How many readers are familiar with the phrase “buy term and invest the difference?”
When we started in the insurance legal business, virtually every stockbroker and many life insurance agents specialized in selling term insurance with an investment element in mutual funds. In fact, many mutual fund companies either owned life insurers that provided the term element in the investment program or had well-established relationships with insurers to enable them to offer a combined program.
With the advent of variable life insurance, many observers thought VL would do away with the need for “buy term and invest the difference.” The logic was, because the single VL product provides all the elements of buying term insurance with a mutual fund investment, 2 separate products would no longer be necessary.
Unfortunately, VL has never achieved its expected potential. At the same time, the concept of buy term and invest the difference as a sales tool also seems to have almost disappeared.
This is not to say there is not a healthy market for term insurance. The life insurance industry has been selling in the “term wars” for quite some time, and current term life insurance rates are among the lowest ever. Also, underwriting standards are more flexible and Internet access is so fast that it is probably easier to buy term today than it ever was.
Does this mean cash value life insurance is obsolete? We do not think so. When thinking about term versus cash value life insurance, our minds lead us to consider term life insurance to be “temporary” insurance and cash value life insurance to be “permanent” insurance. This may merely be a reflection of our prejudices garnered from many decades of being in the industry. Nevertheless, it still provides a meaningful frame of reference for evaluating the 2.
Like many in our generation, the two of us bought our first life policies in graduate school, anticipating we would eventually earn enough to justify the protection that such insurance would afford to our yet-to-be obtained families. Also typical for our generation, we chose scheduled premium cash value life insurance, with face amounts that seemed enormous but which by modern standards are almost inconsequential.
We paid the premiums for all the years, allocating dividends to paid-up additions. We ended up with cash values and face amounts that, while not huge, do provide a nest egg for future financial needs, and that have provided mortality protection over all the years the policies have been in force.