Buy term insurance, invest the difference

This is a good article!

I think that what's crucial here is the discipline of saving/investing. Most people do the "buy term and spend the difference".

I think this is the beauty of variable life insurance. You are indeed buying a term and investing the difference.

thanks flexy :). i need to confirm though if an Asian Wall St. Journal article i read is true here in the Philippines. It said that to maximize variable life policies, you need to make sure you invest as much as you can in common stock funds and that you should watch out for exorbitant fees. Care to share any thoughts?

For those with the savings discipline and investments acumen... buying term and investing the difference may work... but for those who want to keep things simple (and those without the discipline)... an investment linked insurance may just be the solution... but you have to be in the market for both insurance and investments and you don't have neither to begin with.

uhmmm... I think it would depend on the risk appetite of the investor. Stock market in the Phils is still a small and young market compared to more developed countries. In my opinion, it is still subject to some level of manipulation given its size (although it has been improving). BUt those who invested a couple of years back really did well today.

Aside from the fees, I think we need to also consider the investment objectives of the fund if it matches your own, underlying instruments (i.e. blue chips vs growth stocks)

It is rewarding to take on some risk/put money in stock/equity funds (as a very conservative outlook limits our opportunity). Just have a well-thought off diversified portfolio instead of just transferring everything because it did 40 to 50% last year. = )

salve is skeptical. 30% sounds too good to be true? i started with 1.5m in 2003. now my portfolio is 9m. it's not mutual funds, stocks or bonds. it's venture capital type of investments.

don't worry i don't use OPM. i use my own funds. i expect growth to slow down. there are now more funds than good investment opportunities.

Hey Salve nice continuation of our previous discussion! My stand is to BUY TERM, PROVIDED you have the discipline to regularly INVEST THE DIFFERENCE WITHOUT FAILURE. For P 1-M coverage costing P 5k/year term and P 12/k whole life, the game plan is to get term and optimize growth in the P 7k/year difference by (1) better-yielding investments, (2) no agent fees on the difference and (3) no 5% premium tax on the difference. Buy term is not difficult if you already invest regularly.

But for the majority it's easy to divert the P 7k to consumption, so cash value plans have a forced-savings element that will take investment concerns off your mind. Insurance also isn't an easy thing to buy and talk with an agent, that's why almost all sales end up in favor of cash value plans.

Investing does have its quantitative and behavioral components, and the latter cannot be entirely ignored. Buy-term is one classic example.

pinoy investor - I guess you have an appetite for risk! = ) venture capitalists are the sophisticated lot.

bottomline is high risk, high potential return or potential loss. If you are a low risk-taker, then expect potential returns to be relatively lower. (of course potential loss is lower as well)

CNBC's suze orman recommends term life insurance as well.

pinoy investor, i agree with flexy :). why dont you share with us how you got into venture capital investing? that's interesting :)

hi hachiko, the difference between term and cash value policies can go up to 50,000 plus, so if you can beat the insurance companies in their investing game, why not? :)

right on, salve! when it comes to substantial sums and estates, it pays to overcome that emotional aversion to insurance and agents, grab that investment bull by the horns.

PS most eligible for insurance: Kris Aquino and James Yap :D hehehe

Salve, this is a very good information! I never really knew what types of insurance is out there and what are options for me. Now, I'm thinking of buying a term insurance!

Hi salve, one of my apprehension in subscribing to "buy term invest the difference" approach in getting protection is the underwriting guidelines of insurance companies, buying term insurance continuously (as it would expire eventually) is predicated on my staying healthy and thus 'insurable, as we get older, conditions with regards to health and some other factors other than my financial capacity to afford permanent plans might change and this might put me in a position of not being able to buy insurance because of "un-insurability"

thanks

hi jeff, i agree. term insurance becomes terribly expensive as we age. Have you seen the rates? its unbelievable. And if you live to see 80, you won't be able to get insurance at all. It's true that by that time people's need for insurance has gone down, because ideally offsprings should be financially independent already. But, i converted to a whole life plan when cash flow allowed me to do so, precisely to avoid higher premiums as I age. As I said, this is not an either-or decision, that's what the literature says. There is no one type of insurance that's best for everyone, because everyone's situation is different :-).

hi nina, i missed your comments :-). i am not recommending you all buy term and invest the difference, nor am i recommending that to buy a cash value policy. I'm saying, understand first your cash flow and your needs. Both types can be a solution depending on your age, your budget and your needs. What's clear is to beware of someone who says its an either-or decision :-)

Nice article!

I too have a term insurance and it gives me peace of mind knowing I get .5M just for P110/month and
it will insure me until the age of 72!
Sounds good investment huh?
And the rest of my finances is diverted to other investments.

Hi everyone. I agree on all your insight above. How we just wish that we could refer to insurance agents that could really help us assess our situation and would not be bias with his/her own company of choice.

hi flexy, salve,
i'm not a real venture capitalist. real vc's invest in equities. my investments are quasi equity but legally structured as debt so it's secured and guaranteed. i used to invest in stocks and mutual funds but i find the return quite low. stocks and MF's are also risky because the return is not guaranteed.

hi pinoy investor. your portfolio appears to be very interesting. would that be structured notes?

as for jeff's comment, that's a very valid point. (I only thought of that when I read his post)

I agree that you should look at the fine prints. In general, premiums for term plans are cheaper on the younger years then become more expensive as we age. For whole life, premiums level so you're actually "paying more than what you have to" on your your younger years and "less than you ought to be" on your later years. Theoretically, total premiums for both cases should be the same. In practice though, it would depend on what age you started buying term and when you plan to terminate coverage. (Yes, ideally you should not have dependents on your senior years but then again, we're in the Phils! = )Also, look at the cash flow, do you have higher cash flow now or during your later years?

As for insurablity, there are term policies which have guaranteed renewability features up to a certain age. But then again, not all may have.

Lastly, it also depends on the purpose of getting life insurance. If it's income/lifestyle protection, maybe it would be better to buy term (considering the other factors I mentioned earlier). If it's for estate tax purposes, definitely whole life would fit the bill.

Just like Salve mentioned, it really depends on the situation. = )

This is a very good discusion! = )

flexy, i use secured promissory notes. it's in between debt and equity. higher yield than bank debt and lower risk than common equity. the security is more than enough to cover potential loss.

how can insurance save you estate tax?

Pinoy investor - thanks for the info.

Regarding life insurance for estate planning, it basically provides liquidity for the heirs.

An simple example would be: If I have P100M in assets, computing estate taxes (let's just simplify things by using 20% estate tax), I am anticipating that my heirs would need to pay around P20M in taxes. What I would do is get a life insurance policy with a coverage of P20M. The total premiums for that coverage would roughly be around 4 to 5M. I would then designate my heirs to be the beneficiaries of my policy. So, if ever something happens to me, my heirs would have P20M in cash to pay off the estate tax. In effect, my estate tax amounted to just 4 to 5% of my total assets. roughly an 80% reduction in estate tax.

Moreover, if I designate my beneficiaries as irrevocable, the entire P20M coverage will not be subject to estate tax.

Of course, there are also other tools to minimize estate tax. Some use a combination of donation, corporation, life insurance,

LIke what Salve has mentioned, it depends on the situation. It's not a one size fits all thing. = )

P.S. I think this should be on the Estate Planning topic. haha. = )

@pinoy investor

secured promissory note??? higher than bank dedbt? where & how can we avail of that?

I have a secured subordinate global notes with callable option earning 10%p.a for 5 years tax exempt...i thought i nailed it hehehe but seems pinoy investor was indeed an investor having that vehicle giving 30% return

can please expound more of that secured promissory note of your that earns 30% - what about the term of investment? was it Q? or Y?

thanks......

Well explained Flexy! In addition, there were many cases wherein the estate suffered "shrinkage" becoz of lack of liquidity. Heirs are therefore forced to sell properties at a lose in order to pay estate tax on time & avoid huge penalties & interest. And yes, cash value policies are the most appropriate for this purpose.

Wanabe, you can take a better bet on life insurance agents who are financial planners affiliated to a particular financial planning group (like RFP) because they are bound by their code of ethics. You’ll be able to tell naman if the agent is not biased, i.e., her thrust is not only life insurance. Let agents interview you & interview them as well, then take your pick.

One more thing, the extent to which we can perform our job well (help clients assess their unique situation, give an objective recommendation, etc.) depends in a way on how much a client is willing to be helped. What do I mean? A load of personal & family data is necessary for us to arrive at a good recommendation. But many are not patient enough to be asked a lot of personal questions. Many want shortcuts, and still expect a good evaluation. (Know what I mean?)

By the way, for me, an effective financial planner is one who has a good grasp of investment math & knows time value of money well, and has knowledge of most types of investment instruments, aside from life insurance. I have already sold term insurance, & still offer it on a case to case basis, & all other types of life insurance policies, incl.Variable life (an investment-linked life contract somewhat similar to mutual funds). Also mutual funds, pre-need plans, & healthcare plans.

Modesty aside, try me. (Salve knows me from our RFP class.) My contact #s are 0916-2554929 & 8242045. My email ad: angievilvar@yahoo.com.

Salve, you are very correct in saying that “there is no one type of insurance that’s best for everyone, because everyone’s situation is different.” I wud hav to say I really admire u for ur objective pt. of view. Daig mo pa ang ibang financial planning (supposedly) experts who preach “buy term, invest the difference” as if gospel truth, esp. American or foreign FPs. & aside from individual differences, there is also such thing as cultural difference. Iba ang investing & insuring habits/values/concerns ng Pinoy vs. Americans generally speaking kaya we shud be open-minded when we read books & articles of foreign source (Tee, take note).

For ex., iba ang taxation sa US. Iba ang yield/returns ng cash value policies dun, pati ang design, for ex. the endowment policies. Iba ang focus nila. Iba ang mabenta or in demand. For example…

What is presented here in Salve’s article is a choice between term & cash value policies. Cash value policies referred to here, I wud assume, are whole life policies. Hachiko, you observed that almost all sales end up in favor of cash value plans. Yes that’s true, but you might be surprised to know that actually, these are more specifically mostly endowment plans, not whole life! (& not necessarily just bcoz the agent pushed for it.) Most of us agents wud really rather sell insurance to meet the need for protection, but surprisingly, more clients really end up choosing endowment, which gives preference to return, rather than protection.

Ganyan ang Pinoy life insurance buyers, especially the Chinoys! Iba sa Kano. That is why, dear readers, after an agent has done a thorough fact-finding & feeling-finding interview, most of the time obvious na agad na term insurance is not an option for that client.

Actually, I believe hindi pa rin talaga ready ang maraming Pinoy sa “buy term, invest the difference”, if ever applicable nga sana sa kanya ito.

For one, many still lack the discipline to invest the difference. Tama si Hachiko, a cash value plans have a forced-savings element that will take investment concerns off your mind.

Second, many are already happy w/ the return of an endowment policy. (Before IC issued a mandate for life insurance companies to pull out this March policies which will no longer be viable in this present interest rate climate, we had policies with 9% return. As for Philamlife, the company I represent, these were replaced by policies having a 5 to 7% return, depending on the age, face amount, pay period, & riders.)

Third, many are still hesitant to step into a vehicle where the risk is borne solely by the investor.

Hi Angie, nice comments, you seem very competent in navigating your clients on the ins-and-outs of insurance, they should give you a ring :D At the end of the day insurance is a valuable service, and proper counsel and execution ought to get first priority over trying to get ahead financially thru buy-term. Yea, it's just so easy to spend, not invest, the difference!

My only advice is to be updated in changes in investing behavior of your Chinoy clients. For one, more are becoming aware of variable life (insurance plus fund shares) as an attractive alternative to endowments. And don't deny them the chance to buy-term when requested - just ask them for investment tips in place of commissions lost :D

Angie, thanks for your comments the insurance post. And yes, I've read your comments on the PERA bill. Thank you so much for your insights. They really help a lot of our readers.

hachiko, tnx for ur kind words. Licensed din ako sa Variable life. Rest assured i am an objective life insurance agent, being a financial planner. My clients, incldg. prospective ones, are well aware of my products & services portfolio coz I always gv them a listing which includes term/ cash value/variable life policies, nonlife, preneed, mutual funds, etc(even Salve got one from me during our RFP class).

I also have a flowchart that guides my clients on the type of plan that suits them. This way, sila ang nagdedetermine ng plan. (Kahit na nga pinagagalitan na ko minsan ng life insurance mgrs ko kc nakakiling daw ako sa investments).

I also offer written financial plans for a fee which recommend generic plans & programs. It is up to my clients if they want to buy from the #1 financial products & services provider (AIG-Philam Group) thru me.

I also regularly email them materials & articles on financial planning matters(insurance, investments, estate planning, taxation, cash flow mgt, retirement, etc). If they improve their financial savvy, I also benefit coz it becomes easier to "sell" to them & it feels soooo good when I get feedbacks how much those materials are indeed educating them & helping them a lot.

In fact, I even invite some of them to attend basic seminars in stock trading even if I am not a stock broker. The more they learn, the better we get to understand each other about financial planning. And when they become better planners & better investors thru my help, I feel good! Oh sooo good! Both of us!

(And I don't engage in pressure selling...d carry ng conscience ko!)

hi flexy, eulem, i just saw your comments now. been very busy these days.

@flexy. by getting life insurance, you create instant estate of 20m but you still pay estate tax. so don't buy insurance to save on estate tax. buy insurance to create instant estate whether or not estate tax is due.

@eulem. my notes are not off the shelf. i make them by negotiating with SMEs. it's like venture capital but using debt paper instead of equity.

pinoy investor - Thanks! That's right. you actually stated it more accurately. = )There is still estate tax due but it provides instate estate and liquidty so cash out would be lower compared to not preparing for it. = )

pinoy investor, insurance proceeds are tax exempt. It automatically goes to the beneficiary so it does not form part of the decedent's estate.

hi pinoy investor, what you are doing is very interesting. how do you choose the SMEs? how do you approach the management?

Hi Salve, mine are still thoughts. I'm thinking of getting an insurance but still shopping around what's best for me. The discussions here gave some me ideas. Thanks for great articles. I've read every single article and comment since Day 1. Subscribing to Google Reader ensures that I don't miss updates, new articles and comments. :))

nina, other readers: just last week i was talking with editor Joey Alarilla and he said moneysmarts is the head of the inquirerblogger network triumverate -- money, gadgets and girls. He said readers first read about money, to get the gadgets, to get the girls.

seriously now, what the editors find really amazing about moneysmarts is the number of readers who come back regularly. it means i am not talking to just passing readers here. isn't that great?? :)

hi nailbiter. yes insurance is tax exempt. i consider insurance instant 'estate' bec. it's part of the wealth that goes to the heirs of the deceased. if i want to leave 20m to my heirs and i don't have 20m in real properties. i just buy 20m life insurance and pay 4m premium. that's 16m of instant estate.

hi salve. i'm an entrepreneur myself so i know other entrepreneurs. it's word of mouth by people i deal with in the past and present. i choose businesses that are already profitable but need capital to expand. i stay away from startups. that's for the brave, the real venture capitalists.

Salve,

What would you recommend? Insurance from insurance companies or insurance from banks (bancassurance)? This is in light with the unstable insurance industry that we have. People still remember what happened to CAP, which was the most famous and the largest educ insurance provider back then, so I think it affected their views on other types of insurance as well. And can you post a topic on Insurance as a whole where readers can learn the different type of insurance, the pros and cons, etc? I'm quite amazed that there is a variable life insurance now where you can choose where to invest the premiums.

Pinoy investor,
I'm quite familiar with your scheme. even Colayco suggested this kind of investment. You can even become part of the SME and arrange for a portion of profit if you lend them a significant amount.

AngieV,
Do you do free profiling? Or how much do a financial planner usually charge? thanks

john, good question. Insurance products sold by banks and those that are not are under the same regulatory agency -- the Insurance Commission. CAP and other pre-need companies are not insurance companies, but they have similar operations that is why there are calls to make them answerable to the IC instead. Bancassurance of course adds some level of confidence to certain products because you would expect banks to do their due diligence before having a tie-up with insurance companies. However, these are not banking products they are selling and are thus, not guaranteed by the PDIC. I want to make that clear.

Excellent suggestion. Yes, I will write more on insurance topics. :-) MoneySmarts readers are always ahead of me hehe. I can hardly keep up! :-) Good to hear from you today, John.

Hi John!

The fee for the complete Personal Financial Planning Program which includes the written Plan depends on the complexity & extent of the case and the time required to complete the Program. An Agreement, specifying the scope of work expected from the FP and from the client is presented on the 2nd meeting for the client’s approval. A 50% downpayment is paid upon signing.

The complete Program requires not only an extensive fact-finding interview of almost all (very) personal data like all health, income, spending habits, or if there are any illegitimate children… but also includes a serious goal-setting exercise, a valuation of real estate properties, investments, assets & liabilities, and a review of important documents such as insurance policies, mortgages, debt statements, etc.

The complete Program I do covers only the ff. FP areas:
1. Cash flow analysis & Goal-setting
2. Risk analysis & protection planning
>life insurance
>property & casualty or non-life
>disability, accident & health
>memorial
3. Children’s education planning
4. Retirement planning
5. Investment planning
(Note: I do not do investment analysis, eg. fundamental & technical analysis)
6. Estate tax planning
(Note: For estate transfer & distribution concerns, I refer a lawyer-RFP specializing in this)
7. Basic Business Continuity Planning

However, in our experience, majority opt only for a single-need approach or a limited program. This involves only 1 or 2 areas of concern the client had specified for the FP to work on in the meantime. I have observed that a complete Personal Financial Planning Program is usually achieved over a long period of time, as the client goes through each life stage, working at one FP aspect at a time.

Some of the reasons I can think of why a single-need or limited program is at present being preferred over the complete program are: (1) because Filipinos are not yet used to disclosing very personal data; (2) they are overwhelmed at the bulk of work to be done like preparing documents, listing down expenses, and planning; (3) they cannot commit to the time required for them to be involved; (4) since FP is still a new concept which is just being introduced to the Filipino income-earner, many still cannot totally welcome the idea of getting financial planning advise from somebody else for a fee.

The fee involved in a single-need or limited program is of course much less than that of a complete program, but not necessarily more economical because you end up paying more if you add up the costs of all single-need programs. The cost again depends on the complexity of the case. But to give you an idea, for an hour’s consultation on retirement planning— helping the client plan out an investment portfolio for the cash build-up (or accumulation) phase and for the pay-out phase, according to his risk profile and situation, and working out the mathematics of how much to invest, how often & for how long, factoring out inflation and assumed rates of return, etc., for his expected amount of & duration of pay-outs— I would charge a min. of P1,000 (and additional P1,000 if a written Plan would be requested, to be sent to the client by email). I may opt to refund fees for a single-need or limited program, if a life insurance product (except single-pay policy) is purchased thru me.

If the client requested for the meeting, I would prefer to meet him at Philamlife in Alabang, Makati, Cubao, UN Ave., Manila, or at a mutually-convenient place depending on my itinerary for that day. He is not yet financially obligated during the initial appointment, but the agenda is limited to an introduction of the FP Program I offer and its scope of work, expectations, entertaining of some queries, other financial services I offer, the products I carry, and getting to know each other. On your query re “free profiling”, I wouldn’t want to carelessly say “Yes” coz you may have a different expectation of what “profiling” entails. (Just in case what you expect entails more “work” than I thought, I guess I can be very lenient if the coffee is good…hehe).

Re how much do FPs charge, FPs have not yet standardized their fees so our fees vary. Personally, I believe it’s hard to standardize fees because it would be difficult, for ex., to measure the complexity of a Plan since it is something relative. FPs also have different levels and fields of specialization.

Hope I was able to answer your query in full. If you wish, you may first interview me by phone at 824-2045 (R) or 807-4314 (O), but text me first what time & when you will be calling so I may confirm with you if the time is OK. God bless and more power!

Salve is right. The insurance products that banks recommend are actually plans of insurance companies. They just act as a distribution channel.

Salve is again right in saying that the big banks would only distribute the products of reputable and stable companies. If you're referring to pricing, it would generally be the same. Insurance companies do not want to minimize channel conflict among its channels.

So where to buy is up to you...ideally someone whom you trust, who can undestand your needs and give you the best solution. That's the beauty of it, you have more choices today. = )

oops, statement should have said that " Insurance companies WANT (and not DO NOT WANT) to minimize channel conflict...

Sorry Salve. My fingers are faster than my brain! haha!

INTERESTING! Hope more Filipinos buy insurance and increase their level of financial literacy.

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