Buy Term and Invest the Difference: Does It Really Work?

Are you trying to decide which type of life insurance to buy? You want to protect your family in case something happens, so how do you do it best?

Whole life insurance is often rejected as expensive and a poor “investment,” while mainstream opinion leans in favor of the “buy term and invest the difference” strategy, which involves opting for cheap insurance coverage and investing the dollars you save.

We’ll guide you through the compelling story behind the “Buy Term and Invest the Difference” strategy, a concept born from Art Williams’ personal experiences in the late 1960s. 

By examining the benefits and pitfalls of this popular approach, we empower you to make informed decisions tailored to your unique financial goals and risk tolerance.

Explore the vital distinctions between whole life and term life insurance, and learn why a one-size-fits-all solution may not serve your best interests. Through relatable analogies and real-life examples, we break down the often misunderstood aspects of life insurance, helping you see the bigger picture.

We also address the psychological and financial barriers that many face when considering life insurance, sharing insights from LIMRA and Dr. Wade Pfau on how whole life insurance can provide a stable safety net during economic downturns.

Finally, we delve into the concept of becoming your own banker, illustrating how this alternative perspective can offer unparalleled financial flexibility and security. 

By understanding the sequence of returns risk and leveraging whole life insurance loans during market downturns, you can protect your investment portfolio and ensure long-term financial stability.

Join us for an episode packed with actionable insights and strategies to enhance your financial planning journey.

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What You’ll Learn

• Why the buy-term, invest-the-rest approach only works with perfect execution (and why most people fail)
• The hidden costs that make term insurance more expensive than you think over time
• Why less than 1% of term policies ever pay out—and what that means for your family
• The discipline problem: why people buy term but never actually invest the difference
• How market volatility can destroy years of disciplined investing overnight
• Why getting priced out of term coverage as you age creates a dangerous protection gap
• When this strategy might actually make sense (hint: it’s rare)

A better approach that combines guaranteed growth, tax advantages, and permanent protection

The Myth of “Buy Term and Invest the Difference”

The idea of “buy term and invest the difference” is really common in the financial sphere because, on the surface, it seems to make a lot of practical sense. After all, you’re being told “buy cheap insurance to get the protection, then build your wealth in investments.” 

The problem is that this strategy doesn’t work with certain goals. There isn’t a singular, perfect insurance strategy to trump all else. There are myriad ways to get coverage, depending on what you want out of your dollars.

Many people believe that Art Williams is the origin of this phrase; after his father passed, the whole life insurance death benefit didn’t seem as large as what a term insurance policy could have been, and for less money.

He felt strongly that his father had been sold the “wrong” policy, and so his life’s mission became to get rid of whole life insurance. 

Curiously, he partnered with a mutual company, and the phrase “buy term, invest the difference” was born. 

Breaking Down Insurance, Investments, and More

So, what are the elements of “buy term and invest the difference”? It may sound like there are two things at play here, but really, there are many factors to consider. 

While, of course, there’s term insurance and stocks (or other investments, technically), you have to ask what that strategy is being compared to. And what that’s being compared to is whole life insurance.

What Is Whole Life Insurance?

Whole life insurance is insurance that is with you for your whole life, and if done with IBC in mind, can also be used as a warehouse for your wealth. 

Whole life insurance is guaranteed to pay out no matter what age you die, and if you live to the “end” of the policy (called endowment), the death benefit gets paid directly to you. 

This is permanent insurance in the truest sense. 

What Is Term Insurance?

Comparatively, term insurance is insurance that you only have for a portion of your life. There’s no cash value component, and once your term is up, you are no longer insured. 

This means that there is no guarantee of a death benefit ever being paid. The trade-off is that it’s much less expensive on a purely dollar-for-dollar basis.

Quick Comparison Table

The Buy Term Invest the Rest Strategy Explained

Because term insurance is much cheaper and does not have a cash component, the argument is that you can use the “difference” in cost from whole life to term insurance to make investments. The argument is that you can get a higher death benefit AND put your money to work.

Here’s how it’s supposed to work: You calculate what you’d pay for a whole life policy, then buy a cheaper term policy instead.

You take that monthly savings — the “difference” — and invest it in stocks, bonds, or mutual funds. The theory is that your investments will grow faster than the cash value in a whole life policy, leaving you with more money in the end, plus the death benefit protection you need.

Of course, that sounds great. The problem is that this isn’t the ideal solution for everyone.

Why the Buy Term Invest the Rest Strategy Has Limitations

For starters, there are many reasons for people to want permanent insurance. If you want to guarantee your kids have an inheritance no matter when you die, whole life insurance is necessary.

Additionally, IBC strategies — warehousing wealth, deploying “other people’s money,” and uninterrupted compounding — only work with whole life insurance. 

It works because of the specific structure of the policy, which allows policyholders to take loans against their cash value in a tax-advantaged way.

This means you can have whole life insurance and make investments down the line.

The buy term and invest the difference strategy only works if executed perfectly, and most people don’t execute it perfectly.

The Discipline Problem

Another common pitfall of buying term insurance and investing the difference is that… many people are not investing the difference. In some cases, they can’t, and in others, there is just no discipline.

And so you have people managing to purchase cheap insurance, but they have no savings or investments working for them to build or store wealth. In these cases, is buying term and investing the difference actually helping? Or is it just an illusion?

While whole life insurance has a higher price tag, it also functions as a place to store money. And with every premium payment, you’re building cash value, which can be leveraged for anything you want. 

This means that the cash value you build is liquid and can function like a savings account, with no extra payments necessary.

This can be a good way for someone to put money into “savings” without extra steps because the premium payment “feels” like paying a bill.

Market Risk and Investment 

Furthermore, investments in the stock market can be volatile and might not have the desired results. That money isn’t liquid and can have steep tax penalties for accessing.

Market volatility can destroy years of disciplined investing overnight. While whole life insurance offers guaranteed cash value growth, your investment portfolio could be down 20% or more, exactly when you need the money. 

There’s also the sequence of returns risk. If the market performs poorly in your early investing years, you may never recover enough to match what a whole life policy would have provided.

Coverage Gaps and Health Changes

Then, you have to think — what are the downsides of “buy term and invest the difference”? 

Those who exclusively use this strategy will have plenty of coverage for a short time, but if they decide they want permanent coverage later, it could be too late. Their health could change, or something else could make them ineligible for whole-life insurance.

This is one of the most overlooked risks of the strategy. Term insurance premiums skyrocket as you age, and many policies simply won’t renew past a certain age. 

If you develop diabetes, heart disease, or any number of health conditions during your term period, you might find yourself completely uninsurable when the policy expires. At that point, all the money you’ve invested doesn’t provide any death benefit protection for your family.

Is Term Insurance Actually Cheaper?

Above, we mentioned that while term insurance is less expensive on a dollar-for-dollar basis (i.e. if you compare a term policy with a whole life policy of the same death benefit, the term will have the lower monthly premium). But in the long run, is it actually less expensive? 

Overall, we’d actually argue that it’s not cheaper. 

Term Policies: 1% Pay Out Rate

First, consider that term insurance is only in place for a short time. You could have it for a year or 30 years, but typically not much longer than that. 

This is the time of people’s lives when they really don’t want to die without protection — often because of spouses and kids — and yet they’re also the least likely to die.

Fewer than 1% of term insurance policies actually pay out, because term insurance policies cover the lowest risk time of your life. So while you may be paying for peace of mind, there’s typically no “return” on term insurance. 

Whole Life Insurance: 100% Payout Rate

On the flip side, whole life insurance is going to pay out no matter what. So every dime that you put into your policy is going to get “repaid” to someone, and then some. 

You can also think of it this way — whole life insurance spreads the cost of risk across your whole lifetime. So while your premiums are going to feel like a lot up front, on the back end of your policy, those payments are going to seem cheap. 

Term Premiums Skyrocket, Whole Life Stays Level

If you want proof, look at any term insurance policy for someone over 60 or 70. Around that age, premiums skyrocket because the risk to the insurance companies increases exponentially. 

These premiums are often greater than even whole-life insurance premiums because the cost of the whole life insurance is spread out over your lifetime.

Compare the lifetime costs of each type of insurance, and you’re generally better off spreading the cost over time. At the very least, doing so ensures that you have coverage no matter what. 

There’s nothing worse than being priced out of term insurance as you age, and realizing you still want the coverage.

Who Is Buy Term and Invest the Difference For?

So, who is this kind of strategy really for? 

Ultimately, this is going to be the ideal strategy for someone who isn’t concerned with multi-generational wealth and primarily wants to focus on protecting what they have now, while their kids or spouse are young.

They’ve got something else figured out for retirement, maybe those stocks they’ve invested in, and otherwise don’t have a major interest in investing for cash flow and building long-term sustainable wealth.

Buying term and investing the difference makes sense for disciplined investors with temporary insurance needs or those who genuinely prefer juggling separate investment accounts.

When You Should Consider Term Insurance

This isn’t to say you shouldn’t buy any term insurance. Term insurance can be a great asset to have, in addition to whole life insurance.

So why buy term life insurance?

For example, young people who cannot yet afford whole life insurance or are not ready for it can buy a convertible term insurance policy. Doing so will lock in their insurability, and over time, they can convert the term policy to whole life insurance as possible. 

Term insurance can also be used to supplement your whole life insurance. Yes, you can have both! We often work with families who buy whole life insurance to execute an Infinite Banking Strategy, and then buy additional term insurance to supplement the death benefit. This allows them to save, invest, and protect their wealth to the maximum extent.

[32:31] “We’re not saying term insurance is bad, because you want to be in a position where you’re getting as much death benefit as you can, and you’re using whole life insurance to build up that cash value and have accessible capital during your lifetime. [This way] you’re in a position where your family is going to get as much as possible to cover your human life value.”

Book A Strategy Call

Do you want to coordinate your finances so that everything works together to improve your life today, accelerate time and money freedom, and leave the greatest legacy? 

Let’s run your numbers and compare real outcomes between term and whole life strategies.

Book an Introductory Call with our team today to learn how Privatized Banking, alternative investments, or cash flow strategies can help you accomplish your goals better and faster.

That being said, if you want to find out more about how Privatized Banking gives you the most safety, liquidity, and growth… plus boosts your investment returns, and guarantees a legacy, check out our free Privatized Banking guide to learn more.