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Buy Term Invest the Difference?
- 1. Term vs. Perm CASE STUDY: Buy Term & Invest The Difference Presented by: Conrad Metz Registered Investment Advisor
- 2. Perm vs. Term Permanent ● Higher Premiums ● Cash Value ○ Retirement ○ Emergencies ○ Vegas ● Death Benefit for Life Term ● Low Cost ● Death Benefit for Stated “Term”
- 3. Buy Term...Invest the Difference ● Total Amount Allocated Annually- $20,000 ● Face Amount - $500,000 ● Term - 20 Years ● Annual Premium $800 ● Investing Balance Annually - $19,200 ○ 7.5% Average Annual Return
- 4. ...Or Buy Permanent ● Total Annual Premium- $20,000 ● Face Amount - $500,000 ● Term - Life
- 5. The First 20 Years
- 6. The First 20 Years
- 7. Years 20 to 30 Retirement Income - $60,000 Annually ● Term Strategy - Investment Fund ● Permanent Strategy - Cash Value
- 8. Years 30 to 40
- 9. Investment Return Required to Match Permanent Policy Strategy
- 11. Year 40
- 12. Term ● $0 Investment Balance ● No Death Benefit Permanent ● $823,877 Cash Value Balance End of 40 Years
- 13. Term ● $0 Investment Balance ● No Death Benefit Permanent ● $823,877 Cash Value Balance ● $927,377 Death Benefit End of 40 Years
- 14. So which would you prefer?
- 15. Questions? Conrad Metz Registered Investment Advisor Conrad@StrategicInsurance.io StrategicInsurance.io
Editor's Notes
- Hey folks! My name is Conrad Metz...a Registered Investment Advisor here in Newport Beach, CA...and today we are going to discuss Term vs. Permanent life insurance. Or more specifically...Buy term and invest the difference...which is something you may here quite often. Many of the personalities you see on tv...that give the same financial advice to everyone say Buy term invest the difference. So first...it is just dangerous to give the same financial advice to everyone. As an investment advisor...I could lose my licenses if I did that. Second...for a properly designed life insurance policy...that just doesn’t add up. And today...I’m going to show you the difference.
- First, let’s start with the basics of what is permanent and term insurance? Permanent insurance, such as whole life or index universal life will cost more, because you are getting more from your policy. Essentially, you get the death benefit for as long as the policy is in force...which, if funded correctly can be for your entire life. The other big benefit of permanent life insurance is cash value. The amount in excess of the cost of insurance will go into the cash value of the policy. This cash value grows tax deferred, can be pulled out tax free, and can be used for anything you want...whether it is for an emergency or you want to bet it all on black in Vegas. Term is cheap because the premiums you pay go only to the cost of insurance...which for you is the face amount your beneficiaries would receive in the event of premature death. This term policy is only for a stated amount of years...or term. Usually 10, 15, 20, and 30 year terms.
- So here is the basis of the term policy. In this scenario we are going to compare what $20,000 a year will get you allocated to two different scenarios. The first is to buy term and invest the difference. The other is to buy a whole life (permanent) life insurance policy. So the term policy, you are paying only $800 for $500,000 face amount for 20 years. We are going to be investing $19,200, the balance between $20,000 and the $800 annual premium for the term policy. Our assumption is that we can get 7.5% return on that money. We may be able to knock it out of the park every once in a while, and we will likely experience some losses along the way. But a reasonable rate of return over 20 years is 7.5%.
- Now when you buy a whole life policy...your policy is in force as long as the premiums are still being paid...or that there is enough cash value in the policy to keep it from lapsing. This study has us paying $20,000 over 20 years into a whole life policy. That is plenty to not only keep the policy from lapsing...but keeping the cash value in tact. For this illustration, the death benefit of the whole life policy starts at about $520,000 and grows over a majority of the life of the policy. So...right off the bat, you’re getting about $20,000 more in death benefit as soon as the policy is in force.
- So, here’s what the first 20 years looks like. We’ve contributed a total of $400,000 to both the “buy term invest the difference” strategy and $400,000 into a whole life policy. At the end of 20 years, we’ve paid $16,000 into the term policy…$800 for 20 years. And the policy has expired. There is no getting that money back. However, since we’ve been able to invest the remaining $19,200 in this strategy, getting 7.5% annual returns, you can see at the bottom of column 5, we’ve got almost $600,000.
- Now...lets take a look at column 10 and 11, which represent allocating the entire $20,000 into a whole life insurance contract. By the end of 20 years...we’ve got $862,807 in cash value that can be used for anything...tax free. And we have a death benefit of over $1.3 million. So our cash value has already outperformed our investment account by $263,543 or about 44%!
- Now, in years 20 to 30...or ages 65 to 74, we are taking income distributions to help fund retirement. Each year, we are pulling out $60,000. In the buy term, invest the difference, we have no choice but to take distributions from our investment account. I’ve circled the investment account values in red. So when we begin taking distributions of $60,000 each year, the value is $557,043. In the permanent strategy, we are taking $60,000 annually out of the cash value. Now, we are done putting any more money into either strategy...however, the permanent policy continues to receive dividends. That is why you don’t see the cash value...which is circled in green...losing much value. The policy is nearly entirely self funding. In addition to the cash value, circled in blue...you have over $900,000 in death benefit at the end of 30 years.
- So now with the buy term invest the difference strategy, we’re out of money at age 76 as you can see circled in red. But looking at our permanent life insurance strategy, illustrated in columns 8 through 11, we are still comfortably receiving $60,000 every year...tax free. And the cash value is $823,877 which is circled in green with a $927,377 death benefit circled in blue.
- Now most people will say something like, “I can get way more than 7.5% on my investments...so I can still beat this strategy”. No doubt...some people can...fewer can do it consistently. In order to match the cash value in the permanent life insurance policy, we would have to get a return of 12.85%...annually. And to match the death benefit...we would have to get a return of 12%. The whole life policy gives you both of those for the same $400,000 cash outlay the “buy term invest the difference” strategy had.
- The next thing that goes through many people’s minds is…”how’s that possible?”. Don’t forget about Uncle Sam. Our investment account is taxed. The cash value in a permanent life insurance policy grows tax deferred and...if done correctly, we can take withdrawls tax free.
- So we have contributed $400,000 to each strategy. And taking taxes into consideration, at year 40, we have taken $687,817 in withdrawls from our investment account. But in our cash value life insurance policy, we were able to take $1.2 million. And...the policy is still rocking! So we can continue to take that $60,000 every year...tax free! And of course, we still have the $927,377 in death benefit from our permanent policy, while there is no death benefit remaining in the term strategy.
- Here’s just another view showing we paid $400,000 total...for each strategy. And at the end of 40 years...the “buy term invest the difference” is left with nothing, while the permanent policy has over $800,000 in cash value, and continuing to generate tax free income….
- And has over $900,000 of death benefit that will go to our beneficiaries totally tax free!
- So...a simple question. Which would you prefer? Now...as a Financial Advisor, we set clients up with both. I am not suggesting that term is garbage. Quite the contrary. We place a lot of term insurance for clients who simply need to protect their family at an affordable cost. But I am challenging the “buy term and invest the difference” model. We can only determine which strategy would be best for you if we consider your own unique situation and goals.
- If you have any questions, or would like to explore your options for protecting your family and funding your retirement, you can contact me directly via email at conrad@strategicinsurance.io or visit our website at strategicinsurance.io, where we have a lot of helpful tools and videos and a way to schedule your appointment. Thanks for watching and take care!