Why Buy Term Insurance and Invest the Difference May Work in this Economy?

Under most circumstances, I do not believe in the “buy term and invest the difference" approach to financial planning. However, the economy is in a major slump and your wallet may be in the same condition. If you do not currently have a life insurance policy outside of work, you might benefit from buying term insurance and starting an investment program in 2009.

If you already have a life insurance policy, I am not advocating that you change to term life insurance. This article is primarily for individuals who need to start a life insurance program, outside of work.

For years, Suze Orman and other financial gurus have advocated for individuals to purchase term life insurance instead of other life insurance products, such as whole life insurance or universal life insurance. After purchasing a term life insurance policy, these financial experts prefer that you take the remaining money that you would have paid into a permanent life insurance policy and place it in a mutual fund. Based on past performance, over a long period of time, growth stock mutual funds have generally outperformed the rate of return earned within life insurance based products, such as whole life, which normally is invested in bonds; however, there is no guarantee that this performance trend will continue. Nevertheless, financial planners and gurus will continue to market “the buy term and invest the difference” philosophy, even if they cannot guarantee the results.

For people who are just starting their careers or need to start over due to financial woes, term life insurance can be an affordable way to cover debts, such as credit cards, mortgages and student loans. Term life insurance is generally cheaper than a permanent life insurance policy with the same face amount because buying a term life insurance [i] policy is the equivalent of renting life insurance. If you do not die during the term life insurance policy’s term period, such as a 10 year or 30 year term period, you get nothing in return for the premiums you paid during that term period, unless you have selected a return of premium rider, which usually costs an additional premium. Yet, in most cases, term life insurance will allow you to buy a larger face amount (e.g., $300,000) at a cheaper price than other forms of permanent life insurance. Therefore, if the premiums for a $300,000 permanent life insurance policy do not fit into your budget, buy a term insurance policy, instead.

For those who purchase term life insurance, do not forget to invest the difference. Talk to your financial advisor about investing in mutual funds that require as little as $25, per month. Remember, failure to invest, along with buying a term life insurance policy, may leave you in a worse financial position than the person who bought a permanent life insurance plan, such as whole life insurance.