Life Insurance Blog

buy term and invest the difference
March 6th, 2009
in Life Insurance

This is an expression commonly heard in the life insurance business.   Buy term and invest the difference refers to buying term life insurance and investing the difference in something like mutual funds.   The difference is between the cost of the term premium and the permanent insurance premium (whole life or universal life).

Would you get a better return on your money by putting that money in a separate account that grows at 15% annually than have the money grow tax deferred inside the life policy?  It depends on a few things, including your tax rate, liquidity, and how much you value the permanent death benefit to your family.  If you are netting a 15% return is it simple interest that you pay yearly or is it compound interest in a tax deferred account?  Tax deferral can be great, but it also leads to compound tax down the road.   Is the place you are investing the difference a liquid fund or is it locked up with early withdrawal penalties?  Does a death benefit that goes away at a certain age because it is term, provide a lost opportunity cost to your family?  What if you have don’t make 15% and actually lose on average 15%?

There is no one answer to this question and both strategies can work very well.  What we often find is that people buy term and say they are going to invest the difference but don’t.  It is important to save one way or another, so we encourage our clients to adopt a strategy that truly involves savings.

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