BTID is a good insurance and investment scheme if...

If your income is small or budget is tight, can you still avail insurance to protect your family and, at the same time, grow your money?

Aldrin, 43-year-old father with a wife and two children, wants to get insurance but his budget is limited due to normal living expenses, costs of education, and credit card liabilities.

A Variable Unit-Linked (VUL) product, which is a combination of insurance and investments, is over his budget since a 1 million coverage could cost him around Php 4,500 or more.

Is there hope for him to get insured and grow his money for future use (e.g. retirement)?

Yes, there is.

If you've been following online video and articles on financial matters, you must have come across the term BTID or Buy Term and Invest the Difference. It is a concept popularized by celebrity financial gurus in the United States like Dave Ramsey and Suzie Orman.

Many savvy advisors in the Philippines also promote BTID as an alternative to the popular VUL. Other advisors, however, argue that it is not for the best interests of the client.

You can even find articles online which show comparisons of VUL and Mutual Fund projections in ten or twenty years just to prove their point.

Remember, though, that...

projections are only based on PAST performances of an investment vehicle in the market.

Future investment returns in both VULs and Mutual Funds/Stocks are never guaranteed.

So, if you ask me, arguing which of the two is the better strategy is useless because both VUL and BTID are excellent ways to protect your income and grow your wealth.

The real question which you need to answer is this: Is BTID the right insurance and investment strategy for you?

After all...

the best financial strategy is one that is within your budget and is in line with your goals.

HOW DOES A BTID STRATEGY WORK?

BTID is basically buying the cheapest insurance product in the market - the Term Insurance - and investing the remaining money in managed funds (e.g. Mutual Funds, UITFs).

If Aldrin can save Php 2,500 every month, he can avail Sun Life's 5 Year Renewable Term Plan with Php 2,000,000 coverage and pay approximately Php 1,200/month or Php 14,400 for the first five years of his contract.

This gives him the opportunity to invest the remaining Php 1,300 in selected Mutual Funds or in the Stock Market.

Sounds cool, right?

Before you say YES, Term Insurance products have features which you need to know.

1. It is a renewable insurance product. This means, your plan will expire after a specified period (e.g. 1 yr, 5 yrs, 10 yrs). In Aldrin's case, he has to renew his policy after five years.

2. The premiums increase after every renewal. After the specified term, you can renew it for a higher premium. Here's a basic example of what happens as Aldrin continues to renew his policy.

YEAR 1-5 Php 14,400

YEAR 6-10 Php 18,300

YEAR 11-15 Php 25,900

YEAR 16-20 Php 40,000

By his 60th birthday, Aldrin would be paying Php 40,000 annually for his Php 2,000,000 insurance coverage. The premiums increase as the individual gets older due to health and safety issues.

You also need to know how Mutual Funds work. Read my article on Mutual Funds here.

NOW, IS BTID THE BEST FOR YOU?

It depends on your budget and goals. There's no clear-cut method to insurance planning and investing. We're different individuals, with different temperaments, desires and goals.

In my opinion, BTID can work for you if...

1. You have limited budget but need immediate income protection and want to start investing. Assuming that you're like Aldrin who can only save Php 2,500 every month but needs immediate insurance coverage despite limited budget, then go for BTID.

Later on, you can convert your term plan to a VUL plan with a fixed paying period once the funds are flowing in.

2. BTID can work for you if you have the time and discipline to invest funds regularly. Time and discipline are the keys to investing and growing money. If you don't have these, a VUL policy would be a better option.

Let's say your goal is long term investment and you opted to invest in Sun Life's Prosperity Philippine Stock Index Funds. After opening an account with the minimum Php 5,000, you should buy at least Php 1,000 worth of shares every month to take advantage of changes in the fund's NAVPS (Net Asset Value Per Share).

This method is called Peso Cost Averaging. Learn more about this strategy here.

In Peso Cost Averaging, you can arrange with your bank to automatically debit the Php 1,000 from your savings account of ATM. Just make sure there are available funds in your account before the scheduled pull.

3. BTID can work for you if you know how to grow your money in investments. Take note that in BTID, you do not have the luxury of fund management which is present in a VUL product. So, make sure you know the ins and outs of the investment vehicle/s you chose to grow your wealth.

Sa madaling salita, alam mo ang ginagawa mo.

Also make sure that your chosen term insurance product is enough to protect your income and cover taxes/liabilities in case you are untimely taken out of the picture.

4. BTID can work for you if you are willing to develop your personal discipline and knowledge on how to invest using the BTID method.

You may not have the discipline and knowledge now, but if BTID seems to fit your current financial situation or goal, go for it. Learn how to budget, save, and invest. Read books and credible articles online which teach about investing. You can send me a message for additional information on the BTID method.

SO, WHAT'S YOUR PLAN?

BTID is basically buying the cheap term insurance and investing the remaining money in a Mutual Fund or in the Stock Market.

This can work for you if you have limited budget but need immediate income protection and want to start investing, if you have the time and discipline to invest funds regularly, if you know how to grow your investments, or if you are willing to develop the discipline and knowledge needed for a BTID setup.

Thanks for reading my article. Send me a message for questions or request for an appointment by filling out the form below. It's always good to meet 1-on-1 to discuss your financial needs and plans. Also, feel free to put your comments below. I hope to hear from you.