Is buying a term life policy and investing the rest a smarter choice than getting whole life insurance or an investment-linked plan (ILP)? We explain the popular ‘BTIR’ concept and break down all the pros and cons.
Insurance and investing do not mix, so a popular credo goes. After all, insurance is about spending money now to avoid future financial loss, whereas investing is about putting off spending now for a future financial gain.
From this philosophy emerged the BTIR concept. According to this, when buying life insurance, you should stick to ‘pure’ life insurance – A.K.A term insurance – instead of whole life or an investment-linked life insurance plan (ILP). Then, you should take the premiums you saved by buying the cheaper term plans and invest that instead.
The idea is that you would ultimately get a higher upside from investing the premiums saved while still protecting your downside through term life. This makes intuitive sense, which explains why BTIR is popular worldwide.
But is it right for you? Personal finance is personal, so we cannot say. There are advantages to BTIR, but there are disadvantages as well – and these are often less discussed.
That’s why in this article, we will break down the pros and cons of BTIR, elaborating on various scenarios where it may or may not be the best option for a person.
Important Note: If you’re someone who’s confused over the difference between term, whole, and investment-linked life insurance, read these two articles first:
- 5 Best Term Insurance Plans in Singapore (specifically the table comparing term and whole life insurance)
- ILP Versus Whole Life Insurance: What’s the Difference?
Pro #1: Lower premium costs
Term life insurance is far cheaper compared to either whole or an investment-linked life insurance plan. There is zero debate on this. According to CompareFirst, a fully independent government-approved life insurance comparison platform, for a 30-year old male non-smoker:
- The highest annual premium for term life is $365 for coverage up to age 65 with a sum assured of $200,000
- For whole life insurance with a similar sum assured, the lowest annual premium is $2,032 for coverage up to age 85 (the highest is $3,222)
And if you followed BTIR properly and invested that difference, you would get…
Pro #2: Higher future returns (most likely)
The ‘most likely’ is there because nothing is guaranteed when it comes to investments. But if we assume an annual premium difference of about $2,000 (just to make things easier), then for a 30-year old:
- At a 4% annual rate of return – the current guaranteed interest rate on your CPF Special Account – you would have $147,304 at age 65
- At a 9.2% annual rate of return – the annualised total return of the Straits Times Index from 2009 to end-2018 – you would have $451,450 at 65
- At a 6.6% annual rate of return – the midpoint between the two – you would have $253,481 at 65
These numbers indeed sound fantastic ($2,000 a year to over $400,000?) to those new to a compound interest calculator. But that is the true power of long-term compounding.
These amounts far exceed the guaranteed cash values of whole life insurance policies, which are often close to the sum of premiums paid. And because of the high fees involved with many ILPs, investing it yourself using low-cost options such as robo advisors (check out the five best ones here) will also give you higher returns over the long run.
Pro #3: A higher ‘cash buffer’ for times of need
You need to hold your investments for the long term to benefit from compounding’s full power. But life happens, and you may end up facing unexpected cash demands. The good news is that in most cases, your investments will be liquid, meaning you should be able to turn them into cash at short notice.
Further, there’s no rule saying that you must invest ALL the premiums savings. You can choose to invest most and put the rest in your emergency fund (if you don’t already have one).
Either way, going the BTIR route is almost guaranteed to give you higher liquidity in your times of need.
Pro #4: More variety in investment options
If you are leaning towards an ILP, although you will have some choice in the assets and funds you can invest in, they will be limited. For example, if you are the type that likes to use a small percentage of your portfolio – say 5 to 10% – as ‘fun investment money’ for things like hot stocks or crypto, you won’t get that option in an ILP.
But again, the main differentiator here is fees. When you invest it yourself, you will most likely be able to go for lower fee options, which, over the long run, make a huge difference. Just pull up the compound interest calculator and see for yourself.
Now that we’ve looked at the pros – which are highly convincing – let’s look at the flip side of the coin.
“The biggest benefit of whole life insurance is building up cash value with a guaranteed rate of return. However, the growth rate of your funds isn’t anything to get excited about.”
“Although that is true, many of us are so ‘busy’, we always tell ourselves, “I’ll definitely invest the rest later”. This procrastination is a potential pitfall, as investments or even endowment policies need time to grow in value.” – Cassandra Wee, Head of Insurance, SingSaver
Con #1: You need to actually invest the rest
The key part of BTIR is you must actually invest the premiums you saved. Sounds obvious, but as with most personal financial advice, it’s easier said than done. When it comes to finance, most people are their own worst enemies thanks to ingrained behavioural biases.
One such bias is mental accounting. This is where people place money in ‘buckets’ and spend accordingly. For instance, a tax refund is often considered ‘free money’, which means it is often spent frivolously. And because ‘premiums saved’ is not technically something you receive, people may not actually follow BTIR and invest it.
This is corroborated by a study by Dr David Babbel, Professor at the Wharton School of Business. He found that most people didn’t actually end up ‘investing the rest’ but spent it instead.
Con #2: You may end up losing money on investments
There is, of course, no guarantee that you will end up making money on your investments (although keep in mind there are no guarantees in most ILPs either).
This goes further than just market movements, because as we explained earlier, there are guaranteed returns such as for the CPF Special account. Rather, it again comes down to behavioural biases leading to emotional – and often poor – decision making.
This poor investment decision making can take many forms. It could be buying into expensive unit trusts with extortionate upfront sales charges by slick, fast-talking ‘advisors’. Or it could be succumbing to herding bias and jumping into the latest ‘hot stock’ (when it has already gone up significantly) and then panicking and selling when it starts to collapse – thus ending up buying high and selling low.
Whatever the case, if you don’t arm yourself with the necessary investing knowledge, you are leaving yourself vulnerable. And this could lead to…
Con #3: Having insufficient coverage in your old age
If you invested wisely, the amount in your investment portfolio in your old age should more than cover the sum assured of any life insurance policy. But if you didn’t, then you might find yourself vulnerable and lacking coverage in your twilight years. You would no longer be able to get term life insurance and whole life insurance would be exorbitantly expensive (for a 60-year old male non-smoker, the lowest would be $5,546 per year for a $200,000 sum assured).
In such a scenario, it would have been far better if you had just gotten a whole life policy when you were younger. The cash value – though not much when viewed in terms of annual returns – would still be there, on top of your sum assured.
To BTIR or not to BTIR – knowing yourself is key
As Sun Tzu once said, knowing yourself is half the battle. If you read the list of cons and thought to yourself, “Ha, I would never do that!” then congratulations – you would probably do very well with BTIR.
But if you thought “Gosh, that sounds like me”, it might be time to pause and reflect. Maybe it’s time you began learning about the basics of investing and personal finance. Maybe you should set up automated investments. Or maybe, if you know that you will never be able to invest consistently, then getting a whole-life or ILP – where you are forced to save and invest – might actually be the best route for you.
Again, only you will know. All we can do at SingSaver is provide you with the best information to make the most informed choice possible.
Read these next:
5 Types Of Insurance You Can Get For Free In Singapore
Do You Have a ‘Dangerous’ Job? Here Are The Insurance Plans You Need
5 Best Brokerage Accounts To Start Your Investment Journey In Singapore
Regular Savings Plan (RSP): What They Are And The Best Ones To Invest In
Pros and Cons of Buying an Investment-Linked Policy
By Ian Lee
Ian is a former investment banker turned freelance financial and investment writer. He specialises in creating versatile finance content for the attention economy on topics ranging from personal finance and investing to fintech and cryptocurrencies.