A new twist to “Buy term and invest the rest”

Article 2-A new twist to “Buy term and invest the rest

What is “Buy term and invest the rest?”

The underlying concept of “Buy term and invest the rest” is to replicate an endowment policy into its investment and protection components at a lower costs and/or higher protections. The protection component is best replicated using term insurance, which covers the policy owners for death and total permanent disability (TPD) for a fixed time period. Term insurance has no monetary value at the end of the policy terms.

Why invest the “difference” in resale endowment? There are a multitude of investment instruments that the investor can choose from the crowded investment sphere such as units trust, shares, or bonds. Each instrument requires different amount of time and financial knowledge to analyse the investment risks and rewards. For small-scale investors with no inclination to monitor or to time the market, it is difficult to create and manage a diversified portfolio of equities and other assets.

Exchange-traded fund (ETF) and unit trust (UT) investment addresses the above concern as professional fund managers invest on behalf of the unit holders. The pooling of money from many unit holders will achieve both diversification and systematic selection of equities/bonds. In spite of its many advantages, a common pool investment schemes like many other investment instruments have a serious drawback that is not widely recognised, i.e. a sudden and dramatic decline of asset prices across all asset classes concurrently. Such a scenario is happening with increasing frequency in this high volatility environment. A sudden plunge in the asset values at a time when the investor needs to cash out the investment is going to be disastrous, and it is especially catastrophic for retirees who may not have the luxury of time to wait for the eventual recovery.

Resale endowment policies (REPs) is a synthetic endowment policy which combines the positive features of ETF and UT without the volatility associated with stocks. Similar to funds, the insurance company pools policy holders’ premium in a participating fund which is used to invest on behalf of the policy owners. Unlike ETF and UT, insurance participating fund have a unique feature of smoothing the return. Basically the profit earned during good years is held back to be added during years of poor performance, thereby ensuring a stable increase in the investment fund returns as opposed to the daily price fluctuations observed for stocks or ETF. Consequently the maturity date of the policy becomes less critical and the investor will not suffer any massive losses even if the policies matured during a market downturn.

Conclusion The term plus REPs option offer a flexible means for policy holder to self-insurance at a lower cost and achieve higher returns.  The synthetic endowment policies are simple to implement as there is a specialized company in Singapore dealing with REPs, and term insurance are readily available from any life insurance companies.

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