Should I use the “Buy Term, Invest the Rest” strategy?

Learn more about “Buy Term, Invest the Rest.”

Life Insurance

Investment Insights

<p>When it comes to investment and insurance strategies, there are different routes that people believe in and opt for. The final decision is often influenced by individual circumstances and factors such as income, financial goals and needs. One common strategy you have probably heard is “Buy Term, Invest the Rest”.</p><h2>Keeping cost of wealth protection low (“Buying term”)</h2><p>Essentially, insurance is for wealth protection. In the unfortunate event of your death, disability or terminal illnesses that would deprive your family of a source of income or create an additional financial burden, insurance protection would deliver a payout that could alleviate the financial stress at that time. This would protect your current wealth and the future wellbeing of your loved ones.</p><p>In the market, there are two main types of plans which provide such coverage, generally known as term life and whole life plans.</p><p>The concept of ‘Buying Term’ is as literal as choosing to buy term life insurance, over other options of life insurance coverage. By doing so, you pay less in premiums for your life insurance coverage.</p>

<p></p><h2>Having the flexibility of funds for wealth growth (“Invest the rest”)</h2><p>The key differentiator between term life and whole life insurance products lies in its investment function. For term life, there are no returns besides its coverage. For whole life insurance, returns can come in the form of cash value or sometimes dividend payouts, subjected to the performance of the insurer’s investments. These policies have a guaranteed and non-guaranteed component that is stated in the policy details.</p><p>Whole life insurance products are hence commonly recognised as a hybrid insurance-investment product. If you decide to get a whole life insurance policy, you should be expecting that the cash value growing over the years will be greater than the total amount of premiums paid over the years. As there is no free lunch, this cash value is funded by the additional premiums paid for whole life insurance. To better manage their wealth, more retail investors are trying to get the same coverage at lower cost, which makes “buy term, invest the rest” a popular option.</p><p>Investments are essentially for wealth growth. The investment objective is to reach financial goals at various stages of your life and help you plan for retirement. With more money available from the premiums saved by buying term insurance, you are able to start investing earlier. The earlier you start, coupled with the power of compounding interest, you can enjoy a longer time horizon for your portfolio to grow.</p><p>Instead of combining your investment with insurance through whole life policies, separately investing also gives you more flexibility when growing your money.</p><h3>No lock in period</h3><p>Firstly, the investment period is at your own discretion. Unlike whole life insurance where you have to commit to the entire policy duration, term insurancehas no lock in period. As long as you’re paying, you will be covered. Similarly, investing separately gives you the flexibility to decide if you want to stay invested. Anytime you wish to invest more money, you can. Anytime you wish to stop your investment, you can liquidate it as well.</p><h3>Low cost</h3><p>Secondly, the built-in cost of investing into a whole-life policy is likely to be higher than that of a buy term invest the rest strategy, an insurance company has to price in distribution, agent’s commission and investment cost into the whole life policy. These costs are often high and may not be obvious to you. Compared to buying a term insurance policy online and/or investing yourself, the cost of having a whole life policy is higher. Moreover, whole life insurance often charges a fee to manage the investment for you. Since it is combined with insurance coverage, it becomes complicated and difficult to account for the investment expenses you spend on whole life insurance.</p><p>Hence, by buying term insurance and investing the premiums saved, you can opt for low-cost investments options, such as investing in unit trusts or ETFs. This puts you in a better position to reap the best potential returns.</p><h3>No penalties upon withdrawal</h3><p>Thirdly, your financial circumstances may change anytime. Whenever there is a financial emergency, you can stop your investment and liquidate your funds without losing to penalties or termination charges, while keeping your insurance coverage. Unlike whole life insurance where you may have to take premium holidays to escape the hefty premiums or surrender chargers, you have the flexibility to cease your investments anytime you need.</p><p>Similarly, renewable term life insurance allows you to cease your coverage anytime and renew if you wish to be covered thereafter.</p><h3>Choosing your investment strategy</h3><p>Fourthly, you can choose the investment strategy that suits your personality and lifestyle. With various platforms such as online brokerages or a digital advisory platform, you can decide if you have the time to take investments into your own hands or leave them to a wealth platform. Choosing between depositing a lump sum or setting up a fixed amount to deposit every month — also known as dollar-cost averaging (DCA), also depends on your financial circumstances and preferences.</p><p>Regardless of the investment strategy you choose to employ, it is encouraged to give yourself exposure to different asset classes and diversify to reduce risks. Hence, instead of investing through the insurer from a whole life policy, getting term life insurance and investing the rest allows you to diversify your investment portfolio.</p><h2>Is this the best strategy for everyone?</h2><p>Regarding personal finances, there is never a one-size-fits-all method. As a rule of thumb, there are 3 main areas that you can look at to decide if the “Buy Term, Invest the Rest” strategy will best serve you for years to come.</p><h3>Protection needs</h3><p>If you’re concerned about coverage at old age — like 99 years old, you’ll have to consider a renewable term life plan or whole life plan.</p><p>However, if you’re looking for protection over a fixed duration due to your priorities, having a fixed term instead of whole life coverage could be more suitable for you. Buying term insurance at the lowest premium leaves you more money available for investment, while maintainingsuitable protection at various stages of your life.</p><h3>Financial goals</h3><p>Everyone has differentfinancial goals. On top of wealth protection, it is important to generate investment returns for wealth growth to reach your goals. With the amount you save from getting term life instead of whole life, it can significantly generate more available cash for investment.</p><h3>Investment risk appetite and knowledge</h3><p>Assuming you have bought a term life plan and bagged some savings, the next big question is then how you can have those savings work harder for you.</p><p>If you are able to take up some level of risk to grow your money even more, investing with wealth platforms would be a great option. It offers convenience, expert advice on portfolio management and access to world-class funds. You can simply choose your portfolio and risk level that best suits you while still having your funds managed for you.</p>

<p><span>The above information is provided by FWD Financial Limited ("FWD Financial") for reference and educational purposes only. It does not constitute an offer to buy or sell any insurance products outside of Hong Kong. Before purchasing any insurance product, you should understand your needs and affordability, read the policy carefully, and select suitable product. FWD Financial is an appointed insurance agency of FWD Life Insurance (Bermuda) Company Limited (incorporated in Bermuda with limited liability) (“FWD Life”). FWD Financial, FWD Life, their subsiding companies or their respective directors or employees make no express or implied representations, statements or warranties as to the accuracy, completeness or suitability for any particular purpose of the information provided. In no event shall FWD Financial, FWD Life, their subsiding companies or their respective directors or employees liable in any way for any consequences resulting from the use or reliance upon this article, and shall not incur any legal liability (including third-party liability). Users should evaluate all the information contained in this article and seek independent professional advice.</span></p>

【BTID】一文了解您適合「差額理財」嗎？| Should I use the "Buy Term, Invest the Rest" strategy?

Can I use “buy term, invest the rest” strategy? | FWD HK

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How do rising interest rates affect property buying and mortgage loans?

<p>With the recovery of the US economy together with rising inflation, the US Federal Reserve has tightened their monetary policy and announced the start of an interest rate hike cycle. The Fed announced a 0.75 basis point interest rate hike on 15th June, with the expected eventual interest rate to range from 1.5% to 1.75%<sup>1</sup>. This hike in the US interest rate will no doubt have an impact on central bank interest rates and financial markets across the world. How will property prices be affected by this interest rate hike? What will this mean for the mortgage ratees and the property market?</p>
<h2>The largest interest rate hike by the US since 1994</h2>
<p>The Federal Reserve said that the US unemployment rate has remained low in recent months and job growth has been strong<sup>2</sup>. Additionally, energy prices have increased due to international events, and inflation also increasing due to tariffs and other factors<sup>2</sup>. In hopes of countering inflation, the Federal Reserve has hiked interest rates<sup>3</sup>. The latest US Federal Reserve's interest rate hike of 0.75 basis points is the largest since 1994, and it is also expected for interest rates to be raised to 3.4 basis points within this year, 1.5 percentage points higher than forecasted<sup>2</sup>.</p>
<h2>How will the US interest rate hike increase the cost of homeownership?<sup>4,5</sup></h2>
<p>Several financial institutions believe that with the increase in US interest rate, many banks may have the opportunity to increase their prime rate based on their own funding cost structure, which may eventually affect the borrowing costs of citizens or investors.</p>
<p></p>
<p>Those interested in buying a car or a home and do not think that the interest rate hike would affect them, may currently be overlooking the potential impact of the rate hike. They should evaluate their ability to afford the impact of the rate hike and check whether banks have increased their loan rates in the past due to the rate hike.</p>
<p></p>
<p>Buying a house involves taking on large amounts of mortgage loans, coupled with a long repayment period, even slight changes in interest rates can affect affordability. Therefore, whether you are planning to buy a home or a car or financing your home through a mortgage loan, the increase in interest rate may affect your property and mortgage plans. It is essential that you carefully evaluate and manage the relevant risks. If you decide to finance your homes with floating interest rate mortgages, do pay extra attention to changes in mortgage interest rates.</p>
<p></p>
<p>When it comes to the property market, interest rate hikes are not the only factor affecting the market. Other important factors include the current housing supply, overall market sentiment and economic development. Thus, we cannot make a general assumption on the direction of the property market based purely on changes in interest rates.</p>

<h2>Should you choose a fixed interest rate mortgage during an interest rate hike cycle?</h2>
<p>In a low-interest environment, choosing a fixed interest rate mortgage may give a lower interest payment. Even if the market rate increases due to tight market funds, it will be more attractive as there is a locked-in interest rate cap to provide protection. During an incoming interest rate hike, there is a probability that the interest rate cap on fixed-rate mortgages will follow the increase in variable-rate mortgages. In theory, choosing a fixed-rate mortgage can help to hedge against the risk of increasing interest rates. However, if there is no significant interest rate hike during the mortgage repayment period, those who choose a fixed-rate mortgage may end up paying more interest than those who choose a variable-rate mortgage.</p>
<h2>Plan carefully before buying a property</h2>
<p>Buying a property is a significant milestone in life, and thus we should consider carefully before making any decision. It is important to anticipate how to deal with uncertain scenarios. Changing interest rates and financial environments are only a small part of it. Once you meet with an unexpected situation, such as losing the ability to work or even passing away, have you thought about how to handle the property which has not been fully paid off yet?</p>
<p></p>
<p>Purchasing a life insurance policy can be one of the ways to counter such expected scenarios. The life insurance policy can provide financial support to your family members in the form of a lump-sum death benefit. This lump-sum cash can then be used to pay off any remaining mortgage, preventing it from becoming an added burden on your family members, and can help to avoid the financial struggles of losing a loved one.</p>
<h2>Factors to consider before buying a term life insurance policy</h2>
<p>There are many types of term life insurance policies available in the market, here are some factors you should consider before deciding:</p>
<ul>
  <li>The premium and amount of coverage</li>
  <li>Terms of the plan and any relevant sales documents</li>
  <li>Renewal period of the policy</li>
  <li>Cooling-off period for the policy</li>
</ul>

<p></p><ol><li>Source: Federal Reserve Board of Governors, "<em>Open Market Operations</em>", 2022</li><li>Source: Federal Reserve Board of Governors, "<em>Transcript of Chair Powell's Press Conference</em>", 2022</li><li>Source: Federal Reserve Board of Governors, "<em>Federal Reserve issues FOMC statement</em>", 2022</li><li>Source: HK Monetary Authority, "<em>Q&amp;As on impacts of the US rate hike and global financial environment on Hong Kong’s financial stability and monetary market</em>", 2022</li><li>Source: Investor and Financial Education Council, "<em>What is holding off the rise in Hong Kong's interest rate?</em>"</li></ol><p>The above information is provided by FWD Financial Limited ("FWD Financial") for reference and educational purposes only. It does not constitute an offer to buy or sell any insurance products outside of Hong Kong. Before purchasing any insurance product, you should understand your needs and affordability, read the policy carefully, and select suitable product. FWD Financial is an appointed insurance agency of FWD Life Insurance (Bermuda) Company Limited (incorporated in Bermuda with limited liability) (“FWD Life”). FWD Financial, FWD Life, their subsiding companies or their respective directors or employees make no express or implied representations, statements or warranties as to the accuracy, completeness or suitability for any particular purpose of the information provided. In no event shall FWD Financial, FWD Life, their subsiding companies or their respective directors or employees liable in any way for any consequences resulting from the use or reliance upon this article, and shall not incur any legal liability (including third-party liability). Users should evaluate all the information contained in this article and seek independent professional advice.</p><p></p>

【美國加息】香港跟隨美國加息！按揭供樓要留神 | How interest rates affect property and loans

How interest rates affect property and loans | FWD HK

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