Buy Term Invest The Difference (BTID), is that for me? Myth vs Reality

Maybe some of you have heard of “Buy Term Invest the Difference” from your financial savvy friends or from some financial blogs you follow. This post will not be like the comparison between term and whole life, or pros and cons between the two. This post is about knowing if BTID is for you. So read along before you jump into the bandwagon of BTID mentality.

This post is to help you have an informed choice, so just keep an open mind.

“Buy Term Invest the Difference” or BTID, meaning, buying term insurance over whole life policies and investing the amount you saved. This operates in the concept of the “Western Culture” which includes the famous financial gurus like “Suze Orman or Dave Ramsey” from America.

I have no objections to them if they say “Buy Term and Invest the Difference” as far as the USA or other countries are concerned. But for the Philippines, there are a few points you need to consider first before applying anything they say.

The following are their arguments on why BTID is better than buying a whole life policy:

Argument #1: “Just renew the term policy until the time comes that I don’t need it anymore”

“You don’t need to be insured your whole life.” – Dave Ramsey (American Financial Author).

I think Dave Ramsey may be right. If you live in the U.S., that is.

The importance of having life insurance coverage for life in the Philippines is a very important tool especially in wealth preservation. Life insurance is one of the simplest and cheapest ways to protect your accumulated wealth as we have discussed in this series:  (What is Estate tax and what it can do to you even after death?). Therefore, as long as you are building your wealth and you want your fortune to stay within your family, you need to protect it as long as you are alive.

FACTS:

• In some countries like Singapore, Taiwan and Hongkong, there is no such thing as Estate Tax. They already abolished it.

• The concept of the Estate Tax is, to redistribute the wealth of the rich. In the U.S., “Estate Tax is only applicable to the Rich,” the top 2% of the population get taxed with their estate when they die. Their Estate Tax is approximately 46% per property that is worth 5.3 M Dollars ($) or roughly 238 Million in Pesos per property. Meaning to say, if your house is around 200M Pesos only, it won’t be taxed, there.

• In the Philippines, as long as you have 200,000 Pesos net of estate after deductions, you will be taxed. Sadly, this is true; the law that made it that way has not yet been changed since the time they made it. Sure, 200,000 Pesos was bigger in the past, so, maybe also only the RICH get taxed that time. But today? You can have 200,000 Pesos and can still be considered poor. Let me give you an example. You are a poor farmer who inherited a 1 hectare property in the province worth 3M Pesos. You are not exempted from paying Estate tax when you die. This only signifies that, there is never in the lifetimes of the Filipinos that won’t be needing life insurance for life. If until the law in Estate tax will be changed, when it increases the tax exemption on estates or completely abolishes it.   See Estate tax table in this post.

• There are many complex and more sophisticated estate tax reductions or tax deferment procedures in the US that we simply do not have here. Steve Jobs the creator of Apple with a total net worth of $7Billion did not owe any estate tax liability. Imagine that if Steve Jobs is a Filipino, his estate tax liability here would be 20% of his total net worth (less his wife’s share). If he was a Filipino? His estate tax liability here would be 31 Billion Pesos.

Mr Aristides S. Merida, Jr. Of Wealth Management Center says, “Death and Estate Taxes are Permanent Problems in the Philippines. Term Insurance is a Temporary solution. You cannot solve Permanent Problems with a Temporary Solution.”

Argument #2: “I won’t have issues in Estate Tax in the future because when I get older, I will transfer my properties to my sons or daughters before I die.”

“An Inheritance quickly gained will not be blessed in the end.” – Proverbs 20:21

According to Atty. Angelo M. Cabrera, in his book – Thy Will Be Done, — “By its very character, an inheritance is designed to be a post-mortem transfer – an after death event. But people change the original intention of inheritance to suit their objectives, their tax-avoidance objectives.

As the verse says, the inheritance is not going to be a blessing. Not to the giver because he loses control. And neither would it be a blessing to the child or recipient, because wealth that is untimely and prematurely given can even destroy the child’s character instead of relying in his God-given abilities.”

The disadvantages of giving your wealth too soon are:

1. The problem of losing control of the property
2. Loss of possession and enjoyment of your own property
3. Articles 88 up to 104 of the Family code of the Philippines impose the “Absolute Community of Marriage.” The problem of losing the property to your in-laws if your heir dies ahead of you. Your wealth goes to your in-laws if there is no proper estate planning that was imposed during transfer and if there is no pre-nuptial agreement made before marriage. (Read more on this here.)
4. According to Atty. Cabrera, “The problem of making your sons or daughters prematurely rich. They may not rely on their own capabilities anymore. What would it do with their character?”

Certainly, there are ways how to avoid these complications, but a common Filipino may not have the resources to seek for proper estate planning advice and the ugly truth is, they may even get a wrong advice. Even some perceived experts give the wrong advice, (even some lawyers and accountants give the wrong advice). If these are not done the proper way, it could go all wrong.

Argument #3: “Graduating into your whole-life insurance”

Some BTID mentally operates in a way that, I will buy term now, then, when I have enough funds, I will convert it to a more permanent insurance.

This one, I think this a good idea, only if, you really do it as soon as you can. Life insurance operates in a way that, the premium is cheaper when you are younger and healthier. The main difference in Term and Permanent plan is, you lock in the price (premium) and health status when you get the permanent plan, insuring you will be paying the same premium for life. With term, the premium increases as you age, and there are some health status factors where in some companies, they won’t let you renew if you are diagnosed with an illness and there is also the problem of age limit. Some companies insure only up to age 65. What if you live longer than that and you became filthy rich? How can you preserve your wealth?

From the Financial Web, it says “Another disadvantage of this strategy is that it requires a great deal of self-discipline. Most investors do not have the discipline that it takes to be successful with this strategy.”

In other countries, where there are more sophisticated economies. Financial products also operate with more sophistication, making some term insurance products much better than what we have here. In some countries, they have some term insurance products that you simply have to pay for 10 or 20 years, and you are covered for life. It is like a Term insurance behaving as a Whole life Policy. That is really quite amazing. If we have that here, I will unquestionably have one for myself.

But in reality, in our country, where the economy just started progressing, financial instruments are not that sophisticated enough to offer better products. TERM Insurance products in the Philippines of almost all insurance companies are usually fixed for yearly or every 5 or 10 years, renewable term, changes premium every 5 to 10 years and when you reach the age of 65, the premium is so high you don’t want to renew it anymore or insurance companies won’t let you renew when you reach 65 or 70 because of age limit. That is why Term insurance is merely a temporary solution for temporary needs. It needs to be converted to a whole life policy the earliest you can, so you can lock in the premium to your age.

Argument #4: “If a life insurance agent sells you a permanent plan, or a VUL (Variable Unit linked Product), they are “not your friend” or they are misinformed.”

Are they really misinformed? Or the advisers of BTID (Buy Term Invest the Difference) are misinformed? By advising people in applying concepts that may not be that applicable in our settings?

The relationship between life insurance agent and his client operates in the realm of trust. It is not merely transactional, it is a relational. I believe life insurance agents have a noble profession. I believe it is a very dangerous advice to give to fellow Filipinos because you are putting “mistrust” between the agent and his client by saying the agent “is not a friend” or “misinformed” where the relationship between them should have been like in marriage “till death do they part”. And to even advise that to a Filipino audience that only has 6% of the population that are INSURED and 93% of those that are insured are UNDERINSURED. Actually, that is very dangerous. Filipinos might be doubting all the agents, giving them a permanent plan instead of a term plan. How can “Trust” be built?

To my fellow financial online writers:

We have to be objective in giving away advices online, and researching more comprehensively could do that. Unfortunately, there are many Filipino financial experts as they call themselves, that advice the “BUY TERM INVEST THE DIFFERENCE’” but do not know all the variables involve. I am not totally against it, but depending on who is doing it. That is why they need a personal financial adviser, expert enough that they trust that will guide them with their financial goal.

Giving comprehensive advice to a large online Filipino audience should be governed with more responsibility.

To those who are thinking of doing the BTID:

If you know how to invest your money on your own, then BTID may really work for you to maximize your investments, but you also need to see the whole picture as stated above.

Filipinos are so fascinated with western culture. So we try to adapt everything from them, from burger to pizza and even advices coming from them.   There is nothing wrong with listening to their advice, but we also have to be careful. We have to think if their advices are applicable in our own setting.

I will give you another example:

“2013, Robert Kiyosaki told people that Mutual Funds are lousy investments.”

I have 2 answers:

True!   More than 90% of Mutual fund companies in the US UNDERPERFORMED vs their US stock exchange index

False! More than 90% of Mutual fund companies In the Philippines OUTPERFORMED vs the Philippine stock exchange index.

I am not against BTID advice but again, it all depends on your financial goal.

What is your financial goal? What is the best path on how to accomplish it? Seek help.

Kindly seek a good and trusted financial adviser or consultant who will also be objective in helping you achieve your goals. All your financial goals should be align to your objective.

To my fellow financial advisers:

We carry a responsibility to our clients in guiding them so that they could reach the dreams they have crafted for themselves. Be responsible enough to learn your craft and know how to give the best possible instruments suited to the needs of our clients.

“Plans fail for lack of counsel.” – Proverbs 15:22

“Listen to advice and accept instruction, and in the end you will be wise.” – Proverbs 19:20

Be informed,

Do you have any questions? Contact me here!

Read more here:

• TERM Life insurance, the Cheapest Life insurance Ever!
• What is Estate Tax and How it can hurt you even After Death?Part 1 of Estate Planning 101

• Investment Scams: How Not to be a Victim?
• Why are Most Filipino Doctors not RICH? Top 5 Obstacles Keeping Filipino Doctors from Becoming Wealthy
• The Top 10 Life Insurance Companies in the Philippines The Most Updated and Most Unbiased Review

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Pinky De Leon-Intal, MD, RFC

Doc Pinky is a licensed Medical Physician, Internationally Registered Financial Consultant, Certified Investment Solicitor and Associate Wealth Planner and Estate Planner of the Philippines. She loves to educate and spread financial literacy. She is a Lactation Consultant. She loves to travel. She is a devoted wife and mother.

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