Most of the “experts” have spouted this piece of advice over the years when anyone brings up the subject of life insurance. By “experts” we mean everyone from financial “gurus” like Dave Ramsey and Suze Orman, to your in-laws, your barber, your preacher and your kid’s kindergarten teacher. We think it’s utter nonsense.
According to Dr. David Babbel, Professor at The Wharton School of the University of Pennsylvania…
People don’t buy term and invest the difference. They most likely rent the term, lapse it and spend the difference.”
Professor Babbel is co-author of “Buy Term and Invest the Difference Revisited,” published in the May 2015 issue of the Journal of Financial Services Professionals.
Although much lip service has been given to the notion of “buy term and invest the difference,” we’ve never met anyone who actually bought a term policy, priced the cost of a permanent policy with an equivalent death benefit, and then put the difference into an investment account every month.
It just doesn’t happen.
Compare Dividend-Paying Whole Life Insurance to Buy Term and Invest the Difference
Here are four ways they differ dramatically:
1. Do you have any equity in the policy?
Bank On Yourself
The dividend-paying whole life insurance policies used for this concept have a cash value which is guaranteed to increase every year.
A portion of your premium goes into riders that enable you to have significantly more equity in your plan, especially in the early years of the policy. It also reduces the commission the agent receives by up to 70%.
Term Insurance
Buying a term life policy is like renting insurance, and studies show that you’re likely to have zip to show for it, as most term policies never pay out a claim. Term policies are designed to terminate before you do, as many experts point out (even those who recommend term insurance). Case in point: Suze Orman writes “these policies are not very expensive… because the insurance company knows you have relatively little chance of dying while the policy is in force.” (Source: The Road To Wealth, 2001).
2. Does it give you protection against inflation?
Bank On Yourself
The death benefit can increase over time, as dividends left in the policy are used to purchase additional coverage. Here’s an example of how this type of policy can protect you against inflation.
Term Insurance
Most term policies recommended by the financial gurus have a level death benefit for the term of the policy.
If you buy a $250,000 20-year term policy, and inflation averages 4% per year, your policy will lose 56% of its value!
3. Are you protected if your health deteriorates?
Bank On Yourself
You’re insured until the policy matures (typically age 121), as long as you don’t let the policy lapse. Changes in your health have no impact on your coverage or premium.
Term Insurance
If your health deteriorates during the term of the policy and you bought the kind of policy recommended by experts like Dave Ramsey and Suze Orman, you’ll have to pay more to renew it, or you might not qualify for coverage at any price.
4. Can you predict how much your plan will be worth when you’re ready to retire?
Bank On Yourself
You can know the minimum guaranteed value of your policy in any given year, as well as the minimum income you could take from the plan and for how long you could take it. To find out what your numbers could be, request a free Bank On Yourself Analysis here.
Invest the Difference
If you “invest the difference” in stocks and mutual funds, you have no way of knowing how much money you’ll have when you need it, because there is no way to know the value of your investments next year OR in 30 years. Furthermore, if you are investing inside your retirement plan, you are subject to strict 401k withdrawal rules.
- Bank On Yourself vs. the Stock Market
- Bank On Yourself vs. Your 401(k) Plan
- Bank On Yourself vs. a Roth IRA
- Bank On Yourself vs. Real Estate and Other Investments
- Bank On Yourself vs. Buying Term and Investing the Difference
