Does “Buy Term and Invest the Difference” Really Work?

Transcript of Podcast Episode 368

Hello, this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode: does “buy term and invest the difference” really work?

For those who are unfamiliar, there are two basic types of life insurance: term and permanent. Term life insurance is pretty basic: you make a simple payment in exchange for a death benefit. The good news is you pay a specific premium for a specific number of years, say 20. Your premium purchases the specific death benefit you need, say $1 million. That’s it. There is no cash value, however Return of Premium options may exist, which would likely increase the premium. The bad news is that you must die to collect the death benefit for the benefit of your heirs.

The premium can be relatively inexpensive. For example if you’re 30 years old and in good health, you might only pay $600 or so per year for your coverage under a 20-year term policy. If you survive the year, you typically pay the same amount the following year and each year thereafter until the 20-year term is complete.

But the problem with term insurance is that it only covers you for the period you’ve chosen. What happens at the end of the 20 year period? You may need to start over, except now you’re 50 years old, and the cost to insure your life will be much higher, say somewhere around $2,300 per year. And this assumes that 20 years later, your health is still good enough to qualify for coverage, and at the most economical rates.

On the other hand, various types of permanent life insurance exist, are generally more complex, and involve higher initial premiums. In the case of our 30-year old, the premiums may be three-to-four times the cost of term, or more. But if structured properly and premiums are paid on time, these types of policies can provide lifetime coverage, not just for a period of years. They also can potentially provide a cash value, which is the amount you would receive if you surrendered the policy for cash. You might also be able to borrow against, or withdraw some of the cash value later on.

But some people are scared off by high permanent life insurance premiums compared to term. The difference is that permanent life insurance is designed to cover you for your entire life, not just a specific term.

So, what do you do if you don’t want to—or can’t afford to—pay that much? Keep in mind that there are numerous ways to structure a permanent policy, and some of those can be considerably more affordable than others.

There’s also an old adage in the insurance industry that you may have heard: “buy term and invest the difference.” In other words, you could buy the term policy, figure out what the premium difference is between the term and permanent policies, and invest that amount in some other place, like the stock market. The theory goes that if you’re disciplined and invest well, you’ll be better off in the long run. But does it actually work?

The concept seems to make sense. You buy a term policy to cover your insurance needs temporarily and invest the difference in premium into a diversified portfolio. By the time your term policy expires, your new account may have accumulated enough money that you can now, essentially, self-insure for your permanent life insurance needs.

The theory may work on paper, especially when you consider that so many of your liabilities, such as your home mortgage or a future college education for your child, are expected to be paid off in the future.

But it’s not that simple. For one thing, you must commit to investing the difference every year. More on that in a minute. In addition it’s important to consider any tax advantages that permanent life insurance may offer. We spoke earlier about the cash value that a permanent policy can provide. That cash value typically grows on a tax-deferred basis. And if you structure the policy properly, cash withdrawals and loans may also receive favorable tax treatment.

Then there’s the so-called “sequence of returns” risk. It’s a concept that many people—including some well-known-financial pundits—fail to consider. Sequence of returns risk is normally thought of in the context of retirement planning. It’s the issue faced when there is a market downturn late in your working years or early in your retirement years. When this happens, it could have a much bigger impact on your planned retirement income, simply because you don’t have the time you need to recover.[1] And it applies equally to “buy term and invest the difference.” Permanent life insurance, paired with another option such as guaranteed income from an annuity, can help protect against sequence of returns risk.[2]

But perhaps most importantly, and we touched on this briefly a minute ago, “buy term and invest the difference” requires consistency and discipline over many years. Needs change significantly over time. The real world can be expected to throw a curve at you from time to time and even one missed investment can adversely affect the process.

For example, what happens if you have a major medical emergency or other adverse financial development during one of those interim years? For many, the tendency is to skip your planned investments when money is tight, or the market is down. The entire “buy term and invest the difference” plan could crumble as a result. Is that worth the risk?

Are there times when it makes sense? Absolutely. But remember that term insurance is designed for a temporary need. The simple truth is that permanent coverage can work better when the need is permanent.

Confused as to which options are the best for you? A Security Mutual Life insurance agent can help. Your trusted life insurance agent will discuss and assess your needs and objectives, coordinating with you, your attorney and tax professional to review your situation and to determine the insurance plan that will best suit your needs and objectives.

[1] U.S. Bank. “How sequence of returns risk can impact when to retire.” USBank.com. https://www.usbank.com/retirement-planning/financial-perspectives/sequence-of-returns-risk-impact-when-to-retire.html (accessed January 7, 2026).

[2] Garcia, Gonzalo. “Why “Buy Term and Invest the Difference” No Longer Holds Up.” Linkedin.com. https://www.linkedin.com/pulse/why-buy-term-invest-difference-longer-holds-up-gonzalo-m-garcia-clu-fuwhe/ (accessed January 7, 2026).

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