Buy Term and Invest the Difference: Does It Really Work?

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? https://www.youtube.com/live/QDyfZjPaMgc 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. What You'll LearnWhat Is Whole Life Insurance?What Is Term Insurance?Quick Comparison TableThe Buy Term Invest the Rest Strategy ExplainedThe Discipline ProblemMarket Risk and Investment Coverage Gaps and Health ChangesTerm Policies: 1% Pay Out RateWhole Life Insurance: 100% Payout RateTerm Premiums Skyrocket, Whole Life Stays Level What You'll Learn Why the buy-term, invest-the-rest approach only works with perfect execution (and why most people fail) The hidden costs that make term insurance more expensive than you think over time Why less than 1% of term policies ever pay out—and what that means for your family The discipline problem: why people buy term but never actually invest the difference How market volatility can destroy years of disciplined investing overnight Why getting priced out of term coverage as you age creates a dangerous protection gap When this strategy might actually make sense (hint: it's rare) A better approach that combines guaranteed growth, tax advantages, and permanent protection 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. What 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.  What Is Term Insurance? 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. Quick Comparison Table FeatureWhole Life InsuranceTerm InsuranceBuy Term Invest the RestDurationPermanent (whole life)Temporary (set term)Term coverage + separate investmentsCash ValueYes, builds over timeNo cash valueNo insurance cash value, relies on investment accountsPremiumsHigher, but levelLower initially, increases with ageLower insurance cost, but requires separate investment contributionsDeath Benefit Guarantee100% guaranteed to payOnly pays if death occurs during termOnly guaranteed during term periodInvestment ComponentBuilt-in cash value growthRequires separate investmentsSeparate investments (stocks, bonds, mutual funds)Access to MoneyPolicy loans against cash valueNoneSubject to investment account rules and taxes The Buy Term Invest the Rest Strategy Explained 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. Here's how it's supposed to work: You calculate what you'd pay for a whole life policy, then buy a cheaper term policy instead. You take that monthly savings — the "difference" — and invest it in stocks, bonds, or mutual funds. The theory is that your investments will grow faster than the cash value in a whole life policy, leaving you with more money in the end, plus the death benefit protection you need. Of course, that sounds great. The problem is that this isn’t the ideal solution for everyone. Why the Buy Term Invest the Rest Strategy Has Limitations 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. The buy term and invest the difference strategy only works if executed perfectly, and most people don't execute it perfectly. The Discipline Problem 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. Market Risk and Investment  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. Market volatility can destroy years of disciplined investing overnight. While whole life insurance offers guaranteed cash value growth, your investment portfolio could be down 20% or more, exactly when you need the money.  There's also the sequence of returns risk. If the market performs poorly in your early investing years, you may never recover enough to match what a whole life policy would have provided. Coverage Gaps and Health Changes 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. This is one of the most overlooked risks of the strategy. Term insurance premiums skyrocket as you age, and many policies simply won't renew past a certain age.  If you develop diabetes, heart disease, or any number of health conditions during your term period, you might find yourself completely uninsurable when the policy expires. At that point, all the money you've invested doesn't provide any death benefit protection for your family. Is Term Insurance Actually Cheaper? Above,