For many years, most financial advisors have been rallying behind the ‘buy term, invest the difference’ policy. They convincingly manage to woo insurance clients to invest in inexpensive term life insurance then spend the received premium savings conveniently rather than splurge on costly life insurance. While this works well for some, most clients fail to execute the ‘invest the difference part of the equation’ thus leaving them exposed immensely at a later stage. Interestingly, the BTID policy requires the strong financial will to pull off due to its complicated nature.
A new life insurance study debunks BTID. According to a recent survey titled; Buy Term and Invest the Difference Revisited May 2015 issue of Journal of Financial Service Professionals by David F.Babbel, a professor at the Wharton School of the University of Pennsylvania, an assistant professor at the Tepper School of Business at Carnegie Mellon University and director of Insurance economics at Charles River Associates & Oliver Hahl, most people rent the term, lapse it and end up spending the difference rather than invest it on their own. Also, those who manage to fund the difference have a tendency of buying high and selling low due to the perennially underperforming market indices.
The well-researched financial analysis claims that distinctive economic analysis comparisons on purchasing term and whole life insurance policies overlook the essence of scrutinizing the guaranteed cash value growth factor of permanent life insurance. Mr.Babbel notes that although extremely volatile portfolio of bonds stocks can either rise or fall significantly with the market, the cash value guarantees of permanent life insurance always grows.
The study also discovered that term life insurance policies are not necessarily cheaper as most people assume. In fact, their premiums rise as policyholders’ ages or renew their policies. Interestingly; Mr.Babbel found that most policies are never renewed particularly if their holders are in great health. The study claims that older policyholders pay top dollars under term coverage as compared to other types of insurance contracts. Generally, term life insurance is ideal for those who need coverage for a limited period and cannot afford permanent life insurance. As per the study, the best alternative to term life insurance is whole life insurance since it never expires or requires renewal. Additionally; it comes with level premiums until a policyholder’s death and level death benefits irrespective of its holder’s age at the time of death.
According to the author, a whole life insurance, universal life & variable universal life insurance plans offer more value to policyholders as compared to BTID. They generally provide more flexibility in terms of premium amounts, timing, and affordability. Whole life policies cash value always grows are more stable than other funds.
In other words, investing in a BTID tactic requires patience and self-control for anyone to reap its benefits effectively.