact that TVM involved a lot of computation did not deter my interest (this from a person who chose her college course based on the number of math units required. Math 1 for the win!), and I actually stayed up past midnight a few days after my class researching on TVM and solving problems. Imagine that!
Anyway, what really hooked me on TVM was how I could start planning for Ace's college fund starting now, and for as little as Php5,000 a month. Here's how I plan to go about it:
Tuesday, April 8, 2014
- Take care of your money and control your finances.
- Don't blame other people for your poor money habits.
- Don't depend on others to provide for your because you are an intelligent, capable and independent grown-up.H- Health
- Don't blame your parents, your great-grandparents or your bald uncles for your conditions, even though genetics play a significant part in your health status.
- Control the food that goes into your body- you wouldn't like to store useless junk in your tummy, right?
- Move. Exercise!E- Education
- Don't blame your school's curriculum for your failures.E-Emotional State
- Know that your thought are very powerful and accountable for your actions; therefore, promise to filter them accordingly.
- It's up to you whether you want to be influenced by other people's thoughts or not.L-Love
- Be mature enough to give back to the community and make your money mean something.