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Does this mean cash value life insurance is obsolete?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.
Would we have been better off buying term and purchasing mutual funds with the amounts that were paid into the cash value life insurance policies as premiums?
The intervening decades have seen spectacular increases in the value of mutual funds and the stock market in general, despite short-term “corrections” in the markets. It is quite likely that, had we been disciplined enough to make regular investments in mutual funds of the amounts that would have been saved by purchasing term life insurance, we might be better off. But there is no way to be sure, particularly in view of the tax-effective nature of cash value life insurance.
However, one thing is certain: we always had the discipline to pay the life insurance premiums and the policies have long since been more than adequate to carry themselves. When we started in the life insurance industry, this aspect of “forced savings” was a key motivation for buying cash value life insurance. And it works!
The two of us are long past the age when term life insurance makes economic sense. As the years have passed, we have invested in the stock market (as well as in homes, businesses, children and grandchildren). Yet, through it all, there was always the comfort of knowing that the cash value life insurance was available to provide a floor for whatever unforeseen developments might occur.
Unsaid in all of this is the knowledge that in event of premature death, the spouse and children would be financially secure.
There were times, of course, when we bought term–always to cover a temporary need. It was never thought to be a permanent solution to either savings needs or mortality needs.
On sober reflection, we now realize that if we, long-term insurance professionals, are not smart enough or sophisticated enough to be able to successfully “unbundle” our insurance planning, it is unlikely that the average citizen can do so.
The bottom line: While term insurance is a useful tool with an important role in financial planning, it is still “temporary” insurance and should not be considered for permanent long-term needs.