"Buy term and invest the difference" is advice you'll hear from a lot of financial gurus. Term life insurance covers you for a set number of years, like 20 or 30, and it's cheap. Permanent insurance, like whole life, costs more because it lasts your whole life and builds cash value. The advice says to buy the cheap term policy, take the money you'd have spent on permanent insurance, and invest it, usually in the stock market. Term vs. permanent life insurance, minus the sales pitch covers the two types.
It can work. If you're a disciplined buy-and-hold investor who buys low-cost index funds every month and never panics, the math can come out fine. Dollar cost averaging, which means investing the same amount on a schedule no matter what the market is doing, helps a lot. Carlo Viqueira, who co-hosts the LIFE Pod with me, has kept a term policy since his first child was born, and he has no problem with it.
The plan usually breaks in the second half. A lot of people buy the term and never invest the difference. The money just gets spent. And the people who do invest it have to beat their own emotions. When the market is riding high, everybody wants to throw more money in. When it's crashing, people panic and sell near the bottom. Buying high and selling low is how a good plan on paper turns into a bad result. Carlo and I went back and forth on this on a LIFE Pod episode about buying term and investing the difference, and that behavior problem is where we spent the most time.
Term insurance is cheap because it rarely pays out. Most people outlive their term, so for them the premiums were a cost they don't get back. That's fine, because it's insurance. If you do die during the term, it's the best return you could have gotten on that money. But the plan only builds wealth if the investing half actually happens and holds up through a crash.
The high cash value policies Carlo and I design are built on almost the same idea. We buy a small amount of permanent insurance and blend in as much cheap term insurance as the carrier allows, often around nine or ten times as much term as base. That keeps the cost of the insurance low and lets most of your premium go into cash value. So in a sense, you're buying term and investing the difference, and the difference goes into cash value that's protected from market losses and that you can borrow against.
A safe pile changes how you invest everywhere else. When part of your savings can't drop with the market, it's easier to leave the rest invested during a crash, or even buy more. People call it your sleep number: are you diversified enough to sleep through a crash? If a 30% drop would keep you up at night, you don't have enough in something that doesn't move with the market. Retiring into a down market shows why that matters most near retirement.
So I don't tell people term is bad or the market is bad. I use both ideas in the same plan, as part of an overall portfolio. I'm a licensed insurance broker, not an investment advisor, so none of this is investment advice. Cash value policies have costs, dividends and index credits aren't guaranteed, and policy loans reduce the cash value and death benefit while they're outstanding.
Look back at the last big market drop and check what you actually did that month. If you sold, or stopped investing, part of your savings probably belongs somewhere that doesn't drop with the market.