Have you guys heard of this strategy called Buy Term invest the Rest ? The idea is this: Purchase a term insurance which covers temporarily over X years (usually during a person working life) and simultaneously invest a certain amount separately to another portfolio so that when the term insurance expire, the separate portfolio would have grown to an amount sufficient to be used for self-insurance. This portfolio must earn a higher return than a plain vanilla fixed deposit and thus there is risk involved. Those who advocate buy term and invest the rest says that this is better than a limited pay whole life policy. Well, I have something nasty to say about this.
The strategy sounds good on paper except one problem: The separate portfolio’s return cannot be guaranteed and hence if that portfolio fails to achieve the required return, one’s protection plan goes down the drain. Secondly, one of the greatest enemies in investing is self. After last year massive slaughter in the equity market, many gave up investing all together. So those who had followed blindly the idea of buy term and invest the rest would found their plans totally ruined.
Why does some financial advisers advocate buy term and invest the rest? There are a few reasons why:
- Financial advisers who strongly advocate buy term and invest the rest tend to be those FA firms that focus primarily on investment. So to get their clients to have the money to invest, they tend to recommend a cheap term so that the “rest” can be invested with the FA firm. Since a whole life insurance only pays commission for 3 or 6 years but the FA can charge a perpetual wrap fee of the investment, any businessman with a long-term vision would prefer the perpetual income.
- Secondly, some FAs that advocate this strategy are those who promise to rebate all commissions back to the client. So if they recommend a term which pays a pathetic amount of commissions, the amount to rebate isn’t much. This means they will not recommend whole life and endowment as there are more commissions to rebate. To put it another way, if the FA recommends a whole life and rebate all commissions, there is nothing further to earn since the client will not “invest in the rest.”
- The third reason is because buy term and invest the rest is appealing to those who are greedy. To know that they can “potentially” earn a higher return than the insurance company appeals to the human greed for more money. If they are told that they can earn 8% return instead of the insurance company’s 3 or 4% return, they will be attracted to this strategy. The problem is that the investment return is unknown which many FA advisers conveniently “forgot” to tell their clients that.
When I see some FA firms advocate the buy term and invest the rest strategy generically to anyone even without doing the necessary due diligent, these FAs are no different from those who sell ILPs regardless of a person’s financial situation. In other words, these FA firms are no different from product pushers and hence they have commited a crime under the Financial Advisers Act as they did not recommend based on a “reasonable” basis. If an adviser has not even met a client, how could he recommend a strategy? Thus, they cannot pass the reasonable test basis. I feel sadden by many who were misled by these FAs to follow this strategy without being impressed that the investment return can be very very negative.
Personally, most of my clients did not adopt the buy term invest the rest strategy not because they don’t want to but because I told them that for long-term protection plan, it is best not the mix insurance and investment together. Buy term invest the rest is effectively mixing insurance and investment together because one’s insurance needs on old age is dependent on the ability for the investment to grow at a minimum desired return.
I feel that FAs must be honest with their clients on their main business model. If the firm’s primary focus is on investment, they should tell their clients that they are more keen to earn a management fee for investment portfolio without resorting to all sort of gimmicks just to get the client to invest. If the FA has no intention of doing insurance, they should just give up their insurance license altogether rather than continuing propagate half truths.
The industry is full of vested interest. I believe that when the market picks up, the buy term invest the rest strategy will start to be propagated by these financial advisers and the mass media love to tell this story since it is so appealing to the human greed. For now, nobody is mentioning this strategy because last year’s massive slaughter in the equity market is still fresh in everybody’s mind. Well, humans are forgetful and they will not remember it eventually. Coupled with the human greed, the only people who will earn a good income are financial advisers. Are clients interest look after? Look after who? I don’t think the industry recognize clients’ interest is required to be look after anyway.
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