“Buy term and invest the rest” was a slogan that became popular in the late 70’s by a company that advocated buying term insurance. You will hear the same thing being advocated today by radio and TV “financial gurus” that apparently, believe their entire audience is in the same financial situation with the same needs. Having been in the business of managing assets for 24 years; I can assure you that almost everybody’s needs are different.
First off let me be clear that I believe most people should have some form of life insurance, whether it be an inexpensive term policy for basic coverage, or an indexed universal life policy that can serve several purposes beyond a death benefit for your beneficiaries. If you have a very limited budget, but want to make sure your spouse and children are covered in the event of your death, by all means seek out a low cost level term policy that will cover a specific period that you or your advisor determine.
What I have been noticing lately is a return to a more permanent life policy that builds cash value. There are several compelling scenarios that seem to be cropping up quite frequently.
The first scenario is one that I believe is related to an aging population. Many people bought a 20 year term policy in their 30’s or 40’s thinking that their families would be grown and not need insurance any longer, but have found out that not having insurance at 55 or 60 years old is not an option. At this point buying another 20 year policy becomes very expensive. They realize that having a permanent policy years ago would have been a much better choice, and they would have cash value that they could borrow tax free from their policy.
The second scenario pertains to those who were born after 1960, and are really concerned about social security. The indexed universal life policies of today typically have cash accumulation option that allows for tax free loans that do not have to be paid back. Many people are using these cash accumulators as a means of retirement income.
To summarize; if term is all you can really afford, do it! But if you have extra income that you think you could allocate towards a more permanent policy, I would encourage you to speak with your advisor about the possible benefits of spending a little more now to diversify your tax obligation in the future. Life insurance is an asset class of its own and some of the Indexed universal life policies have internal rates of return that compete with investments that have much more volatility and down-side risks. Do your homework and compare policies.
