Buy term insurance, invest the difference

What is term insurance?

As everyone knows by now, we have a financial planner in our office.  He has put together this post to talk about term insurance.

There’s at least one life insurance company whose agents’ mantra is to buy term; invest the difference (BTID). They purport that permanent life insurance is a bad idea. Their advice is to buy 20-year term insurance and invest the difference in mutual funds. The difference they refer to is the difference between what you would’ve paid for the permanent policy and the term policy.

The advice is built on the premise that you won’t need life insurance in 20 years.

Perhaps you know who they are. Perhaps you don’t.

Everyone?

Is there such thing as one-size-fits-all when it comes to life insurance and other financial products?

If an agent advises someone who’s 25, how can that same agent give the same advice to someone who’s 45?

Are they saying their formula is magic? Is it guaranteed? Are they saying that by investing in mutual funds for 20 years, regardless of when you begin, will eliminate the need for life insurance?

If that’s correct?

The way I understand it, if everything goes well with the investment in mutual funds, the investment will have made enough money for the investor that they will have made enough from the investment to live on for the rest of his or her life.

I also understand it to mean there will be enough money left over to pay the taxes on the investment and all the final expenses after death.

The questions

Did I miss something or is that accurate?

If it doesn’t work out?

What happens if the mutual funds don’t work out as forecast? What’ll happen if the stock market crashes at the same time the 20 years are up? What if someone realizes this plan is less than foolproof and decides they need more life insurance? And, what if that person has developed health issues and now doesn’t qualify for life insurance or if they do qualify, the premium is cost prohibitive?

Is there a backup plan?

Is the BTID idea a bad one?

Are you able to predict the future? Do you know anyone who can?

Whether you agree with the concept or not, does it not make sense to have a plan B in case the plan doesn’t go as planned or goes completely awry?

The way I see it, there are many different scenarios and the correct scenario for any individual depends on several variables. Furthermore, does it not make sense to review your situation regularly, at least once a year?

My personal opinion about the concept presented here is that it’s an option, not THE option that’s best for everyone all the time.

If it makes sense for you, go for it, but are you willing to put all your eggs in one basket?

There’s only one person who can answer that question.

Permanent life insurance, term insurance, and mutual funds each have different functions. You don’t have to choose just one path.

If insurance is about protection and peace of mind, does BTID provide that for life?

Have more questions? Feel free to contact us!