Buy Term and Invest the Difference: Here’s What’s Wrong

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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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.

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. 

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.

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

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.

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. 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. 

Common Pitfalls of Investing the Difference

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.

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. 

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. 

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. 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.

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. 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.”

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