BTID or “Buy Term and Invest the Difference” is a strategy that some investors are recommending. But like everything else, there are pros and cons to this strategy. Learn more about BTID and how it works with the help of this beginner’s guide.
What Is BTID?
In simplest terms, “Buy Term and Invest the Difference” or BTID is a strategy wherein you determine how much you’re willing to set aside every month for investments. From that budget, deduct your term insurance cost, and then invest the difference in different investment instruments like stocks, mutual funds, UITFs, etc.
One of the main beliefs of BTID practitioners is that you will reach a certain age or point in your life when you will not need insurance anymore. Hence, they advocate for term insurance instead of whole life insurance or VUL.
BTID vs. VUL: What’s the Difference?
BTID believes in separating your life insurance from your investments. On the other hand, with VUL (Variable Unit Linked or Variable Universal Life), your investment and insurance are in just one instrument. All you have to do is pay the quoted premium. This premium is then invested, and the insurance company will get the insurance payment from your investment.
A lot of life insurance agents push for VUL as it is admittedly the easiest way to “invest”. You only need to pay the premium on the due date and the insurance company will handle the investment and insurance on your behalf.
BTID vs Self-Insurance: What’s the Difference?
BTID recommends buying term insurance from a reputable insurance provider. With self-insurance, you’ll cover your own insurance needs with your own money. This strategy is best for people who have already accumulated enough wealth that they can cover the costs of any medical emergency that may arise. If you already have at least Php 2.5 million of liquid investments, self-insurance is something you can consider.
Why Choose BTID?
BTID is for anyone who has self-discipline. It does not matter if your monthly investment budget is 1,000 or 100,000. What is important is that you have the discipline to set the money aside to be invested and to ensure that your insurance is regularly paid.
BTID allows you to grow your money faster. This is especially true for the first few years of the policy. When investing, especially in stocks, mutual funds, and UITFs, you can check the status of your investments daily and see the effects of the ups and downs of the market on your investment. In the first years of your VUL, you will see a huge chunk – if not all – of your premium going to initial insurance charges, instead of your investment. A lot of BTID proponents cite this reason as to why they do not like VUL.
BTID gives you more control of your money. With initial insurance charges deducted, VUL policies will not have good investment returns in the first few years. It definitely cannot compare to the investment growth of BTID practitioners. So, in the first 3-6 years of your policy, if you suddenly have an emergency and you need access to some funds, your VUL will not be able to help you.
How To Buy Term and Invest the Difference: A Step-by-Step Guide to BTID
You will not go into battle without a gun, right? When it comes to investing, knowledge and continuous learning serve as your weapon and ammunition. It will help you avoid scams, deal with your insurance agent and stockbroker, and help you create a good financial plan to reach your goal.
2. Set a budget
How much are you willing to set aside per month for your investment and insurance? You can invest more than the budget you set but ensure that you do not invest below your set amount.
3. Find an insurance agent
There are two kinds of life insurance agent licenses, one is for VUL and the other is for traditional policies. Not all agents have both licenses, so make sure that the agent you’ll deal with has a traditional life license.
4. Get a term insurance policy
Some policies are renewable yearly, while others are renewable after 5, 10, or 15 years.
There are a lot of investment instruments in the market today. You can invest in stocks, mutual funds, UITFs, or Pag-IBIG MP2. You can also start a business, buy a rental property, and others. Make sure you diversify your investments and avoid get-rich-quick schemes.
What Are the Common Mistakes of BTID Investors?
1. Not buying insurance
A lot of investors who adopt this strategy tend to forget the first two words: Buy Term. They get so excited about seeing their money grow, they forget that they also need a safety net in case something happens before they’re able to build wealth.
2. Not investing regularly
One of the biggest challenges in BTID is that no one would remind you to invest. Not investing regularly means you won’t be able to reach your financial goals on time.
3. Not having a goal and a plan
As Stephen Covey once said, “Begin with the end in mind”. Therefore, the first thing to ask yourself when starting your BTID journey is ‘Why are you investing?’
Do you want to retire comfortably? Do you want to retire early? Do you need capital and buffer to start a business? Do you want to leave your kids a huge inheritance? If you don’t know why you’re investing, it will be harder to keep going through rough times.
4. Not reading about different types of investments
Being ignorant about the different kinds of investments you can get is as dangerous as not investing, sometimes even more so. Pouring your hard-earned money in investment instruments you haven’t fully studied makes you vulnerable and prone to fall for investment scams.
Frequently Asked Questions
1. I already have a VUL plan, should I cancel it to start my BTID journey?
The answer depends on why you got your VUL plan. If you got a VUL for investment purposes (i.e., education plan, retirement plan, etc.), it might be time to re-evaluate if it’s still worth continuing your VUL. If, however, you got your VUL for financial protection, it is best to keep your policy and maybe just get another term policy to close your insurance gap.
2. Where should I invest first? Mutual funds, stocks, UITF, Pag-IBIG MP2, or others?
For investment newbies, mutual funds and UITFs are the best instruments to invest in because you get all the benefits of a VUL without locking your money for a period of time. You can invest as little as Php 1,000 and your fund manager will be the one to manage the fund and make it grow.
3. How do I compute my retirement needs?
The general rule of thumb is that you compute how much you spend annually and then multiply it by 251. This formula gives you the leeway to withdraw 4% of that amount every year without running the risk of outliving your retirement fund.
4. What are considered investments? Can I consider real properties like land or our house and lot an investment?
Although cars, land, houses, and condos are considered assets, in investing, an asset is something that generates income. For land, houses, and condo properties, it could be rented out. For vehicles, it can be used to transport goods for your business. If your real properties do not generate income, it is considered an expense.
5. How much should I budget for insurance and investment?
Your income is regularly divided into three: Savings (and debt repayment), Needs, and Wants. There are a lot of “rules”2 suggesting how you should divide your money but almost all of them agree that 20% of your salary should be saved.
6. Can I use my investments for estate planning?
In terms of estate planning, your assets will typically be frozen until your heirs pay the estate tax and necessary bonds. This is normally the point where life insurance proceeds will be beneficial so that your heirs will not have to shell out their money to get their inheritance. However, with the new TRAIN law in effect, your heirs can now withdraw the money you have in the bank though it is subject to the 6% final withholding tax.
7. When is the best time to start BTID?
The best time to start your BTID journey is after you’ve read up on the pros and cons of the strategy and are convinced that it is the right strategy for you. It is always best to start saving and investing when you get your first salary.
- Pant, P. (2020). How to Calculate How Much You Need to Retire. Retrieved 28 April 2021, from https://www.thebalance.com/how-to-calculate-your-retirement-needs-4061547
- Whiteside, E. (2020). What Is the 50/20/30 Budget Rule?. Retrieved 28 April 2021, from https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp