Buy term, invest the difference?

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Buy term, invest the difference?

Published by sam - 19/10/07 - 12:10:59 am

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By Carlos Gonzales
MoneySense
Last updated 12:13pm (Mla time) 10/15/2007

You often hear the phrase “buy term, invest the difference” when it comes to the debate on term versus permanent life insurance. It does make a lot of sense, but you have to remember these important points:

Buy when you’re young
Jerry Miraflor, Cocolife first vice president, gives this warning about this strategy: “I’d say, ‘be very careful’. There are a lot of very big ‘ifs’ for that statement to work. You must be young enough and healthy enough to qualify for term insurance.” Once you hit middle age, premiums for term insurance can be expensive.

Have the discipline
Saying “invest the difference” is easy; actually doing it regularly is another matter altogether. Carl Gustini, president and CEO of Manulife says, “This advice may not be generally applicable to all. If a person knows how to save regularly, buying a term insurance policy can be a good strategy, yet it boils down to the fact whether or not he or she really needs term insurance. Furthermore, most people who have this mentality neglect to invest the difference and use it for additional living expenses. This advice can be applicable for as long as the person knows how to invest the difference into another investment vehicle.”

Invest smartly
Aside from the discipline of investing, you have to make sure the return on your investments can beat the returns of insurance policies. And for that, you have to allot time and effort.

Jerry says, “You’ve got [to have] the expertise and the time to manage and generally oversee your investments. I’d venture to say that 90% of the general public does not have that expertise.” Of course, you can invest in mutual funds and trust funds that are managed by professional investment managers. You can even automate the process of setting aside money to invest. Nevertheless, you still shouldn’t neglect insurance, adds Jerry.

“If that investment turned bad, they’d need a fallback position like a whole life cover. Or if they successfully grew their investments into, say, a P100-million enterprise, they would still need some form of permanent insurance cover to enable them to pass their estates on to their heirs. And that insurance cover would likely be a whole life cover.”

(From the July-August 2007 issue of MoneySense, the Philippines first and only personal finance magazine. Visitwww.moneysense.com.ph for more.)

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