Should you Buy Term Life Insurance and Invest the rest?

The pros and cons of Permanent and Term Life Insurance have been debated extensively. Term life insurance premiums are cheaper, but have no cash value attached. On the other hand permanent life insurance premiums are higher because the insurance company invests a part of the premiums so that beneficiaries receive a cash value when the policy ends. Many financial experts advocate buying term life insurance and investing the extra premium that you would have paid for a permanent life insurance policy. The idea is to self insure yourself, and invest the difference wisely in avenues that will get you better returns than permanent life insurance would.

Is the ‘Buy term, invest the difference’ ideology for you?
Insurance is a very personal decision. How much, how many years, and other factors that determine your purchase will make your choice of insurance unique to you and your family’s financial needs.

First assess if permanent or term life insurance is right for you. If you are young with dependants, at the start of your career, you should logically opt for term life insurance, because you may not be able to afford permanent life insurance. Then simulate a permanent life insurance policy by investing your extra cash in safe investments every month to benefit from a “cash value” later on in life.

If you are older, with fewer encumbrances, the death benefit plus cash reserves that a permanent life policy builds up are great ways to provide for your own funeral expenses, your spouse’s maintenance, or for an estate for your heirs. However, it is well known that the interest earned on cash values is negligible and a huge chunk of the first few years’ premiums go towards the insurance company’s charges and fees. So you could consider buying term and investing the difference too. Even for those who are young and can afford permanent insurance, it might make sense to opt for a basic term insurance policy instead, and invest the premium amount you save in investments that yield high returns.

Where to invest the difference?
Assuming that you have chosen your term life policy, it is now left to decide where you will invest the difference. Were you to take a permanent life insurance policy, your premiums, earnings, loans against the cash value, and the death benefit would all be tax-deferred or tax-free, and individual estate taxes are also reduced or avoided. So when you opt for an affordable term policy and invest the difference, you must choose an investment vehicle that offers tax benefits that can match up to those that are packaged with permanent life policies.

Avoid mutual funds and shares, and look at more stable, tax-free or tax-deferred avenues such as annuities (life insurance accounts), IRAs, Roth IRAs and even educational accounts like the 529s. It is important to use a stable investment vehicle with guaranteed returns and great tax benefits.

Implementing the ‘Buy term, Invest the rest’ strategy
‘Buy term and invest the rest’ is a widely advocated strategy for anyone buying term insurance. Most people however, buy term life, but are not proactive in investing the rest. It calls for discipline and planning to set aside money each month to pay yourself. If this is not done, the whole purpose of opting for term insurance is defeated, leaving you with nothing if you do survive the term of the policy.

A few tips on buying term life to get the best out of your ‘buy term, invest the difference’ strategy

  • Opt for a large agency that is not affiliated to any one or two insurance companies, but instead offers unbiased information on the various policies that fit your requirements and/or health concerns.
  • There are a lot of tools and educational articles that are available on the Internet to help you choose wisely. Life Insurance 101 and the online life insurance needs calculator at can be very helpful.
  • Many insurance companies offer free online term life quotes and purport to provide comparisons of affordable term life insurance policies. What they actually do is list life insurance quotes in order of their premium costs (usually the preferred-plus rates), without taking prospects’ health conditions into question. This forces prospects to waste a lot of time applying at the preferred rates as per the life insurance quotes offered, only to find out later that they can only qualify for the standard rates. So only consider free online term life quotes that have been offered to you after taking your medical condition into account.
  • When you outlive your term policy, renewal premiums can be higher than your earlier premium amounts. Take this fact into consideration when planning your investment avenues.

The ‘Buy term and invest the difference’ strategy is a wise one. If you choose the right life insurance quote, get an affordable life insurance policy, and don’t neglect to invest the difference regularly in tax-deferred vehicles, you can combine the best of life insurance and cash value options, effectively eliminating your need for a costlier permanent life insurance.

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