What Is ‘Buy Term, Invest The Rest’?
Business | 09 Dec 2019
Insurance and investing are two of the most confusing things adults have to deal with. So, here are two pieces of pre-requisite knowledge that will be essential in helping you to build your own financial portfolio.
Introducing the simplest way to build a complete portfolio: ‘Buy Term, Invest The Rest’.
What Is ‘Buy Term, Invest The Rest’?
‘Buy Term, Invest The Rest’ is the concept of building a complete portfolio in two simple steps. The first step is to buy a term insurance that forms the base (i.e. protection element) of your portfolio. The rest of your portfolio should be allocated into investments, hence why it’s called ‘Invest The Rest’.
It’s a pretty simple concept, but what’s the rationale behind it?
Step 1: Build The Protection Element Of Your Portfolio With ‘Buy Term’
The primary purpose of insurance is to offer financial protection by transferring the potential financial risk of loss to an insurer. In the event of death or total and/or permanent disability (TPD), the insurer will make a lump sum payout to your beneficiaries. This is especially important if you are one of the main sources of income for your household, be it for your parents or children.
What Is The Rationale Behind ‘Buy Term’?
Affordability Of Term Insurance
For the purpose of insurance, term insurance offers the most affordable coverage. That’s because term insurance coverage is based purely on protection. Unlike Whole Life or Endowment plans, term insurance doesn’t come with a savings element. Every dollar of your premium paid is meant to cover you for your protection. By buying term insurance, you can increase your protection coverage (i.e. sum assured) and ensure that it is adequate. As a rule of thumb, your sum assured should be around 10x of your annual income.
Limited Duration Of Coverage For Term Insurance
The other reason why you should ‘Buy Term’ is due to the limited duration of coverage (i.e. it doesn’t cover you for life). That might sound counterintuitive to many because why wouldn’t you want a longer coverage?
That’s because protection is meant for your beneficiaries, rather than yourself. Once your beneficiaries are financially independent, they won’t require you to pay for protection.
For example, you buy a term insurance plan with your newborn as the beneficiary. In this case, a coverage of 25 – 30 years will be recommended. That’s because your child would’ve probably finished his/her university education by age 25. They’ll be financially independent by then, so you don’t have to be worried about providing for them.
How To ‘Buy Term’?
Term life plans are very common, with just about every insurer selling it. However, not all the plans are the same. Plans differ amongst insurers and finding the right plan for yourself can be a tedious and lengthy process with all the complicated jargons.
However, with the PolicyPal app, we’ve compiled plans to make comparing them a breeze. Choose from a wide range of insurers and a multitude of plans. The information on our app is simple to understand, comprehensive and constantly updated!
Step 2: Grow Your Financial Portfolio With ‘Invest The Rest’
‘Invest The Rest’ is meant to cover the investment aspect of a financial portfolio. There are two key reasons why you should be investing, to beat inflation and to grow your wealth.
What Is The Rationale Behind ‘Invest The Rest’?
If you were to keep the rest of your portfolio in a savings account, your financial portfolio will dwindle over the years. That’s because inflation will always be eating away at the value of your money without you noticing.
If inflation rises at a rate of 1.5% every year, and your savings account is earning an interest of 0.05%, you are losing 1.45% of the value of your savings every year. So, in order to counter the effect of inflation, you need to start investing.
Growing Your Wealth
Besides beating inflation, you also need to be growing your wealth. You can do so by purchasing a wide variety of investment products such as Stocks, Unit Trusts, REITS, Bonds, and more!
If you invest $10,000 at a rate of 8% per annum, that $10,000 would be worth a whopping $46,600 after 20 years. That’s more than 4 times the original sum invested.
The returns can range but as long as the amount is growing year on year in the long term, your wealth will expand tremendously without you even noticing.
How To ‘Invest The Rest’?
For starters, if you want to invest you can create a portfolio based on your investment profile. If you are someone that’s young and likes to take risks then a more high-risk portfolio filled with stocks and equities will suit your risk appetite. However, if you are nearing your retirement then a low-risk portfolio made of bonds and blue-chip stocks will be more suitable for you. The decision of what is most appropriate for you cannot be taken lightly.
There are two ways you can start to build your investment portfolio – DIY Investments and FA-Assisted Investments.
Firstly, you can DIY your portfolio. If you pass the Customer Knowledge Assessment and Customer Account Review you can invest on your own without the need for a financial adviser. However, experience is needed to pass the review. You would either need to have had education experience, working experience or investment experience to pass the assessment. If you have any of this experience, you can pass the assessment and build your own investment portfolio!
Secondly, you can work with your financial adviser to guide you on how to build your portfolio. Investing can be a very risky thing to do so it’s important that proper planning is put in place to protect you during downturns. You can reach out to any of our financial advisers if you prefer someone to assist you in building your portfolio in-person.