In discussions of life insurance, you’ve probably heard someone say, “Buy term and invest the difference.”
Some have suggested this popular mantra originated with financial guru Suze Orman or perhaps Andrew Tobias (in his 1978 book, The Only Investment Guide You’ll Ever Need).
Others attribute the pithy sales pitch to insurance magnate A. L. Williams, who convinced tens of thousands of people in the 1970s to cash in their whole-life policies, buy cheaper term insurance, and put the leftover money into an annuity or some other investment vehicle.
But the phrase was in use prior to that. It’s found in an article in the New York Times from 1962. And Kiplinger’s quoted the adage in 1961.
Regardless of who first said it, the fact remains that many took it to heart–and plenty of financial advisors still tout this idea.
For 50+ years “buy term and invest the difference” has been standard financial advice and accepted truth by millions.
Too bad it’s not great advice for every person and situation.
It’s not that it’s never right, or could never pay off. Under certain circumstances, the “buy term and invest the difference” approach can indeed be a smart money move.
But that’s not how the advice is given. It is typically delivered as something that should be obviousto the informed—a no-brainer. Something you always do, because not doing it is…well…dumb.
Since life insurance is such a critical part of a family’s financial security, I want to take three columns to explore this advice I so often hear repeated, but rarely see examined.
So, let’s look more closely at this popular maxim. Here’s the first problem I see with “buy term and invest the difference.” First, it fails to focus on the primary reason for life insurance.
Here’s what I mean: No grieving widow ever calls the family’s insurance agent and asks, “Tell me…did Roger have term insurance, whole life insurance, or universal life insurance?”
The only question she has for Mr. or Mrs. Agent is “How much insurance did my husband have?”
That’s where every discussion about life insurance should begin. “If I were to die prematurely, how much life insurance do I want my family to have?” (And remember discussions about any insurance purchase should always take place with a trusted, experienced, licensed agent.)
For young families, life insurance needs can be quite large. For that reason, term insurance is often a smart choice. It’s a way to provide ample protection for a low monthly premium.
But unlike antiques, jeans, cheese, fine wine—and my beautiful wife—term life insurance doesn’t age so well.
Next time, we’ll take a look at what happens down the road, where life starts to get interesting.
Meanwhile, as you ponder insurance options, you may also be wondering about your best options for turning your retirement savings into regular retirement income. If so, I have a free gift for you. It’s a short quiz called the RISA (which stands for Retirement Income Style Awareness). Just as one kind of insurance plan isn’t best for everyone, so your retirement needs will differ from your neighbor’s. The RISA can help you figure out the plan that’s best for you. Email me (bmoore@argentadvisors.com) for your link to take the quiz.
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