“Buy term and invest the difference” is a simple yet powerful piece of advice you will hear from many financial experts. The phrase relates to investing with life insurance and encourages consumers to stick with a straightforward term life insurance policy over a risky, investment-backed whole life or universal life policy.
With term life insurance being one of our main areas of expertise, JRC Insurance Group is a strong proponent of the “buy term and invest the difference” school of thought.
In this article, we’ll explain why it’s best to keep your life insurance and investments separate, and also provide you with a roadmap to finding an affordable term life policy.
Quick Article Guide:
1. What is Term Life Insurance?
2. What is Whole Life Insurance?
3. What is Universal Life Insurance?
4. Dangers and Drawbacks of Investing with Life Insurance
5. Benefits of Term Life Insurance
6. How Term Life Insurance Fits into a Personal Investment Strategy
7. Snippets from Financial Experts
8. Common Mistakes When Buying Term Life Insurance
Term life insurance is typically the most affordable type of life insurance. It provides a death benefit (money paid to your spouse or heirs upon your death) at a fixed premium (your monthly payment), for a set period of time (your term). Terms are generally available in 5-year increments ranging from 10 to 30 years, after which the policy will usually become renewable on an annual basis.
People typically purchase term life insurance to secure replacement income for their family or to cover a notable debt, such as a mortgage.
Investopedia offers the following definition for whole life insurance:
“Whole life insurance is a contract with premiums that includes insurance and investment components. The insurance component pays a predetermined amount when the insured individual dies. The investment component builds an accumulated cash value the insured individual can borrow against or withdraw. This is the most basic type of cash-value life insurance.”
In plain-and-simple terms, whole life insurance comes with an investment component. The other key difference between term life and whole life is that a whole life policy is permanent, meaning it lasts for your entire life (rather than a set number of years).
For a visual comparison of term life and whole life insurance, check out this infographic.
Universal life is another type of life insurance designed to provide coverage for your entire life. Universal life policies offer greater flexibility in regards to premiums and policy adjustments than whole life insurance.
The similarity between whole life and universal life is that they both come with a “cash value” or “cash accumulation” investment. There are many different types of universal life insurance, from indexed universal life policies embedded in stock market indexes to variable universal life, which is actually invested in the stock market. Universal life insurance can be customized to provide coverage to the age of your choice: 90, 95, 100, 110, or even 121.
Investing with life insurance is not as easy as many insurance agents make it out to be. Before you buy any type of cash value life insurance, understand the following:
- Any investment comes with a market risk, and life insurance is no different. There is a very real possibility that your cash value could perform poorly and quietly dwindle down to zero, at which point you might have to cancel your policy if you are not able to afford the premiums out of pocket.
- The cash value is not a death benefit and is not paid to your family upon your death. If you do not withdraw the money in your cash accumulation account, the insurance company keeps it.
- If you do withdraw money from the cash accumulation account, you are essentially taking out a loan that you will have to pay back (with interest, and a surrender fee of up to $750).
- If you still have an outstanding loan balance when you die, the amount of the loan is subtracted from the payout that your loved ones will receive.
- Put simply, the cash value in a life insurance policy is never really yours.
Term life insurance, on the other hand, gives you the same coverage you seek in a permanent policy, without the bells and whistles that drive up your premium and make your policy difficult to understand. Here’s why we recommend term life insurance for most people:
- Affordable coverage
- Flexible options
- A fixed rate for a set period of time
- No startup costs
- No surrender charge
- No hidden fees
- The freedom to cancel or change your policy at any time
Term life insurance allows you to determine your needs and reverse engineer your coverage. With term life, you can be sure that you’re getting the exact protection you need—nothing more, nothing less.
Instead of rolling the dice with cash value life insurance, you can use term life insurance to protect your family, and invest elsewhere.
A lifetime policy is typically anywhere from 3 to 10 times more expensive than a comparable term life policy, which enables you to take the money you save and put it toward separate investments, whether stocks, bonds, or a small interest-bearing account. We even joke that putting the money under your mattress is better than giving it to the insurance company.
For example, a whole life policy might cost $150 per month. Meanwhile, a term life policy could provide the same if not better coverage for $30 per month. That equals $120 per month in savings or nearly $1,440 per year. Over the course of a 30-year term, the savings would exceed $43,000! When your term expires, you can reduce the amount of coverage, renew your policy, convert to whole life insurance, or buy a new policy altogether, depending on which option makes the most sense for you at the time. That $43,000 could also be helpful in paying down your debts, so you do not need as much coverage.
Don’t believe us that buying term and investing the difference is the way to go? Here’s what a few thought leaders on the subject say:
Dave Ramsey, Businessman, Author & Radio Host
“If you follow the Baby Steps, you will begin investing well. Then, when you are 57 years old and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured. That means when your 20-year term is up, you shouldn’t need life insurance at all—because with no kids to feed, no house payment and $700,000, your spouse will just have to suffer through if you die without insurance. Don’t do cash value insurance! Buy term and invest the difference.”
Suze Orman, Author & TV Host
As for other ways to protect yourself and your loved ones against loss, one of the easiest is to make sure you have Life Insurance. Although there are many kinds (such as whole or universal life), the only type you need is term insurance, because it’s simple and affordable. Other plans include investing components, but you’d do better to buy the cheaper Term policy and invest on your own.”
Bob Brinker, Financial Advisor & Radio Host
“Life insurance salesmen hate me because I recommend term life [not WL, VL, UL].”
Think “buy term and invest the difference” might be the right strategy for you? Be sure to avoid these common mistakes when shopping for a term life policy:
Not Taking a Medical Exam
You can usually get a better policy at a better rate by opting in for a medical exam. The caveat here is that if your doctor discovers an undiagnosed health issue, such as diabetes or high cholesterol, you may see higher rates and possible difficulties with getting approved. But assuming you check out fine, the medical exam is your ticket to quality, affordable coverage. Besides, you would want to know about a potentially serious health condition in the early stages, so you could seek treatment, right?
Not Taking the Medical Exam and Phone Interview Seriously
You don’t need to wake up at 3 a.m. in a cold sweat over your life insurance medical exam, but there are a few precautions you should take beforehand. The week before your medical exam is not the time to start going back to the gym. This sudden change to your exercise habits can cause abnormal test results.
And here’s a pro tip: avoid pain pills, alcohol, supplements and vitamins 24 hours before your exam. These have an effect on liver enzymes that can decrease your score and increase your life insurance rate. Relax and eat light and healthy the day before your exam.
Sometimes a life insurance company will also conduct a telephone interview as part of their inspection report. If this happens to you, make sure you find a quiet place where you can take the call and focus on answering the questions asked. If you’re scatter-brained during the call, you might be subject to extra red tape before being approved.
Working with a Captive Agent
Agents at big insurance companies are only able to sell their company’s product, limiting their ability to find competitive rates and reliable coverage.
Above all, do yourself a favor and let an independent agency like JRC help you find an affordable, fully underwritten term life policy. We will shop 40+ top-rated carriers to find you the best rates so that when you do “buy term,” you have more money to “invest the difference.” We do not have sales quotas or corporate politics, which means we will also provide honest advice if we for some reason do not believe buying term and investing the difference is the best strategy given your situation. Call us toll-free at 855-247-9555 or request a free quote online here.
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