The Pros and Cons of Buying Term and Investing the Difference

Insurance

The following post is written by Brian So, an insurance advisor and blogger at http://aafsinsurance.com.

When it comes to life insurance, many of you may have heard of the strategy ‘buy term and invest the difference.’ Before I get into the concept behind the strategy, you should know the basic differences between term and whole life insurance. With term, you purchase temporary insurance that expires at a age 80 or 85, with premium increases at every term renewal, most common being 10 and 20 years. Whole life, on the other hand, has a fixed premium but never expires as long as the insured continues to pay the premium. The premium for term insurance starts out much more manageable, but its price increases exponentially and eventually outpaces whole life.

Whole life insurance also has a cash value that is guaranteed and increases every year. Contrary to popular belief, there is no investment involved with whole life insurance. The cash value is actually a reserve of premium kept on the side by the insurance company due to overpayment of premium in the early years.

Buying term and investing the difference means that you purchase term insurance and invest the difference in premiums between term and whole life. The hope is that when you cancel the policy at age 65, your portfolio will be larger than the cash value in a whole life policy.

For example, let’s consider a 35 year old non-smoking male looking for $500,000 of coverage. His options are a term-30 policy, which would take him to age 65 at renewal, and a whole life policy. The annual premium for the term-30 policy is $750, while the annual premium for the whole life policy is $3,395, for a savings of $2,645. Assuming he invests this amount at the beginning of each year for 30 years with a 6% return, he will have $221,655 when he turns 65. The cash value of the whole life policy at age 65 will equal $131,500.

Clearly, buying term and investing the difference is better than buying whole life and cashing out at a later date. Or is it? Are there other factors that affect the comparison? Let’s take a look at the pros and cons of the strategy.

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Chatter Around the World – 63

Chatter Around the World is a curated weekly update of articles related to economics, investing, dividends and personal finance. In these weekly updates, I also capture my blog updates and news related to my portfolio holdings.

Pacific Remote Islands Marine National Monument

Obama expands the Pacific Remote Islands Marine National Monument

New Blog Posts

Let’s dive into the links that caught my attention this week.

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Alternative Investments

Alternative Investments Yesterday, Jay at Thinking Wealthy published an article on alternative investments (Thanks for the inspiration, Jay). This article is quite timely as the topic has been on my mind for a while. With the stock market hitting all-time highs and the lack of easy value pickings, I have been spending my time reading and exploring alternative investment ideas.

Alternative Investments

So what are alternative investments? The classic definition of alternative investment is an investment in asset classes other than stocks, bonds and cash. This can include investments in gold, jewelry, real estate, private equity, art pieces etc.

Real estate is probably the most common alternative investment form used by many. But since my wife and I just bought our house this summer, we think buying a second investment property will have to wait a few years. However, that hasn’t stopped me from doing my research and learning about other investment opportunities out there.

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Chatter Around the World – 62

Chatter Around the World is a curated weekly update of articles related to economics, investing, dividends and personal finance. In these weekly updates, I also capture my blog updates and news related to my portfolio holdings.

Scotland

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New Blog Posts

Let’s dive into the links that caught my attention this week.

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The Buyback Annoyance

Stock buybacks have been the craze over the past couple of years. Ever since the Fed has flushed the economy with cheap money, corporations have been using the funds to invest in their businesses to grow, spend on mergers and acquisitions, raising or issuing special dividends, and of course, the buyback annoyance – buying back its own company stock. While a majority of the investors and traders see that as a good thing, I see it mostly as an annoyance that does not achieve much more than some financial engineering.

The Buyback Annoyance

For the readers who are unfamiliar, buybacks – also called share repurchase, is where a company decides to purchase its own shares from the marketplace, thus reducing the number of outstanding shares. The reduced number of shares in the market is good for the key-stats in annual reports as it shows an increasing earnings-per-share (EPS) value and increases the value of the remaining shares in the market. Don’t get me wrong…there is a place for buybacks in the marketplace. Without any buybacks, shareholders would see their stock value depreciate as companies routinely issue more shares thus making the value of each share just a little bit less valuable. But my annoyance has been with the degree with which we see the buybacks occurring.

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