Buy term insurance and invest the difference (the difference of premium between term and permanent insurance) is perhaps some of the most pervasive life insurance “advice,” and yet it’s built on a complete misunderstanding of whole life insurance. While it likely comes from a place of frustration and hurt by those who were not taught to optimize whole life insurance, that doesn’t mean it’s worth perpetuating to a whole new generation. So, we’ve done the work to dispel the myth ourselves.
Our First Thoughts?
Your clients should buy term insurance (if it’s right for them). There’s no issue with term insurance itself—it’s a way for your clients to protect their families. Term insurance serves a purpose, and that purpose is protection and peace of mind. Never underestimate the power of peace of mind. If your clients are seeking to optimize their Human Life Value (which we hope they are), having term insurance can be an inexpensive way to bridge the gap between what they can afford in whole life insurance and full coverage.
The biggest drawback to term insurance, however, is that no death benefit is received unless you die while the policy is in force. Since term insurance is most often purchased and kept in-force between the ages of 30-60, most people will not receive that life insurance benefit.
While of course longevity is cause for celebration, it means that term insurance offers no “return” for most people. The difference is that whole life insurance DOES have a return, because it is guaranteed to pay out when you die. This means that every penny is making a positive impact on your client’s future. Meanwhile, it’s also something they can use while they’re alive, via the cash value account. Having both covers ALL the bases.
The Myth of Buy Term and Invest the Rest
Again—term insurance is a great tool. Where the myth comes in, is that term insurance + investments = a result that outperforms whole life insurance. Upfront, whole life insurance looks to have higher costs (when in reality, higher premium doesn’t mean higher cost). That’s one reason why the myth of “buy term and invest” is so popular: it makes people feel like they’re getting more bang for their buck. Especially because so many people think that risk=profit; i.e. if they invest, they’ll get rich. Unfortunately, it rarely works that way.
And one of the biggest reasons this method doesn’t work is because many families don’t actually invest the difference. Lower premiums make it seem as though there’s more money in the client’s pocket, but their insurance is pure cost (unless they use the insurance…which isn’t exactly a solution).
The “extra” money becomes a license to spend. After all, there’s “extra” money in the budget every month, and they’ve got a death benefit! Unfortunately, that extra money would be more beneficial in an emergency/opportunity fund, and because term insurance is temporary, any large financial benefit will only be experienced in the event of a death. Does that seem like a good reason to spend the excess?
So, How Does Whole Life Insurance Fit?
One of the unique elements of Whole Life insurance is not only the permanent Death Benefit but the living benefits—benefits you have just for owning your policy. One such benefit is the Cash Value Account. This Cash Value is accessible throughout one’s lifetime and accumulates as you pay premiums.
Whole Life insurance, however, is not an investment. It is an asset, and it is a place to store cash. Every penny of premium put into a whole life insurance policy is eventually reflected in the cash value account and then some. You can think of it like the equity of the death benefit. So not only are clients engaging in the action of saving, they are also covered PERMANENTLY.
When planners raise the phrase “buy term and invest the difference,” clients think that they have to find an investment in order to put away the difference. This strategy is even more difficult because good investments require lump sums—it’s the more effective route in long-term market performance. So in order to invest lump sums…the client would have to SAVE. (We love the saving portion, and we actually believe that saving is a better option than investing.)
So realistically, if the myth were to be worded properly, it would be something more like, “Buy term and save the difference.” But there’s another, even better take.
“Buy Term and Save Into Whole Life”
This isn’t necessarily as catchy as the aforementioned myth, but it provides the most effective results. If Whole Life insurance—something permanent and secure—isn’t an option for your client up to their full Human Life Value, this solution covers the most ground. Term insurance provides coverage at cheaper premiums, and that difference can be put toward a Whole Life policy with a lower face value. The goal is to fill in the gaps and give your client complete coverage. (Although ideally, the client should buy as much whole life as possible first, and THEN fill the gaps with term.)
The first benefit is that your client now has some permanent coverage, even if it is low face value. With paid-up additions, this can increase over time.
The second benefit is an answer to the question, “But where do I store my cash?” The location of savings is important, and Whole Life insurance is an effective place to do so. The Cash Value accounts often outperform banks when it comes to returns, and makes the impact of that saved money even greater. And, nothing prevents a client from also having a savings account at the bank. In fact, one strategy is to have an account that supports the Cash Value in the early years, before it “breaks even.” This way, your client has access to funds in case of opportunities—and this account can also be the source they draw their funds from to pay the premium.
What About Access?
A common concern with Cash Value accounts is the “policy loan.” When a client is ready to access their Cash Value, the optimal way to access the cash is through a policy loan. And a loan means that interest must be paid. So why should your client pay the insurance company for access to their own money?
The bottom line is that by taking money in the form of a policy loan, your client’s Cash Value remains untouched. It can, therefore, continue to accumulate from where it is, rather than a reduced amount. And this is crucial. To access your money, you don’t have to pass up any interest earned. In a well-constructed policy, this outweighs any interest that might be paid.
In Conclusion…
This is never an either/or discussion. It’s a both/and discussion. Just because your client can’t afford their Human Life Value in Whole Life insurance, does not mean that they can’t have Whole Life insurance. Nor does it mean that term insurance is bad. We also don’t claim that investments are bad—they can be a great supplement to a solid strategy.
The key is to develop a strategy that covers all of the client’s bases and optimizes the benefits received… starting with a good foundation. Maximization (as is often the goal of investing) does not always equal optimal results. Because investments involve risk, they aren’t the ideal tool for building wealth-protecting strategies.
Instead, you should be aiming to give your client strategies that keep their funds liquid, their options open, and their family protected. Whole Life insurance does just that, even in policies with a lower face value. Term insurance is a tool in order to protect a client’s family, and should, therefore, be used within a broader strategy when possible.
Truth Concepts software allows you to test the performance of different policies for your clients, in order to determine the best results. Calculators like the whole life insurance policy cash value calculator (Life Insurance Values) give you a broad idea of policy benefits, while other calculators offer scenario-specific analysis. Anyone is welcome to a free 30-day trial, which you can find below.