This post is part of a series of posts that discuss about the buying term insurance and invest the rest in detail. To access the other posts in this series, click here.
How can one implement a buy term and invest the rest plan or a BTITR plan practically ? One method will be to devise a plan that will take out part of the discipline that will be required for a BTITR plan. A Regular Savings Plan or RSP, in short, which are applicable to unit trusts would be appropriate. This involves the investment of a fixed amount of money into the unit trust periodically.
However, I would prefer to invest in an low-cost Exchange Traded Fund or ETFs in short such as the STI ETF or the DBS STI ETF 100 since their performance is likely to be superior to unit trusts. But these ETFs do not have the equivalent of a RSP thus one will need discipline to purchase these ETFs manually on SGX periodically.
One solution would be to participate in the Philips Share Builders Plan or PSBP in short. This is similar to a RSP except that you will be purchasing counters on the SGX instead. Furthermore, the minimum investment amount is only $100 monthly and this can be done through GIRO deductions. As such, this takes the hassle out of purchasing these ETFs manually and it will also help to maintain discipline in implementing such a plan since the PSBP simplifies the purchasing procedure.
Thus what one can do is to compute the amount of money for investing, which is the difference between the monthly premiums between the life insurance and a comparable term insurance. Once this is done, be ready to set aside this amount of money from your salary or any other sources of income every month. Next, you can apply for the PSBP to deduct this amount of money through GIRO for the purchase of the ETFs every month. After that, all you have to do is to continue this plan to continue to acquire more of the ETFs. Dividends that are being distributed from these ETFs should also be reinvested to acquire more of the ETFs too and this will help to compound your returns at a higher rate. Over time, the value of your investments should increase and provide coverage which can be more than the sum assured for a comparable life insurance policy once your term insurance coverage ceases.
Posts
Hi,
ReplyDeleteSorry I do not have a Google account so I'll just use Anonymous.
For PSBP, "the minimum investment amount is only $100 monthly". Can you illustrate the effective sales charge of such small monthly PSBP contributions (e.g. $100 and $200)?
Thanks!
Anonymous
Hi,
ReplyDeleteThe main charge will be the handling fee which will be $6.42 if you purchase an amount of less than $1000 and less than 2 counters. Assuming that you will be using the difference in premiums to buy less than 2 ETFs and the amount that you are purchasing is only $100, the sales charge in terms of percentage will be very high and that will not be worth it. As such, it will be better to use the PSBP if the amount available for investment amounts to a couple of hundreds.
Kay
Hi
ReplyDeleteI am fully on board with the concept of Buy term invest the rest. However, i am often challenged by "the other camp" on the issue of critical illness funding? to which my response is self insure for critical illness expenses - woudl you agree?
regards
Michele
Hi Michele,
ReplyDeleteOne can always add a rider to their term insurance policy to obtain critical illness coverage during this coverage period. After the term insurance coverage has expired, I agree with you that one can self-insure themselves.
Kay
Hi Kay
ReplyDeleteThanks for giving us amateur investor such a informative site.
I have one question to ask. (Will be glad if any kind soul knows the answer)
Are there any alternatives (better) such as the 'Philips Share Builders Plan'? I would like to start a DCA plan and explore more options.
Thanks in advance
Hi Michele,
ReplyDeleteNTUC Income provides a term insurance - LUV - for death, total permanent disabilty and critical illness up to $200,000 till age 70. The premiums are highly affordable.
However, one has to be an NTUC union member.
Factoring the cost of the union membership, the monthly cost is a mere $49.75 for a person below the age of 45 @ $200,000 coverage.
The links are as follows
Union membership: http://www.ntuc.org.sg/members/signup/application.aspx?refID=NTUC200910&refCode=&Union=an%20NTUC&NexusBypass=true
NTUC LUV policy:
http://www.income.com.sg/insurance/LUV/index.asp
Hope this helps.
Hi Michelle, Kay,
ReplyDeleteIn your post your mentioned "self-insuring" one from critical illness.
How do we do that? Do we set aside a certain amount of money periodically?
Also, in terms of buying term insurance, many term insurance policies expire at 65, or the premiums payable are much more expensive after that. What is the strategy to tackle this situation?
Thanks!
This comment has been removed by the author.
ReplyDeleteHi,
ReplyDeleteThe premiums for life insurance and term insurance with critical illness cover for both are likely to be significantly different. This difference in premiums can be used for investment. At the end of the term insurance coverage, the total return from investing in the difference in premiums will serve as the 'insurance' since now you will have a lump sum of money which we assume to be rather substantial. The lump sum of money is analogous to the payout made by the insurance company if you had bought life insurance in the event that triggers any payout. To answer your question, you can compare the premiums for a similar life and term insurance policy and use the premiums to invest.
There is no strategy to tackle this situation. For the majority of us at the age of 65, we are likely to have no dependents since our children would be financially independent thus even if we pass away, no one will be financially worse off. One would only need insurance if there are dependents. Of course, if one can foresee that at the age of 65, we would still have dependents, then perhaps life insurance would be a viable solution after all.
Kay
Is there anyway one can do an automated monthly GIRO with just one hundred to few hundred dollars.? I believe that's the most efficient and convenient way for most people to save up and invest regularly rather than having the discipline to invest once they have saved up enough to buy a single lot of ETF. PSBP is also not cost-effective for smaller monthly amounts.
ReplyDeleteIf one is after investing monthly, and was already going to allocate some towards bonds, would a DBS MyHome RSP be good?
If smaller monthly savings is not cost-effective enough, doesn't BTIR loses SOME of its advantage over an ILP life plan?
Hi, Kay.
ReplyDeleteIf my family has a history of critical illness, will it be advisable to buy critical illness coverage until age 99?
I have come across a standalone critical care plan which has an option for 99 year term coverage. Probably may buy it if it is advisable...
Yanping
Hi Yanping,
ReplyDeleteI don't have a straightforward answer for this. In my opinion, it is more important to ensure that your family has a comprehensive private integrated Shield plan. Subsequently, it will be good to have a critical illness plan. However, these plans will probably be very expensive when the policyholder of these plans gets very old. It is during these times where the premiums will be very expensive yet you would still need the coverage as the risk of your family being afflicted with critical illnesses increases with age.
One other way is that you can buy a critical illness plan that can cover them for a set period of time. Meanwhile during this period, you should save up and invest in a sum of money that will be more than the amount of coverage that the plan can offer. Subsequently, once the plan ceases, this sum of money will be your critical illness fund should anything happen. But that would require you to pick up some investing skills and having the patience and discipline to invest properly.
It would be best to talk to an independent financial adviser who can advise you on this situation.
Kay