Should I Buy Term Life Insurance and Invest the Difference?

Would buying term life insurance instead of buying more expensive permanent insurance, then invest the difference be a better investment? Watch and learn.

If your thirst for knowledge extends past the common questions, peruse our blog at your leisure.

Prefer to read? Read the video below:
I think it’s important to clearly define what we’re actually comparing. Let’s start with Term. TERM life insurance, by definition, is temporary insurance. It’s typically sold as 10, 15, 20, 25, or 30 year level terms, meaning that, for instance, a 10-year term has ten years of level premiums, before the rate jumps dramatically in year 11 and goes up from there. 20-year terms have 20 years of level premiums, and so on.

With level term, when the term period expires, the rate jumps so much (sometimes, to as much as 10-20 times the level premium you HAD been paying) that most people simply cancel their policy. Now that begs the question: "What do you do at that point if you still need or want to maintain the coverage?"

If your health is good, you may be able to buy another term policy, but if your health isn’t good, you may not. As we get older, we typically don’t get healthier. So there’s obviously no guarantee that a new term plan will even be available for you down the road when you reach the end of a level term plan’s level term.

Permanent life insurance, unlike term, is NOT temporary coverage. It's designed to last a lifetime. It certainly costs more. The premiums are usually designed to remain level for your entire life, and if it’s done right, and you pay your premiums each year, it’ll remain in force until you die…assuring that your family will receive the death benefit!

Now, here’s the biggest secret of the life insurance industry. If you want to win the game of life insurance. Pay close attention to the following six words:

DIE WITH YOUR POLICY IN FORCE.

So assuming you die when you’re supposed to, around your life expectancy, in order to have your life insurance in force, you have to own a policy that cannot be canceled by the insurance company before you die, won’t EXPIRE before you die, and that has a predictable, affordable, level premium that can never be raised by the insurance company in order to force you out before you die.

So getting back to whether it makes sense to buy TERM and invest the difference…let’s do the math. The numbers will tell the story.
For our comparison, let’s use two of the most popular product categories…20-year term and Guaranteed No-lapse Universal Life

Our example assumes a 45-year old male in excellent health, with a life expectancy of around 86, or 41 more years. The cost for a 20-year term life policy with a $500,000 death benefit is $600 a year. Universal Life with a lifetime guaranteed level premium, same death benefit costs $3,700 a year. If we invest that difference at say 4% after tax (which is equivalent to earning about a 6-7 percent pre-tax return. At the end of 20 years, the value of that side fund would be $96,000. Then what? You’re now 65 and probably not independently wealthy.

If you had the term insurance, and that side fund of $96,000, you might think well, let’s just get another 20-year term. To replace that $500,000 of coverage with a new 20-year term, would cost you about $14,000 annually. Of course, your $96,000 side fund would cover the cost of the first 7 years of that policy, but then you’re back to having to pay out of pocket...$14,000 a year. And even so, that policy will last exactly another 20 years, bringing you to age 85.

Now, let’s say you live to age 86, your coverage will have expired at age 85. And trust me, if you try to replace it at that age, you’ll be so shocked at the price you might have a stroke right then and there. Forget about it. You’re gonna die without life insurance. No one will get the $500,000. And you will have paid $600 a year for the first 20 years (that’s 12,000), plus $14,000 a year for the next 20 years...that’s $280,000 (for a total of $292,000) for 40 years of term insurance. So you end up collecting nothing.

Now on the other hand, on Day One, if you had bought a Permanent Universal Life policy, with the guaranteed premium of just $3,700 a year (through age 85), you would have paid just $148,000 (plus another $3,700 for age 86), you’d be all in for $151,700. Then…you die. But your spouse, or children, or grandchildren collect $500,000...Income Tax-Free!

There’s no question that term insurance serves a valuable purpose and solves the problem temporarily…but not permanently. And there’s a good reason that term insurance policies are cheap. Statistically, only 1.5% of them actually end up paying a death benefit because they lapse or expire before you die.

[lvmcallister]

Wait, what about the savings it's a Universal Life Policy which has a cash value side attached to it so what happens to the cash value if the person dies. I understand the family gets the death benefit but you didn't mention anything about the cash value. What happens to the cash value??? So, if the deceased accumulated $100, 000 and their family receives the $500, 000 and the insurance company takes the $100, 000 then that family only really received $400, 000 and the life insurance company keeps the$100, 000 the deceased paid and saved into the cash value side. Wait! Isn't that the deceased money that should be given to the beneficiaries along with the $500, 000??? The problem here is having both a savings and a life insurance policy attached to one another chocks one or the other out depending on the life event, in this case, they keep the $100, 000. Please help me understand

[MultiSanchez]

This guy is an insurance salesman. He failed to mention the other investment accounts a person might have or retirement accounts. If you buy term, invest the difference, and budget your money, at the end of that 20 year term you’ll be self insurable. He also failed to mention the amount of money the company made with the premiums of the universal policy. Teach people to fish not be dependent on you for fish, sir.

[ThePeterDislikeShow]

Big deal. Nobody gets disappointed about not cashing in on their car, home, health insurance, etc. Life insurance is about hedging risk, not an investment.

[KiddDostal]

He forgot to mention

1. IUL = A.R.T
2. First 1-4 Years you have no Cash Value building up
3. If you need to pull the money for an emergency you have to repay it back w/ 6-8% interest (its a LOAN! Not your money)
4. When the client dies the family ONLY receives cash value or death benefit
5. Ridiculous Surrender Charges
6. Since its A.R.T it’ll get to a point where the cost of insurance is too high and they pull out of your Cash Value to pay the remaining amount & your policy lapses...leaving your family w no cash value and no death benefit.

Not to mention monthly policy fee, monthly premium expense fee, monthly insurance fee!! And after all those fees are paid then your insurance premium is paid then whatever is left over goes to your cash value!

These guys all use the “It wasn’t FuNdEd correctly” as an excuse to why the lapse.

[astroman]

Simple Question, what happens to the cash value when the person dies?

[vanskizzy]

You're missing something important. If you die at 65 and your term has expires, $96K might just be enough. My spouse will inherit my retirement savings and pension. Not to to mention she will have her own retirement savings. You're making the big assumption that people have saved Zero for retirement.

[rodhubbard]

Guys there are funds out there that has averaged 10% plus for over 60 yrs. BUY TERM and Invest the difference. Get a 30 yr term save 100-200 bucks in good mutual funds over that period of time and youre set!!! Even if you only avg 6% its More than what you will get in a life insurance policy. What do the insurance companies do with the premiums??? Oh yeah they invest it and get 10-20% growth and guarantee you less than 6% off of your OWN $.

[prima]

If you buy term life without investing the difference, you're missing half the equation. Term insurance is a hedge to protect your income in the event of death. If you have enough savings when you die, you either don't need the term policy anymore, or you need very little term insurance to supplement shortfalls in your savings. You can also get a life settlement for your term insurance giving you any extra cash you need.

I guess if you can afford whole life, and you feel good about it, and the price, go ahead and get it. But, some insurance is better than none. And, if all you can afford is term, go for it.

Whatever insurance you buy, just make sure the beneficiary gets to keep both the savings, and the death benefit ; ).

[TopHomeBiz]

I will say this, it depends on where the person or family is financially. This is why it's important to conduct a full financial needs analysis on families first before you start to recommend any product or financial solution. To me both answers or solutions are right. IT just depends on the person and their financial needs, behaviors and what they want their future to look like.

[getlifeinsurancemiami]

Nothing wrong with any of the two I sell term and permanent insurance.

Look if the client is on a budget give term and keep a good relationship with Client so when time comes they get a GUL.

I rollover 401k and all that stuff I have my planer license.

I always say some Insurance is better than no insurance. I have clients worth millions and clients making 20k a year we have over 50 agents helping people down here in Miami-Dade all I care is to see people a little better than they where before.

I rather a Client pay less for a term than cancel a permanent I don’t Mary my team to any one company or product I work for the Client not the companies so whatever it takes to do best for our clients.

[rhsandne]

I’m 2:00 in to this video and I’m already recognizing the bias lol

[shtf]

If i had $3, 700 extra a year to pay insurance companies. Why don't i just save it myself

[marindependent]

We can agree on one thing: You should in fact do the numbers yourself.

If you purchase a level term 20 year policy and invest that savings ($3, 100) in a ROTH IRA.
Then, not have insurance and save your $3, 700 in a Roth IRA for the remaining years.

Which is better? Run the numbers yourself.
Lastly ask yourself, what happens if you can not afford either of the forms of insurance for just one year.

[JoshuaMcIntireMcIntirej]

What happens when the whole life policy lapses?

[jeffreyes]

Nice "math." You pay 3700/year, too bad the COI goes up every year eating up your investment portion. No one can afford a UL policy for the life of the policy. And running 4% ROR shows your lack of knowledge in regards to investing.

[gradysimpson]

This is not a complete explanation of buy Term and invest the difference. However in general it's good information but not in terms of the deeper details. It all depends on how you approach either one

[canadyfinancial]

When people do buy term how many really intend to invest the difference? And if they do want to how many know where to invest? And if they do know where to invest how many have the discipline to do it? And finally if they do have the discipline how many actually make a rate of return respectable enough to protect themselves when they retire after their insurance is gone? Their is no cookie cutter appoach to this subject. Anyone who approaches it that way loses in the end.

[alexmike]

What all of you geniuses and this CEO guy Byron Udell fail to mention about ALL Universal Life Policies is the "COST OF INSURANCE" which it goes up every year, and around year 15 into the policy, goes higher then the monthly premium.
And guess where the Insurance Company start taking the negative difference?
"From your Cash Value"

If you or someone you know have one of this policies call your Insurance Company Customer Service number (not your Agent) and ask them to mail you the "GUARANTEE COST OF INSURANCE", then you will find out the truth.

Let me know how it goes!

[prasathj]

Thanks sir, it’s been really very helpful !!!

[mjefferson]

WOW, from reading the comments like the Primerica agents were watching and commenting on this video.