Buy Term & Invest The Difference: A Smart Financial Strategy
“Buy term and invest the difference” is a financial strategy that involves purchasing term life insurance and investing the savings from lower premiums in other financial instruments, such as stocks, bonds, or mutual funds.
Term life insurance is the most affordable type of life insurance, and it provides coverage for a specific period of time, typically 20 to 30 years. Permanent life insurance policies, such as whole life and universal life, offer lifelong coverage and have a cash value component, but they are also much more expensive.
The “buy term and invest the difference” strategy is based on the idea that you can potentially earn a higher return on your investments than you would pay in premiums for a permanent life insurance policy. Over the long term, the stock market has historically outperformed other types of investments, such as bonds and cash.
This strategy can be a good option for people who have dependents and need life insurance coverage, but who also want to save for retirement or other financial goals. Term life insurance can provide peace of mind knowing that your loved ones will be financially protected if you die prematurely, while your investments can grow over time to help you achieve your other financial goals.
Here are some of the benefits of the “buy term and invest the difference” strategy:
- Lower premiums: Term life insurance is much more affordable than permanent life insurance, especially for younger and healthier people.
- Potential for higher returns: You can potentially earn a higher return on your investments than you would pay in premiums for a permanent life insurance policy.
- More flexibility: Term life insurance policies are typically more flexible than permanent life insurance policies. You can choose a policy term that meets your specific needs, and you can usually change your coverage amount or cancel your policy at any time.
However, there are also some potential drawbacks to this strategy:
- Investment risk: You need to be comfortable with investment risk, as your investments could lose value.
- Discipline: You need to be disciplined enough to actually invest the difference in premiums.
Overall, the “buy term and invest the difference” strategy can be a good way to get the life insurance coverage you need while also saving for your financial goals. However, it is important to weigh the pros and cons carefully before making a decision.
Here are some tips for implementing the “buy term and invest the difference” strategy:
- Get enough coverage. Make sure to purchase enough term life insurance coverage to meet your needs. This will typically be equal to your outstanding debts plus enough money to cover your loved ones’ living expenses for a period of time.
- Choose a term length. Term life insurance policies are typically available for terms of 20 to 30 years. Choose a term length that will cover your needs until your children are grown and your debts are paid off.
- Shop around for the best rates. Compare term life insurance rates from multiple insurers to get the best deal.
- Invest the difference. Once you have purchased a term life insurance policy, invest the difference in premiums in other financial instruments, such as stocks, bonds, or mutual funds. Be sure to choose investments that are appropriate for your risk tolerance and time horizon.
If you are considering the “buy term and invest the difference” strategy, it is a good idea to speak with a financial advisor to help you make the best decision for your individual needs.