One of the longest standing arguments in the insurance business is buy term and invest the difference or buy cash value life insurance.

The argument of buying term and investing the difference is based on the premise of getting cheap term and taking the extra money (you would have spent on whole life) and investing it in the market.  The thought is that you can make a higher return with the money in the market than you can inside a life insurance contract.

While the true accumulation value of an investment account can be higher than the accumulation value of the cash value, other factors must be considered.   For example, what if your investment account performs poorly and you actually lose money.   A life insurance policy has certain guarantees built into it that guarantees that you will not lose money no matter what.

Also, a big consideration needs to be from a tax standpoint.  What is a modified endowment contract?  Where will you invest?  What is your tax bracket?  What will the tax bracket be when you want to access the money?  Would it help you to have money that you can access tax-free from the life insurance?  Is the death benefit being passed tax-free going to be a benefit to your estate and family.

Term is a great way to cover your liability at a very reasonable price.  The problem with term is that it only lasts for a period and most people outlive the term and their family never sees a benefit.  Often times a combined approach can be a good one.   In other words, having a majority of the coverage as term and part being whole life or universal life.

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.