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"Buy Term & Invest the Difference" Explained

"Buy term and invest the difference" is a financial strategy that suggests buying a term life insurance policy instead of a permanent life insurance policy, such as whole life insurance or universal life insurance, and investing the money that would have gone towards the premium on a permanent policy into a separate investment account.


Under this strategy, the idea is to purchase a term life insurance policy that provides adequate coverage for a specific period of time, typically 10, 20, or 30 years, at a significantly lower cost compared to a permanent policy. The difference in premium cost is then invested into a separate investment account, such as a 401(k) or an IRA, with the goal of building wealth over the long term.


The argument in favor of this strategy is that term life insurance is less expensive than permanent life insurance, allowing individuals to secure the protection they need at a lower cost, and use the savings to invest in a separate account for future growth. Proponents of this strategy argue that the money invested in a permanent life insurance policy can be locked in and has limited investment options, while investing the difference in a separate account allows for greater flexibility and a wider range of investment options.


It's important to note that this strategy is not suitable for everyone and that the decision to "buy term and invest the difference" should be based on an individual's specific financial needs and goals. Factors such as age, income, debt, dependents, and risk tolerance should all be taken into consideration before making a decision. Seeking the advice of a financial advisor can be extremely helpful in determining the best strategy for an individual's unique circumstances.

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