You have likely heard about the “buy term and invest the difference” concept. It can spark as much division here in the United States as politics 🙂 .

If you are reading this article, a life insurance agent or financial advisor has likely informed you about permanent life insurance, also known as cash value life insurance, such as a whole life policy.

On one side of the argument, many life insurance agents and financial professionals argue that you should purchase permanent life insurance policies, such as whole life. On the other side of the argument, many other professionals say you should buy term life insurance and invest the difference.

Who is right? Honestly, they both are. The right answer depends on you, your needs, and your situation.

As for me, I see how both can work as I personally utilize the “buy term and invest the difference” strategy and have whole life insurance.

In this article, we detail the “buy term and invest the difference” argument. Here is what we will discuss:

• What is Term Life Insurance?
• What is Permanent Life Insurance?
• Buy Term and Invest the Difference (BTID)
• Where Buying a Term Life Policy and Investing the Difference Works
• Situations Where a Permanent Life Policy Makes Sense
• What is Right For You?
• FAQs About Buy Term and Invest the Difference
• Final Thoughts

Let’s jump in and start right from the beginning. We will detail what term insurance and permanent insurance are.

What is Term Life Insurance?

Term life insurance is a type of life insurance policy that lasts for a fixed number of years (technically, most carriers allow term life to exist until age 95, but no one really does that. More on that in a minute.)

Term life insurance is designed to provide financial protection for temporary needs. Many agents and financial professionals refer to it as “temporary insurance” because it typically lasts only a fixed number of years. For example, term life insurance can cover a mortgage, a loan, protect a family with minor children, and provide extra income for a stay-at-home spouse.

The fixed number of years is called the term period. The term period could be 10 years, 20 years, or 30 years, for example.

If you pass away within the term period, then your beneficiaries receive the life insurance money, known as the death benefit or face value.

If you don’t pass away within the term period, then your beneficiaries receive nothing (unless you have additional life insurance in force).

Term premiums are level during the term period. In other words, you pay the same amount each month throughout the term period.

What Happens at the End of the Term Period?

As you approach the end of the term period, many life insurance companies allow you to continue the policy until age 95. While that sounds good, you pay higher premiums every year. The cost becomes exorbitant.

Companies may also allow you to convert the term policy to a permanent one.

Honestly, most people do neither. Most people let their term life insurance expire at the end of the term period.

Here is an example of a term life insurance policy. Joe is a healthy 35-year-old male. He selects a term policy with a 30-year term and a $1,000,000 death benefit. His cost is $63 per month (subject to change and at the time of this writing) for the 30 years.

Why are Term Life Rates Cheap?

The cost of term life insurance in the example above is about $2 per day. Pretty cheap, right? I am sure you can find $2 each day to spend.

Yeah, John. Why is that?

Here is why. It all has to do with underwriting.

Underwriting examines your health, lifestyle, and other factors.

When you apply, underwriters review your application and compare it to those of similar applicants. They review medical guides and actuarial tables.

With term life insurance, underwriters are looking to see if you will pass away during the term period, based on your current situation at the time of application.

Let me preface and say that anyone can pass away at any time. An accident or illness, even an unexpected one, happens to the healthiest of us.

However, underwriters are looking to see what the probability is that you’ll pass away during the term period based on the information at the time of application. Most people do survive the term period.

This is why term policies are cheap. While unfortunate things can happen (and we hear stories all the time), most people survive the term period.

What is Permanent Insurance?

Permanent life insurance policies are designed to last your entire lifetime. In other words, the life insurance company pays the death benefit to your beneficiary whenever you pass away. That could be next year or when you are 95.

Whole life policies and universal life policies are the most common types of permanent life insurance.

These types of policies contain a cash value, which is similar to a savings account (but it isn’t). Without getting into the weeds, cash value is a critical component of permanent policies because it keeps premiums level (this is true with whole life insurance policies).

Permanent life insurance is going to cost a lot more. Way more. While most agents will say the reason is because of the cash value, that is not necessarily the case.

The main reason is that the life insurance company has already earmarked your death. In other words, it already assumes it will pay out a death benefit to your beneficiary.

Since death is 100% certain during our entire lifetime, permanent life insurance premiums will be higher than those of term insurance.

How much more? Well, let’s use the same healthy 35-year-old man. Instead of a $1,000,000 term policy, he purchases a $1,000,000 whole life insurance policy. In this case, he pays $780 per month.

What, John!

Yes, correct.

Buy Term and Invest the Difference (BTID)

Now you see how the “buy term and invest the difference” concept came about. In our example, our 35-year-old man can spend $63 per month on term life insurance for 30 years or $780 per month for whole life.

You structure your life insurance protection with a term insurance policy. You then invest “the difference”.

In our example, that is a difference of $717 per month. That is some serious premium savings. What can you do with $717 each month? Maybe a lot of things.

This is where the “invest the difference” strategy came about. If you invest the difference, the results could be staggering.

If you invest the $717 in a Roth IRA, let’s say a mutual fund or ETF that invests in the stock market, you could realize a significant amount of money.

BTID Example

Let’s use our 35-year-old man again. He invests this $717 per month in a Roth IRA in index funds that track the stock market. In 30 years, he could accumulate about $1,100,000 assuming an 8% interest / return rate. (Plug these numbers into any future value of an annuity due, and you will see the results.)

Let’s compare what he would receive in 30 years with the whole life insurance. First, a quick step back. Whole life usually offers dividends that can be reinvested into the policy as “paid-up additions”. These paid-up additions increase the cash value and the death benefit of the policy.

So, what does our 35-year-old man potentially receive from his whole life insurance plan in 30 years?

He receives about $365,000 (not guaranteed).

So, we are looking at a difference of around $700,000! Wow!

Note: For the buy term and invest the difference naysayers, I am assuming a reasonable rate of return of 8% over the 30 years. Yes, markets fluctuate, rising and falling.

Where Buying Term and Investing the Difference Works

As you can see in our example, the 35-year-old man will have a substantial sum of cash if he invests $717 every month for 30 years.

That is why personal finance experts and financial gurus, such as Dave Ramsey and Suze Orman, love this strategy. Why buy a permanent life insurance policy and spend all that extra money when you can buy an inexpensive term policy and invest the premium savings into the market (or some other investment vehicle that could generate a higher rate of return, such as real estate)?

Yes, John! I am doing that!

Well, not so fast…

#1 Problem with Buy Term and Invest the Difference

Here’s the problem with the buy term and invest the difference concept. It doesn’t really work.

What, John? You just illustrated that it does.

It can, but it rarely does.

The reason is that people don’t invest the difference. They will use the extra money on other things, such as a car or other expenses that do not generate higher returns over the long run.

For the whole life insurance policy advocates, they are entirely correct on this. Moreover, as a CFP® Professional (and formerly working in family personal finance), I saw firsthand that people did not invest the difference. Witnessing that was rather disappointing.

Even though a $1,000,000 investment account, in our example, generates much excitement, know it probably won’t happen because most people will spend the difference on other things than invest. Unless…

Here is Where it Works

However, buying term and investing the difference works for people who are dedicated to the concept. If you are indeed this kind of person, who can commit to the strategy, then buying term and investing the difference will work for you.

Situations Where a Permanent Life Insurance Plan Works

There’s no need to disparage permanent life insurance. Many situations exist where a permanent policy is well-suited to someone’s needs.

For one, you have to view permanent life insurance, particularly whole life, as an asset class. Just like stocks, bonds, and gold, whole life insurance (particularly the cash value) is an asset class.

The cash value in whole life insurance is guaranteed. It earns a very respectable rate of return. Other than the financial health of the insurance company, no risk exists with whole life insurance. In other words, you receive a decent rate of return for no risk that moves incongruently with market returns. Yes, many people like that.

Paying monthly premiums is like forced savings. Ultimately, through a whole life insurance policy (or universal life as well), you will have generated emergency savings that you can access the cash.

All the financial gurus say you need an emergency savings account, don’t they?

Many people with whole life insurance also employ this strategy: they borrow from the cash value to cover unexpected expenses and then repay the loan. The industry refers to this as infinite banking or “be your own banker.” The concept utilizes high-dividend-paying whole life insurance policies to generate sufficient cash value that can be used when needed.

Permanent life insurance also makes sense in business situations and for families with children or relatives who have special needs. These situations are outside the scope of the article. However, if you would like to learn more, please contact us.

Permanent Life Insurance with Living Benefits Makes Sense

Another situation where permanent life insurance works is with living benefits. What are living benefits? These options allow you, as the policy owner, to advance the death benefit in the event of a covered occurrence. These events include:

• a terminal illness
• a covered critical illness like cancer or a heart attack
• long-term care or custodial care

As a CFP® Professional, I am a strong advocate for utilizing a permanent life insurance policy with living benefits, particularly in cases involving long-term care. Life insurance with living benefits is an extraordinary financial planning tool. You might be a young person reading this article, but the odds are you will face a critical illness like cancer and/or need long-term care in the future. I would think that all financial planners would agree that long-term care coverage is a necessary insurance component for any comprehensive financial plan.

John, I am 30 years old. I am not thinking about this now!

I understand, but you should, since critical illnesses and long-term care situations are real events. These stats are real and not made up:

• 1 in 2 people will have a cancer diagnosis in their lifetime
• 7 out of 10 people will need long-term care in their future

The reasons you should consider a permanent policy with living benefits include:

• bad things can happen to people in the future, even when they are young and healthy now
• a permanent life insurance policy lasts your lifetime, so you have coverage when you need that death benefit the most
• cash value takes time to build, and time is on your side
• the premiums won’t be any lower than they are as you read this article

John, can’t I use the savings I generate from the BTID strategy to pay for long-term care?

I hear this all the time. A few things:

• I already discussed this, but you likely won’t save the difference, right?
• While I have not discussed this, your savings could be a taxable event, whereas the advancement of the death benefit for a critical illness or long-term care need is currently a non-taxable event
• If you are one of the few people who will never face a critical illness event or need long-term care (these people do exist), then you have access to cash value, which can be accessed income tax-free
• You have no idea what your future holds, so why not prepare now?

I personally like indexed universal life (IUL) with living benefits as a long-term financial planning tool. IULs potentially grow cash value and the death benefit much greater than whole life. A discussion of IULs is outside the scope of this article. If you would like to learn more, please don’t hesitate to contact us.

What is Right for You?

Buying term life insurance and investing the difference can work. However, the strategy works only for the most disciplined investors who are willing to invest the difference.

A permanent life insurance policy costs more than a term life insurance policy, all things being equal; however:

• it is a forced savings mechanism
• you can borrow from the cash value for emergency purposes
• it can make sense if the policy contains living benefits (this is huge)

Which plan is right for you? That is up to you. Do you know that you can employ both strategies? Why not purchase term life insurance to cover temporary needs, such as a mortgage, and then purchase a permanent policy for its cash value and living benefits?

Frequently Asked Questions About the Buy Term and Invest the Difference Strategy

We answer frequently asked questions about the buy term and invest the difference concept.

What Does “Buy Term and Invest the Difference” Mean?

It means purchasing an affordable term life insurance policy and investing the money saved by not buying a more expensive whole life or universal life insurance policy. The idea is to build wealth through investments while maintaining temporary life coverage.

Why Do People Choose This Strategy Over Whole Life Insurance?

Because term insurance is much cheaper, it allows people to invest the premium savings into potentially higher growth assets like stocks, real estate, or mutual funds. This strategy offers more control, flexibility, and liquidity than permanent life insurance.

Is Buying Term and Investing the Difference Always Better?

Not always. It depends on your investment discipline, your long-term goals, and how you manage risk. If you won’t consistently invest the difference, or need lifelong coverage, permanent life insurance may be better.

What Are the Main Advantages of Buying Term and Investing the Difference?

The advantages include:

• Lower term life insurance premiums
• Greater potential for higher investment returns
• Flexibility to adjust or stop investments
• Full control over investment choices
• Temporary coverage aligns with financial responsibilities

What Are the Risks of This Strategy?

However, the BTID strategy is not without risk. Disadvantages include:

• Market volatility could reduce investment value
• You may outlive the term and be uninsured later
• Requires self-discipline to invest regularly
• No guaranteed cash value like whole life policies
• Possible higher life insurance premiums if you renew term at an older age
• Savings are possibly taxable, whereas accessing the cash value is generally a non-taxable event
• Ignores the need for long-term care coverage or critical illness coverage

What Happens If My Term Policy Expires and I Still Need Life Insurance?

Once a term policy expires, you’re no longer covered unless you:

• Purchase a new term policy (likely at higher cost)
• Convert to a permanent policy (if allowed)
• Self-insure using the investments you’ve built

This is why it’s essential to invest consistently and plan for future coverage needs.

Can I Still Use This Strategy If I Have a Family History of Health Problems?

Yes, but the cost of term insurance may be higher due to underwriting risk. It’s best to lock in term coverage while young and healthy. Investing the difference still makes sense if you can get coverage at a reasonable rate.

Is Term Life Insurance Enough to Protect My Family in the Long-Term?

It can be if your term period aligns with major responsibilities, such as raising children or paying off a mortgage. The idea is that by the end of the term, your investments and assets can replace the need for life insurance entirely.

Final Thoughts About Buy Term and Invest the Difference

Now you should have a good idea about the concept of buying term and investing the difference. The buy term and invest the difference concept works as long as you actually invest the difference. Most people do not.

People also overlook the benefits of permanent life insurance due to its higher cost compared to term life. However, permanent life insurance contains many benefits, including:

• forced savings mechanism (which nearly all Americans need)
• cash value, which can be accessed income tax free
• lifetime life insurance coverage if needed
• coupled with living benefits, makes for a solid, long-term financial planning tool

What is right for you? Contact us or use the form below. We are happy to discuss your situation. As you can likely gather, we only work in your best interests. That means we recommend and help you put into place a life insurance strategy that is right for you and your family. There is no risk to contacting us. If we can’t help you, we will point you in the right direction as best we can. You can always reach back out to us if your needs change.