My colleagues and I were having a short discussion today and the topic of “Buy Term And Invest The Difference” strike us and we were asking each other the trend of most people coming to us in terms of getting a protection plan and/or a savings/investment plan.
And this is what we are noticing…
Buying Term Insurance
With the economic crisis and the fall of a “Mountain”, everyone is picking up the idea of picking up the buying term insurance because:
- Firstly for a low premium, you are getting a higher sum assured as compared to a whole life plan with cash value but lower sum assured.
- Secondly in such crisis, should there be any potential fall of a giant again, the impact of terminating (which is not recommended) a term plan as compared to a whole life is lesser. If your Whole Life Plan has not even break even yet, and you decide to give the plan up, you are losing money at least 5-6 times more as compared to money spent in a term insurance.
Because of the current crisis, many people started to appreciate the benefits of a term insurance.
Investing The Difference
When we introduce the concept of getting a term insurance, we’ll also recommend our clients to invest the difference (the remaining premium after taking account the difference of the premium that should have gone into a whole life plan and instead a term plan) into an investment-linked fund.
Especially with the current market situation, with the fund prices going down and down, this is the best time to park your lump sum money or using the dollar cost averaging concept to go into monthly investment to chalk up all the units. The benefits are that:
- For Lump Sum Investment
You buy into the low fund prices and once the economy picks up in a few years, you break even faster and going into profits faster as compared to normal time.
- For Dollar Cost Averaging
You chalk up more units now with the same dollar in good times. With the market going down for the next years, you can be sure of getting lots of units on hand to be released for faster profit when the economy picks up.
If you understand the above concepts well enough, you are a true believer of “Buy Term and Invest The Difference”. You will be one of those who will be successful enough for a very good retirement and also to really achieve whatever dreams and goals you want in life.
But What We Are Actually Noticing, Hurt Us!
We are happy that people are noticing the benefits of a term insurance but when it comes to investing the difference… Instead of seeing people trying to gain from the low fund prices we are noticing (that’s hurting):
Those Who Are Already With Some Investments
Fund prices are going down, which means for those who have some investments already, should actually pump in more money. But rather, we are seeing clients’ heart going down and head shaking harder, trying hard to convince themselves to continue with the investments. Those, who are weak-heartened, would rather suffer the loss and terminate their plan.
Let me give you a good scenario why this is a good time to pump in more money when the fund prices are low:
Imagine that you bought into a fund at $2 and in order to profit, you need the fund prices to be above $2. When the market goes down to $1 and you buy into it with the same initial amount, the average of the two fund prices is $1.50. So should the market decide to bounce back to $2 – you are already in profit of $0.50.
Those Who Are Deciding Whether To Go Into Investments
When the fund prices are low, it is always the best time to go into the funds. First and foremost, we are not talking about individual stocks of any company but rather a fund that consists of many different stocks.
But the clients that we manage to talk to, are skeptical of the market and personally feel that the market will hit rock bottom and every companies will crash. Therefore they are hesitant to go into investments.
My advice is to actually study what does your desired fund consists of and decide for yourself the possibility of having more than 50% of the companies going bust. Only then will the funds hit rock bottom.
So are these people trying to wait for the current low fund prices to rise up, remain stable for the next few years before going in and just enjoy the smallest profit whereas those go in at the low and exit at the high enjoy the biggest profit?!
How About Endowment Saving Plans?
With the fall of the “Mountain”, many, not all the people, are skeptical of the other companies. Many would rather wait for the whole saga to blow over, calm down and remain peaceful before committing. And based on our experience, this may take up to a many months or even a few years.
In Summary
If Savings and Investing are important factors in your personal financial planning, which should be started as early as possible but because of the many economic factors that are hindering you, you decide not to go ahead but wait. By the time you are ready, how old will you be? Do you have enough time to let time make your money work harder? You decide…
