Buy Term And Invest The Difference

[xrac]

Buy term and invest the difference is a very effective strategy! That is why the average 401K has a balance of about $32,000 and that includes employer matching money.

Happy 401(k) Day - Distribution - Life and Health Insurance News

 

[VolAgent]

Buy term and invest the difference is a very effective strategy! That is why the average 401K has a balance of about $32,000 and that includes employer matching money.

Happy 401(k) Day - Distribution - Life and Health Insurance News

That is a rather sad statistic. Although, has anyone broken down the numbers to see the effect of changing employers, length of service, and age of 401(k) plan? What would be really telling is to see the balance among employees with ten or more years at a single employer, and the 401(k) is at least ten years old. Something tells me the number would still be embarrassingly small.
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[Crabcake Johnny]

Forced savings through perm also doesn't work. If you're not a saver you're not a saver. The same people who buy term and don't invest are the same people who will cash out the value in their perm policy and go buy the newest HD, go on a vacation or add that outdoor jacuzzi to their deck.

 

[Ron Van D]

That is a rather sad statistic. Although, has anyone broken down the numbers to see the effect of changing employers, length of service, and age of 401(k) plan? What would be really telling is to see the balance among employees with ten or more years at a single employer, and the 401(k) is at least ten years old. Something tells me the number would still be embarrassingly small.
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I recently spoke with a client who told me that his balance in his 401K is less than the amount he has contributed to it over the 15 years he has had the plan. He has taken no loans and uses a conservative investment mix.

 

[VolAgent]

I recently spoke with a client who told me that his balance in his 401K is less than the amount he has contributed to it over the 15 years he has had the plan. He has taken no loans and uses a conservative investment mix.

Now that is truely sad. He would have been better off sticking it under his mattress.

That is the real issue about perm versus buy term and invest the difference. Healthagent is right, forced savings doesn't work at any level. Look at how many people disenrolled from their 401K when their employer automatically enrolled them and matched. But for those that will save, once they've done the 401K and IRA, are they better off with a WL/UL or a BTITD? At least with a WL they are guaranteed to have something to show for it, and they will have insurance in force at death.

 

[Robert Barney]

Believe it or not I have all the money I put in my 401K, and all the interest that was earned on that money along the way.

It did not shrink because I did not put ANY money into mutual funds or stocks. Not that the investment people didn't try to talk me into putting the money into mutual funds. The guy went on and on and on about how I was being way too conservative and that the interest I was earning was too low and that I needed a better return on my investment. I told him I thought the interest was just fine as long as I was getting 2 to 3 points over the inflation rate. He thought I was nuts.

But I have been, and remain somewhat terrified of the stock market - not stocks - the stock market. I own my own corporation, and that stock is fine because I control the corporation. But I don't control the corporations whose stock publicly trades, and so I am at the mercy of those people and I just don't feel very comfortable. They can do some pretty stupid things.

And then there is the stock exchange, which strikes me a lot like a casino and I just don't understand the game well enough to play. For example, I debated buying stock in GM when it got in trouble, thinking that it would have to survive in someway or other, and that long term the stock would come back. I debated it, then was just too chicken to put my money down. Good thing I folded - that took a dump in a way I don't think anyone saw coming. Even the bond holders got killed. The only people who made out were the union workers - communism for all.

So here I am with my CD's earning 5% until March, at which time I will be shopping for new debt investments. I am contemplating going to a self-directed IRA and putting some money in land - just land. Obama is beginning to convince me that paper of any kind may be in trouble. And I won't buy gold because FDR proved the government can come and take that anytime it when it wants to - 5th amendment or no 5th amendment.

So my stategy may have been conservative, but so far I still have all the nuts I put away for winter.

 

[GonnaFlyNow]

Forced savings through perm also doesn't work. If you're not a saver you're not a saver. The same people who buy term and don't invest are the same people who will cash out the value in their perm policy and go buy the newest HD, go on a vacation or add that outdoor jacuzzi to their deck.

great pt healthagent

 

[Death Cab For Tootie]

Well done, Robert. You may want to consider EIAs or fixed annuities as well, as a way to facilitate an income stream in the future from you 401k. I'm with you though, the more I peel away from the marketable securities markets, the more it stinks. I'd rather re-invest in my own business, get more and better tax-deductions, and have more control over its direction.

 

[Robert Barney]

And with respect to the original posting in this thread, I have long since fallen out of love with the argument "Buy Term Invest the Difference".

What difference? Well the difference I would have paid for whole life. OK, brakes on.

Why do we buy life insurance in the first place? So that if the insured person dies, there is money for the beneficiary? Why? Because the insured represented a financial asset to the beneficiary and the loss of that asset will create a problem? Will that always be true? Absolutely not.

Why does Obama and the Democrats want "death panels"? Because they feel that older people, approaching death, just don't warrant the cost of expensive health procedures because they are going to die anyway. But aren't these people financial assets? No, they are financial liabilities. They are not paying social security taxes, they are receiving social security benefits.

And that would happens to us all eventually - unless we die prematurely. At some point in the future we stop being a financial asset and become a financial liability. It happens when we start taking out more than we are putting in.

When you retire you stop working and you stop earning money. At that moment you have switched from being an asset to being a liability. Your beneficiaries are better off financially if you die. For that reason you have to realize that the main reason that most people need life insurance ends - and that means that term insurance is a good fit. It gives you low cost coverage when you need it most, and gets expensive when you don't need it any more. And if younger people attempted to buy all the coverage they need by buying whole life insurance, they couldn't afford it.

Now I appreciate that your death in later years may trigger other problems - estate planning problems and you may need whole life for that and I own some. But the notion that buy term invest the difference is going to answer the question, should I buy term or whole life, is simply a distraction. When I sold life insurance, I often found most people with whole life and not term, and they had way too little coverage. I used to say they had a great insurance program - as long as they didn't die. On once they found out how little term insurance costs, the whole life was cooked.

So let me ask you, if you owned a $400,000 house, would you put $50,000 of fire insurance on it?

 

[Death Cab For Tootie]

Absolutely, Robert. Never should a professional agent sacrifice DB for the sake of selling permanent insurance (unless, ultimately that's what the client wants). I do, however have a point of contention.

I feel BTID vs. WL is an unfair comparion. WL isn't an investment, it is guaranteed. So, comparing to the stock market is apples and oranges. It should be 'Buy Term and SAVE the Difference'. The fact is, on an after-tax basis, WL is one of the most, if not the most competitive savings vehicles out there, when compared to CDs and short-term Treasuries.

That said, even in retirement and without an estate tax problem, having a permanent death benefit has a lot of advantages. Instead on relying on only a lump of money to provide income, strategies like CRTs, Pension Max, Reverse Mortgages, and asset spend downs become more viable strategies. If you don't have the permanent DB, they are not. Plus, if you've been cramming a ton of money into QPs, what happens if your tax bracket goes to 50%? Wouldn't it be nice to have some additional tax-free income (WL, Roth's, munis)? The first one provides the permanent DB, the other two don't. Guess where my tax-free money goes to?

Ultimately, it's not about how much wealth you can create, it's how much income you can generate. And having a permanent death benefit through WL allows us to spend more without running out of money while passing a legacy along.