To obtain adequate life insurance coverage, many individuals believe in the advantages of “buy term insurance and invest the difference” (BTID). Term life insurance generally offers the greatest amount of death benefit protection for an affordable premium. This is especially true for women under the age of 45, who tend to be in the family-raising phase and need affordable coverage to protect their contributions to household income.
The idea behind BTID is to buy life insurance with little cash outlay as possible and then “invest the difference” in strategies with growth potential, such as retirement plans or mutual funds. But is this smart? In this article, we will examine the strengths and weaknesses of BTID.
When BTID May Make Sense
BTID strategies might make sense for you if:
> There is a specific period of time (30 years or less) for which you need life insurance, with a near certainty that you will not require protection beyond this period.
> You are age 45 or younger and have enough time to pursue growth potential by “investing the difference.”
> You are willing and able to exercise the necessary discipline and expertise to invest the difference and manage your own risk.
> The cost saving has a major impact on your budget. Term insurance fulfills an important role in providing a desired death benefit at low initial cost. If you lack the financial resources to procure permanent protection, then term insurance can be appropriate – even if you decide not to “invest the difference.”
Why Not BTID?
One argument that’s often made in favor of BTID is that times have changed, and BTID represents a newer, better investment alternative. Yet, it’s precisely because times have changed that a financial strategy based on term life may not be most appropriate.
The 21st century marks a shift in the paradigm of how long a life span may last. People are not only living beyond life expectancy in ever-greater numbers – they also are working beyond traditional retirement ages. They are having children later, changing careers more often, and starting businesses or second families later in life. Their parents, too, are living longer and may depend on them for care and support.
In other words, your financial obligations may be more wide-ranging than in your parents’ or grandparents’ day, and they also may last longer. The right choice of insurance can play a crucial role in helping you meet those obligations before and during retirement. For all these reasons, given the length of time you’re like to need insurance, it is increasingly unlikely that a BTID strategy will adequately meet your needs.
Take Another Look at Whole Life
Here are three good reasons why whole life insurance may be a better choice for you than BTID.
1. Lifetime Costs – In annual renewable term insurance, premiums increase rapidly as you grow older and can reach an unaffordable level later in life. In level-premium term, premiums are guaranteed to stay constant over a fixed number of years (such as 10 or 20). But at the end of this period, costs may be so high that coverage must be dropped. With more people living into their 80s and 90s, lifetime insurance coverage may not be practical or affordable with term insurance.
2. Legacy Value – In a level-premium term life insurance program, you will build little or no value at the end of the guarantee period. If you “invest the difference” outside life insurance, you may be subject to market volatility during a difficult investment period. In many cases, life insurance professionals can illustrate programs in which the legacy values available in whole life insurance will exceed those that most people are capable of achieving by investing the difference on their own.
3. Retirement Income – If one of your most important goals is to set money aside for retirement, whole life insurance may be worth evaluating. You can access the cash value for retirement income through low-cost policy loans or tax-advantaged withdrawals (up to your cost basis in the contract).
By making the best choice for your personal circumstances, you will increase confidence that you and your beneficiaries will be protected both now and in the future.
John “Jake” Akoury, MBA, CLTC, AAMS, and John G. Balzer, JD, CLTC, RFC, are Registered Representatives of Park Avenue Securities LLC (PAS), 140 Kendrick Street, Needham, MA , 02494. Securities products and services offered through PAS. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. The Bulfinch Group is not an affiliate or subsidiary of PAS or Guardian. Life insurance offered through The Bulfinch Group Insurance Agency, LLC, an affiliate of The Bulfinch Group, LLC. The Bulfinch Group, LLC, is not licensed to sell insurance. PAS and the representative do not provide legal advice or services.
The Bulfinch Group
781-876-5880 x222 / x224
JAkoury@bulfinchgroup.com
JGBalzer@bulfinchgroup.com
PAS is a member of FINRA, SIPC.
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