Buy Term & Invest the Difference: Does it Make Sense

June 25th 2025

When planning for financial security, life insurance is a critical tool to protect loved ones. However, choosing between term life insurance and permanent life insurance can be daunting.  Especially when the guidance is often delivered by an insurance agent that is paid to sell insurance and has a vested interest in selling a more expensive product.

While permanent insurance (like whole or universal life) is often marketed as a lifelong solution with a savings component, buying term life insurance and investing the difference is typically a smarter financial strategy for most people, and here is why.

Understanding Term vs. Permanent Life Insurance

Term Life Insurance provides coverage for a specific period (typically 10, 20, or 30 years) at a fixed level premium.  If the policyholder dies during the term, the beneficiaries receive a death benefit. If the term ends and the policyholder is still alive, the policy expires unless renewed (which will be at a higher cost). Term insurance is straightforward, more affordable, and focuses solely on providing a death benefit.

Permanent Life Insurance offers lifelong coverage as long as premiums are paid. It includes a cash value component that grows over time, which can be borrowed against or withdrawn. However, permanent policies are significantly more expensive due to this savings feature and complex fee structures.

Why Term Life and Investing the Difference Wins

• Lower Premiums and More Savings to Invest

Term life insurance is dramatically cheaper than permanent insurance. For example, a healthy 30-year-old might pay $20–$30 per month for a 20-year, $500,000 term policy. A comparable whole life policy could cost $200–$300 per month or more.

The premium difference—potentially $150–$250 monthly—can be invested in low-cost, diversified options like index funds, ETFs, or using these options via retirement accounts with added tax benefits.

Over time, disciplined investing is likely to far outpace the cash value growth in permanent policies, which often deliver subpar returns due to high fees and conservative investment strategies.

Example: Investing $200 monthly at a 7% average annual return (which is typical long-term return for a diversified balanced portfolio) over 20 years could grow to approximately $98,000. In contrast, the cash value of a whole life policy might only reach $50,000–$60,000 after fees, assuming the same premium contributions.

• Better Investment Returns

Permanent life insurance’s cash value grows slowly because insurers invest conservatively (often in bonds) and deduct substantial fees, including commissions, administrative costs, and mortality charges. Historical data from studies done by organizations like the Consumer Federation of America (CFA) shows whole life cash value returns averaging a mere 1–3% annually, far below the 6–8% long-term average of a balanced portfolio of low-cost investments.

By investing the potential premium savings in a diversified portfolio, you have control over your investments, can choose low-cost options, and benefit from market growth. Over decades, this compounding effect can build significant wealth, unlike the modest cash value in permanent policies.

• Flexibility and Control

Term life insurance covers you during your highest-risk years—when you have young children, a mortgage, or significant debts. Once these obligations decrease, you often no longer need life insurance, freeing up funds for other goals.   Investing the difference allows you to direct money toward retirement, college savings, or other priorities.

Permanent insurance, however, locks you into lifelong premiums. If you surrender the policy early, you may face penalties or lose much of the cash value. Additionally, accessing the cash value through loans or withdrawals reduces the death benefit and can trigger taxes, limiting flexibility.

• Simpler and More Transparent

Term life insurance is easy to understand: you pay a premium, get coverage for a set period, and receive a death benefit if you die during the term. Permanent policies, by contrast, are complex, with opaque fee structures and projections that often overpromise returns. Many policyholders are surprised by how little cash value accumulates in the early years after hefty commissions and costs are deducted.

Investing separately in mutual funds, IRAs, or 401(k)s is also much more straightforward. You can track performance, adjust allocations, and avoid the hidden costs baked into permanent insurance by either evaluating the underlying investments yourself, or working with a trusted Fiduciary.

• You Don’t Need Lifelong Coverage

Permanent insurance is sold on the premise that everyone needs life insurance forever. However, for most people, life insurance is a temporary need to protect dependents during working years. By the time a term policy expires, you may have paid off your mortgage, built substantial savings, or seen your children become financially independent. At that point, the need for a death benefit often diminishes.  All of these are much more likely outcomes if you are a disciplined saver.

Investing the premium difference during the term should create a nest egg that replaces the need for insurance altogether later in life.  Insurance is a contract of indemnity.  That means it is there to replace a financial loss in the unfortunate event that one may occur.   It is not a good mechanism for saving.  If you are a disciplined saver, later in life you become less of a financial loss, and primarily an emotional loss.

When Permanent Insurance Might Make Sense

Permanent life insurance isn’t universally bad. It may suit specific situations, such as:

• High-net-worth individuals in need of tax-advantaged estate planning tools to avoid issues such as estate taxes.
• Business partners that may need to fund a buy-sell agreement well past the age in which term insurance is still a viable option.
• In some cases, certain policies with long-term care riders can offer some estate planning benefits.

However, these cases are exceptions. For the average person, the high costs and low returns of permanent insurance far outweigh the benefits.

Buying Term

• Determine Coverage Needs: Calculate how much life insurance you need based on debts, income replacement, and future expenses (possibly 10–12 times your annual income).
• Shop for Term Insurance: Compare quotes from reputable insurers.  Look for level-premium policies and consider taking a 30-year term. You can always cancel it early if it’s no longer needed.  But the cost to add more years later will be more expensive.
• Look for policies that are “guaranteed renewable” policies.  If you are unfortunately diagnosed with a terminal illness just before the term expires, you’d likely want to extend it regardless of the exorbitant premium increase knowing the circumstances.
• Review Regularly: Adjust your insurance and investment strategy as life changes (e.g., marriage, children, or paying off debts).

Common Objections and Rebuttals

• “Permanent insurance is a forced savings plan.”
  While it encourages saving, the high fees erode returns. A disciplined investor can save more effectively with better growth outcomes that are much more likely and added tax advantages.  A good financial advisor should be guiding you to save more effectively, not telling you why you won’t be able to or how you’re likely to be derailed.
• “What if I need coverage later in life?”
  By investing the difference, you can build enough wealth to self-insure. If you still need coverage, you can purchase a new term policy if you’re young enough, or even convert some term policies to permanent ones (check for conversion options when buying).
• “The cash value is tax-deferred.”
  True, but so are IRAs, 401(k)s, and other retirement accounts, which offer better returns and lower costs. In addition, contributions to a qualified retirement plan will also reduce your current tax liability now by lowering your adjusted gross income (AGI).  By lowering your AGI, you can also increase the eligibility to make further contributions to other tax advantaged accounts such as a ROTH IRA.  The tax advantage of permanent insurance rarely justifies its expense.

For most people, buying term life insurance and investing the difference is a superior strategy to purchasing permanent insurance. Term policies provide affordable, ample coverage during your most vulnerable years, while investing the premium savings builds wealth more effectively than the cash value component of permanent policies. This approach offers flexibility, transparency, and higher returns, aligning with the goal of financial independence.

By focusing on term insurance for protection and disciplined investing for growth, you increase the chances of securing your family’s future without overpaying for a product that often benefits insurers and agents more than policyholders.