When it comes to choosing the right type of life insurance, it can be tough to decide. Do you go with a term insurance, which is pure protection and offers no investment components?
Or do you choose a VUL plan, which gives you the option of investing your money in addition to getting coverage?
And then there’s whole life insurance, which also has an investment component…the list goes on. So, how do you decide?
In this article, we’ll compare and contrast term insurance, VUL, and whole life insurance, so you can make an informed decision about which is right for you.
Types of Insurance Policies
When it comes to life insurance, there are a few different options to choose from.
Term Insurance
You can buy a term policy, which is the simplest and most affordable type of life insurance. With a term policy, you pay a fixed premium for a set period of time – usually 10, 20 or 30 years. If you die during that time, your beneficiaries will receive a death benefit. If you live beyond the term, the policy expires and you get nothing.
Whole Life Insurance
Another option is whole life insurance, which offers lifelong protection. With whole life, you pay higher premiums than you would with a term policy, but your policy builds cash value over time. This cash value can be used to help cover the costs of your premiums, or it can be withdrawn or borrowed against for other purposes.
Variable Universal Life (VUL)
There are also variable universal life (VUL) policies, which offer more flexibility than whole life. With these types of policies, you can adjust your premium payments and death benefit as your needs change.
No matter which type of life insurance you choose, make sure you understand the features and benefits before you buy. And be sure to shop around and compare rates from different insurers to find the best policy for your needs.
The Basics of Buy Term, Invest the Difference (BTID)
BTID is a strategy that involves buying a low-cost term life insurance policy and investing the difference between the cost of the term policy and a whole life policy in a separate account.
The goal of BTID is to provide you with the same level of death benefit as a whole life policy, but at a lower cost. And by investing the difference, you can potentially grow your death benefit while also building up a cash value that you can access if needed.
To understand how this works, let’s say you want to buy a Php 1,000,000 life insurance policy. A whole life policy might cost you Php 30,000 per year, while a term policy might cost you Php 10,000 per year.
So, with the BTID strategy, you would buy the term policy and invest the difference of Php 20,000 each year into a separate account. Let’s say this account grows at an average rate of 8% per year. After 20 years, your account would be worth Php 1,326,000. And if you die during that time, your beneficiaries would receive the Php 1,000,000 death benefit from your life insurance policy.
Pros and Cons of buy term, invest the difference (BTID)
One popular strategy for life insurance is known as “buy term, invest the difference” (BTID). With this approach, you would purchase a term life insurance policy and invest the difference in premiums into a separate account or investment.
The advantages of this strategy include:
Potentially lower premiums
Term life insurance premiums are typically lower than whole life insurance premiums.
More control over investments
With BTID, you have more control over where your money is invested and how it is managed.
The disadvantages of this strategy include:
No death benefit if you live to the end of the term
If you outlive the term of your policy, there will be no death benefit paid to your beneficiaries.
Requires discipline to invest the difference
BTID requires you to invest the difference in premiums on your own. This strategy only works if you are disciplined about investing the money and do not spend it.
Who should use BTID?
BTID can be a good strategy for people who are comfortable managing their own investments and who have a longer time horizon (10 years or more). It’s important to remember, though, that with BTID you are responsible for investing the money yourself, and there’s no guarantee that your investment will grow.
When deciding if BTID is right for you, be sure to consider the following:
Your financial goals
Before deciding if BTID is right for you, it’s important to consider your financial goals. BTID can be a good strategy for people who want to grow their death benefit while also building up a cash value that they can access if needed.
Another thing to keep in mind is that you’ll need to revisit your life insurance policy and investment strategy periodically to make sure they are still aligned with your goals. As your goals change, so should your life insurance and investment strategy.
Your investment timeframe
If you have a shorter investment timeframe, BTID may not be the right strategy for you. This is because there is no guarantee that your investments will grow enough to offset the costs of the life insurance policy.
Your risk tolerance
BTID is a more aggressive strategy and is not suitable for everyone. This is because you are assuming the risk that your investments may not grow as expected. If you are not comfortable with this level of risk, BTID may not be the right strategy for you.
Your life insurance needs
BTID can be a good strategy for people who have a need for life insurance and also want to grow their death benefit. If you only need life insurance for a specific period of time, BTID may not be the right strategy for you.
Your overall financial picture
When considering BTID, it’s important to look at your overall financial picture. This includes your other investments, your debts, and your financial goals. You want to make sure that BTID fits into your overall financial plan.
Your ability to self-manage your investments
BTID requires you to self-manage your investments. This means you will need to have the knowledge and ability to choose the right investments and manage them effectively.
If you are not comfortable managing your own investments, BTID may not be the right strategy for you. You may want to consider a different life insurance strategy or seek help from a financial advisor.
What to watch out for when using BTID
BTID can be a great way to get lower life insurance premiums and more control over your investments. However, it’s important to be aware of the risks involved.
Investment risks
As with any investment, there is always the risk that your investments will not perform as expected. Be sure to carefully consider your investment goals and risk tolerance before starting BTID.
Longevity risk
One of the biggest risks with BTID is longevity risk, or the risk that you will outlive your term life insurance policy. If you do not have a whole life insurance policy in place, your beneficiaries will not receive a death benefit if you live to the end of the term.
Inflation risk
Another risk to consider is inflation risk. This is the risk that the purchasing power of your investments will be eroded over time by inflation. Be sure to invest in a mix of assets that can help protect you against inflation.
How to start BTID
If you decide that BTID is the right strategy for you, there are a few steps you’ll need to take to get started.
Step 1
First, you’ll need to purchase a term life insurance policy. Be sure to shop around and compare different policies before you choose one.
Step 2
Once you have a policy in place, you’ll need to start investing the difference in premiums into a separate account. This account can be an investment account, a savings account, or even a simple envelope labeled “BTID Fund.”
Step 3
Finally, you’ll need to make sure you are disciplined about investing the money and not spending it. This is often the most difficult part of BTID, but it is essential for the strategy to work.
Tips for success with BTID
Here are a few tips to help you succeed with BTID:
- Start early – The sooner you start BTID, the more time your investments will have to grow.
- Be disciplined – It’s important to be disciplined about investing the money and not spending it.
- Choose your investments carefully – Be sure to carefully consider your investment goals and risk tolerance.
- Monitor your progress – Be sure to monitor your investments and make adjustments as needed.
- Get help if you need it – If you are not comfortable managing your own investments, seek help from a financial advisor.
Sample Case Studies of people who used BTID successfully (or unsuccessfully)
Case Study 1: Anna
Anna is a 30-year-old who is considering BTID as a way to save for retirement. She has a term life insurance policy with a death benefit of Php 1,000,000. She also has an investment account that she uses to save for retirement.
Anna decides to start BTID by investing the difference in premiums into her investment account. She is disciplined about investing the money and does not spend it. After 10 years, Anna’s investment account has grown to Php 2,000,000. She has also continued to pay her life insurance premiums and her policy is still in force.
BTID has helped Anna reach her retirement goals and she is on track to retire comfortably.
Case Study 2: Karen
Karen is a 40-year-old who is considering BTID as a way to save for retirement. She has a term life insurance policy with a death benefit of Php 1,000,000. She also has an investment account that she uses to save for retirement.
Karen decides to start BTID by investing the difference in premiums into her investment account. She is disciplined about investing the money and does not spend it. After 10 years, Karen’s investment account has grown to Php 2,000,000. However, she has also had to pay for some unexpected expenses during that time and has had to dip into her investment account to cover them. As a result, her account balance is now only Php 1,500,000.
BTID has helped Karen reach her retirement goals, but she has not been able to grow her account as much as she would have liked.
Case Study 3: Nina
Nina is a 50-year-old who is considering BTID as a way to save for retirement. She has a term life insurance policy with a death benefit of Php 1,000,000. She also has an investment account that she uses to save for retirement.
Nina decides to start BTID by investing the difference in premiums into her investment account. However, she is not disciplined about investing the money and often spends it on non-essentials. As a result, her account balance has not grown much over the years.
BTID has not helped Nina reach his retirement goals and she will likely have to continue working longer than she had planned.
Bottom Line
BTID can be a successful strategy for saving for retirement, but it requires discipline and careful planning. If you are not comfortable managing your own investments, seek help from a financial advisor or consider other investment strategies.
How does Whole Life Insurance work?
Whole life insurance is a type of permanent life insurance that provides lifelong coverage and builds cash value over time.
With whole life, you pay higher premiums than you would with a term policy, but your policy builds cash value over time. This cash value can be used to help cover the costs of your premiums, or it can be withdrawn or borrowed against for other purposes.
Some whole life insurance policies offer living benefits, which allow you to access the cash value of your policy while you are still alive. This can be helpful if you need money for medical expenses or other unexpected costs.
Other whole life insurance policies offer death benefits that can be paid out over time, rather than all at once. This can be beneficial for your beneficiaries, as it can help them cover expenses such as funeral costs or outstanding debts.
Whole life also offers the potential for dividends, which are profits that the insurance company returns to policyholders. These dividends are not guaranteed, but if they are paid, you can use them to reduce the cost of your premiums, or to increase the death benefit of your policy.
Types of of Whole Life Insurance
There are several different types of whole life insurance, including traditional whole life, universal life, indexed universal life and variable universal life. Each type has its own features and benefits, so it’s important to understand the differences before you purchase a policy.
Traditional whole life insurance
Traditional whole life insurance is the original type of whole life insurance, and it offers level premiums and guaranteed cash value growth.
Variable universal life
Variable universal life is a type of universal life that offers the potential for cash value growth that can outpace traditional whole life, but it also carries more risk.
Universal life
Universal life is a type of whole life that offers more flexibility, allowing you to adjust your premiums and death benefit as your needs change.
Indexed universal life
Indexed universal life is a type of universal life that offers the potential for cash value growth based on the performance of a stock market index, while still providing a guaranteed minimum interest rate.
Which type of whole life insurance is right for you will depend on your needs and goals. Be sure to speak with a financial professional to help you understand the different types of whole life and how they can fit into your overall financial strategy.
PROs: What are the benefits of whole life insurance?
Whole life insurance offers several key benefits, including:
1. Lifelong coverage
As long as you continue to pay your premiums, your policy will stay in force.
2. Builds cash value
Whole life insurance policies build cash value over time, which can be used to help cover the costs of premiums or borrowed against for other purposes.
3. Potential for dividends
Dividends are profits that the insurance company returns to policyholders. These dividends are not guaranteed, but if they are paid, you can use them to reduce the cost of your premiums or to increase the death benefit of your policy.
4. Flexibility
Some types of whole life insurance offer more flexibility than others, allowing you to adjust your premiums and death benefit as your needs change.
5. Tax benefits
The cash value of whole life insurance grows tax-deferred, and you can generally withdraw money from the policy without paying taxes.
CONs: What are the drawbacks of whole life insurance?
Whole life insurance also has some drawbacks to consider, including:
1. Higher premiums
Whole life insurance typically has higher premiums than term life insurance.
2. Limited investment options
With whole life insurance, you generally cannot choose where your cash value is invested.
3. Policy loans and withdrawals can reduce the death benefit
If you take out a loan against your policy or make withdrawals from the cash value, it will reduce the death benefit that is paid to your beneficiaries.
Whole Life Insurance vs VUL: Which is better for you?
When it comes to whole life insurance, there are two main types of policies:
- Whole life insurance
- Variable universal life insurance (VUL)
Both whole life and VULs offer lifelong coverage and the potential to build cash value. However, there are some key differences between the two that you should be aware of before you purchase a policy.
Whole life insurance offers level premiums and guaranteed cash value growth, while VULs offer the potential for cash value growth that can outpace whole life, but also carry more risk.
Which type of policy is better for you will depend on your needs and goals. If you are looking for a policy with guaranteed cash value growth and level premiums, whole life insurance may be the better choice.
However, if you are willing to take on more risk in exchange for the potential for higher cash value growth, a VUL may be the better option.
BTID vs. VUL: Which is better for you?
Another option to consider when it comes to life insurance is whether to buy a term policy and invest the difference, or to purchase a VUL.
With a term policy, you will pay lower premiums for a set period of time, typically 10, 20, or 30 years. At the end of the term, the policy will expire and you will no longer have coverage.
With a VUL, you will pay higher premiums, but the policy will remain in force for your entire life.
Which option is better for you will depend on your needs and goals. If you are looking for temporary coverage or don’t want to worry about the potential for increased premiums, a term policy may be the better choice.
However, if you are looking for lifelong coverage and are willing to pay higher premiums for the potential of cash value growth, a VUL may be the better option.
Conclusion
When it comes to choosing life insurance, there are a lot of options to choose from and it can be difficult to know which is the right one for you. Each type of policy has its own set of pros and cons, so it’s important to understand what each one offers before you make a decision.