Buy Term and Invest the Difference


My first real job after college was selling life insurance. That lasted all of 3 months. Why did I exit the industry so quickly? Keep reading to the end.

So I had graduated a month into the start of the early 1990’s recession (July 1990 to March 1991), so it was one of the only things I could find to do without experience.

A common question is what’s the difference between term life insurance and permanent life insurance?

What is term life insurance?

Term life insurance is just that. The policy provides a death benefit for a term. The term is usually 10, 15, 20, 25, or 30 years. When the insured dies, the beneficiary receives a tax-free death benefit.

What is permanent life insurance?

Permanent insurance, such as whole life insurance, provides a permanent a death benefit. That is, until the insured dies, the policy remains in force. In addition, most permanent life policies have a cash value component.

Which is better?

Death benefits are tax-exempt to the beneficiaries with both products. So often the answer is, “it depends.” If you’re an extremely wealthy individual, I’ve heard of single premium whole life (there’s actually a 7-pay test now) being used to shield income from taxes.

But for the rest of us, “buy term and invest the difference” is good advice. Investing in stock market mutual funds and ETFs through a Roth or 401(k) is a better investment that cash value life insurance. You are in the driver’s seat.

Term life insurance by far the best choice for most of individuals. It is cheap, and you can buy coverage for as long a term as needed. You may not want to be paying a life insurance premium in your 60’s. For example, a 20-year term policy may be used to pay-off the mortgage in the event of the insured’s untimely death. In 20 years, the insured owns his home, and the need for insurance for that purpose is over. (Besides, if you’ve followed the baby steps, you’ll be purchasing long-term care insurance when you’re 60.)

The End

As far as I could tell, permanent life insurance benefits the people selling it. When I was in the business, whole life policies provided the highest commission along with annual residuals. So as long as the policies remained in force, the sales person earned residual commissions from the sale of whole life policies for a few years.

This is why I quit the life insurance gig. As a finance major in college, I knew the “buy term, invest the difference” strategy. How could I earn a living selling something I would never buy for myself or sell to my parents?

What other personal finance topics are you interested in learning more about?

Mark

Hey, there. I'm Mark... I teach statistics and personal finance to high school and college students. I'm also a Ramsey Solutions Master Financial Coach. I create content about financial education... things like: budgeting, investing, and eliminating consumer debt.

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