Have you ever heard the phrase “buy term and invest the difference?” If you are a Dave Ramsey or Suzy Orman enthusiast, you’re probably familiar with the idea, and there are plenty of people who have opened further discussion about it since the idea has was initialized.
Well, let’s discuss it openly here by first tackling if you should even be thinking this far ahead.
People who are proponents or opponents of buy term invest the difference usually dive much deeper into the financial and statistical analysis of where a dollar is best spent in the long run.
You may not even be to that point of the discussion yet. You need the basics first.
Buy Term And Invest The Difference
This question will undoubtedly come up from our clients more often than not. But unfortunately, not many of our clients are even ready for it. Let’s be honest: what’s the most basic purpose for life insurance? It’s protection.
If you don’t have the protection down yet, hold off on the investment part.
Buy term and invest the difference is all about finding out where putting each of your dollars will benefit you the most in the end. Some speculate to age 65, some go less or more. There are, of course, a lot of assumptions which exist in each scenario, and every scenario evolves differently than the one before it.
But should you even be a part of the talk? Life insurance exists for a purpose: protection.
- Protecting Families
- Protecting Spouses
- Protecting Businesses
- Protecting Estates
- Protecting Legacies
If you haven’t even gotten this aspect covered yet, start there. Buy term and cover what’s needed. Avoid the Wall Street thoughts and processes and start with Main Street. Get your buy/sell agreement in place, then worry about the intimate details afterward. Safeguard your estate immediately with life insurance, then convert it later if you decide it better suits your needs.
Protect now, analyze after.
When To Jump Into The Buy Term And Invest The Difference Discussion
So you think you have the coverage aspect in place, and you’re ready for the invest the difference portion of the debate, right? Well, there are some other things you need to think about, too.
If pinching every percentage of gain out of life insurance is a concern of yours, have you already protected yourself from the percentages of losses working against you?
Let’s assume you think you can not only pay for life insurance, but invest the difference into some mutual fund and gain a pretty safe 8-9% in the long run. Sounds good, considering your whole life insurance is only netting you 3-4% right? If you’re still paying off debts at 10.99% or 13.99% or 29.99%, you’re still losing!
So many people want to chime in on how they grow their future before they’ve learned to hedge against current losses. If this is you, take a step back and think about if you are really making a smart play by doing anything more than buying term life insurance, whether you’re considering buying term to invest the difference, or converting to permanent. Whichever side of the fence you’re on, pay your debts first.
You might be doing yourself a great dis-service in thinking about how to buy term and invest the difference, when you should actually…
Buy term and pay off the difference!
I Have Those Covered: I’m Ready, Right?
So you don’t have any interest working against you, and you’re already protected; time to get in on the “invest the difference” debate, right? We’re getting there.
Have you safe guarded your income? If you lose your income, and it’s not protected, you’re setting yourself up for failure. While life insurance has a mechanism or two to combat this so your policy stays in force, you better be prepared with disability insurance before you jump with two feet. A loss in salary or income will quickly remove your well thought out plan.
Yes, another layer of protection before thinking about gains with buy term and invest the difference.
Think of this like a diet plan. Every year, millions of Americans jump on diet plans for New Year’s, and they come crashing down in no time. They have failed somewhere. They haven’t built in any basics before jumping off the deep end in weight loss. They’re missing a daily plan, they don’t worry about what they’re eating and only exercise or vise versa. Or, they just get bored and quit because they lack the focus of the long term commitment.
Buy term and invest the difference is no different. There are foundations which need built, and commitments which need to be made, both short and long-term.
You’ve got your life insurance in place (for protection only), you’ve paid your debts and dues, and you have your income protected?
Okay, maybe it’s time you got your pass to the debate. So–buy term and invest the difference or go with whole life?
We’ll talk about it later!