When buying life insurance and choosing between Whole Life and Term insurance, below are some of their key differences.
Whole Life Insurance
- Has cash savings component. If you hold the policy long enough, you can usually get back more money than the total premiums you’ve paid.
- Usually need to pay higher premiums than term insurance for the same coverage.
Term Insurance
- Does not provide any cash returns if no claim is made.
- Usually need to pay lower premiums than Whole Life insurance for the same coverage.
Many people prefer Whole Life insurance because it provides both protection and savings component.
However, another school of thought is that the potential return is too low for Whole Life insurance.
Instead paying for a Whole Life insurance policy, you can use the same amount of money to buy a Term Insurance policy with the same coverage at a much lower premium; then use the “savings” in premiums to invest in financial instruments (eg. stocks, currencies, commodities, properties, business, etc) that may yield a higher potential return than Whole Life insurance.
This strategy is commonly referred to as “Buy Term and Invest the Difference“.
Can “Buy Term and Invest the Difference” work for you?
In theory, this can work for those who have good investment skills. Such individuals can build themselves a high return portfolio with some degree of certainty.
In reality, such individuals are minority because most retail investors actually lose money in their personal investments.
It is Easier Said than Done
To put an investment strategy into practice for a long period of time requires a lot of self-discipline. Few people have the self discipline to consistently invest their “savings in premiums”. Many people end up spending on material possessions like fancy bags, gadgets, and cars instead.
Most retail investors also lack the manpower, time, insight, tools, professional and risk management methodology of fund managers, so they are unable to achieve the investment returns they desire.
Unless you have excellent investment acumen and willing to spend the time and effort to actively monitor your portfolio, or have a stable profitable business you can continue to invest your money in, then buying term and investing the difference might not actually be the best option for you.
