Buy Term Invest The Rest vs Whole Life (Explaining The Numbers)

Daniel Lee
Feb 11, 2022
6 min read

Updated: May 23

Whenever it comes to life insurance, the most common question that clients would ask is: “Which is better for me? Buy term invest the rest or a whole-life plan?”

In this article, I would like to walk you through the numbers behind these two strategies so that you can have a better understanding of the quantitative behaviour of each of these strategies and find out which strategy is better for you.

Bear in mind that we're isolating these two instruments for comparison without the consideration of the reason you are looking for coverage in the first place. As such, the findings should not be blindly applied when it comes to designing your portfolio.

What is Buy Term Invest The Rest (BTIR)?

Before we delve into this topic, let me just take some time to explain what the Buy-Term-invest-The-Rest strategy is all about.

Buy-term-invest-the-rest is a strategy in which you spend a fraction of your budget on term insurance and invest the difference instead of spending the entire budget on whole-life insurance.

The common understanding is that if we were to invest the differences instead of utilizing the entire budget on whole-life insurance, we would be better off, as the returns from the buy-term-invest-the-rest approach would be higher than the returns from whole-life insurance.

Parameters for comparison

To facilitate this analysis, here are the parameters that were used for this comparison.

Profile of life assured:

25 Years Old
Male
Non-smoker
Admin Job

Coverage Breakdown:

Death: 500,000
TPD: 500,000
ECI: 375,000
LCI: 125,000
Wholelife Multiplier: 4x
Multiplier drop off: Age 75
Term life expiry: Age 75

On the topic of deriving the coverage/value

Pay-out Receivable = Sum Assured + Portfolio Value
Total Cash Value = Surrender Value + Portfolio Value

On the topic of calculating the portfolio projections

Portfolio value = Total Invested Amount + Returns
Investment Budget = Whole-life Premium - Term Life or Whole Life Premium
RSP duration = Till age 75 years old (when term life expires)
Investment duration = Till age 99

With that out of the way here are the findings.

Findings on Pay-out Receivable

For starters, let us take a look at how much will we receive in an event of a claim. For context, the total payout receivable would be the sum of the insurance coverage receivable PLUS the estimated investment portfolio value.

From the angle of coverage, here are the findings:

BTIR approach offers higher coverage as compared to Whole-life before the age of 75 due to the investment value that accumulates from the free cash flow invested over time.
Beyond the age of 75 (or when the term life expires), a whole-life plan will offer a higher total coverage for the majority of the duration if your return rate is less than 4% annually.
Should your return rate be more than 4% a year, a BTIR approach will offer a higher total coverage throughout the duration. However, for any return rate below 4%, you'd have been better off with a whole-life plan approach.

Findings on Total Cash Value

The next thing we will look at is the surrender value. For context, the surrender value would be the sum of the estimated cash value of the insurance policy AND the estimated investment value.

From the angle of coverage, here are the findings:

For a return rate of less than 4%, the BTIR approach will offer a higher portfolio value in the earlier stages, mainly due to the investment value that accumulates from the free cash flow invested over time. However, in the middle stage, the total cash value of a whole-life plan will far exceed that of the BTIR due to the contribution from the cash value that is compounded over time alongside the investment value that accumulates now that the whole-life plan is fully paid for.
Beyond the annual return of 4%, the BTIR approach will provide a higher total cash value throughout the entirety of the duration.

Summary of findings:

All things considered, this is the summary of the findings for both the behaviour of the payout receivable in an event of a claim and also the behaviour of the surrender value for both approaches.

From a pure quantitative standpoint:

The whole-life insurance approach will be better if you are unable to deliver an annual return of 4% consistently over a long duration of time.
The BTIR approach will be better if you are confident that you can deliver an annual return above 4% consistently over a long duration of time.

Additional considerations & personal stance

Despite being fully capable of earning a return of more than 6% per year, I would still prefer to use a whole-life plan to act as the foundation of my insurance portfolio and provide for my long-term coverage needs.

The reason for saying so is because:

To achieve a 4-6% return a year, I will need to take on additional risk that, chances are, is higher than the risk of the return of a whole-life plan. From a risk-adjusted standpoint, I believe that a whole-life insurance plan would make more sense.
I prefer to keep my insurance and investments separate in a sense whereby the efficacy of my insurance strategy is not reliant on my investment performance.
Having lifetime coverage is increasingly becoming from a want (legacy purpose) to a need (alternative healthcare financing) as the hospitalisation insurance continues to get nerfed as it did post-COVID with health care inflation being increasingly an issue. This is expected to worsen as the nation marches into the future with an aging population problem. As such, having a lifetime coverage provides us with the buffer and option to provide for our future healthcare financing in the areas that the hospital insurance does not cover.

Furthermore, on the topic of returns and risks, while in theory, earning 4, 6, 8 or even 10% a year seems very doable. In practice, it is not as easy as it seems to be because of discipline and emotional factors that may impede your performance.

In reality, there are pockets of time in history where the market returned 0% over 15 to 20 years, which for the majority of us is the only duration we have to invest as aggressively as we are when we are still young.

As such, unless you have a clear strategy and skills to navigate and deliver a consistent return regardless of the market conditions, you are probably better off with a whole-life plan approach instead of compounding your risk with a BTIR strategy.

Furthermore, as an investor practitioner, choosing a whole-life plan instead of BTIR allows me to keep my insurance and investment separate.

This ensures that the quality of my decision-making process will not be impacted during tough times because the last thing you want for yourself is the constant thought that if your investments fail to perform, both your insurance and investment strategy would have been compromised.

Summary

At the end of the day, I think what matters the most is that you understand what the benefits and risks are for each strategy before you commit to either one.

You should also take into consideration how your decision in your insurance planning would affect other areas of your financial planning such as investment, children's education and retirement planning.

Do take into consideration of qualitative factors as well as determine which strategy will be more suitable to you from a holistic financial planning approach.

All of these can also be found in my eBook: “The Price Of Financial Freedom” which will provide you with a comprehensive guide to help you achieve financial freedom and live life on your terms in the shortest amount of time.

You can download a copy of it for free on my website:

If you do not know how to get started with your financial planning or if you do not have the time to manage your finances or do the necessary market research, you can consider engaging an Independent Financial Advisor who can help you make sense of the market, accelerate your progress and achieve financial freedom by 5 to 10 years earlier!

To find out more information about how you can benefit from my financial and insurance planning services, you can check out what I do on my website here: