Many of your clients who are interested in life insurance have probably heard of the strategy “Buy Term and Invest the Difference.” Buy Term and Invest the Difference is a financial strategy that involves purchasing a term life insurance policy instead of a permanent life insurance policy and investing the money saved in premiums in other investment vehicles. It is based on the premise that term life insurance policies are generally more affordable than permanent life insurance policies, allowing individuals to allocate the difference in premiums towards investments that have the potential to generate higher returns.

However, investing wisely is a key factor in determining the success of this strategy. And, as you know, investing wisely is especially difficult in times of market volatility, like we’ve been experiencing over the past few years.

It is difficult to know how much your client should invest in stocks or for how long they should hold that investment. Nevertheless, historically, the stock market averages around a 10% rate of return, not considering inflation.

Inflation is a huge factor to consider when looking at stock market returns. While the Federal Reserve works to keep inflation ideally at 2%, that varies from year-to-year. For instance, the annual inflation rate in 2022 was around 8%. Since 2022 was also a down year for the market, with an average return rate of -18.11%, inflation makes the loss harder. Not only did investors lose money last year, but their money is worth less than it was in 2021!

On the other hand, let’s assume market volatility has calmed down, your clients wisely held onto their investments and are ultimately able to achieve a positive return. There are other issues to address within the Buy Term and Invest the Difference Strategy, for example:

1. Lack of discipline: The success of this strategy relies on individuals consistently investing the saved premiums and managing their investments effectively. If someone lacks discipline or the necessary knowledge to make sound investment decisions, they may not achieve the desired returns or may even incur losses. It’s essential to have a solid understanding of investment principles and be committed to regular investing.
2. Changing insurance needs: While term life insurance may be suitable for covering specific needs, such as income replacement or debt repayment, some individuals may require coverage beyond a certain term. If someone’s insurance needs evolve or they develop health conditions that make it difficult to obtain new coverage later in life, they may regret not having a permanent life insurance policy in place.
3. Estate planning and legacy goals: Permanent life insurance policies can provide benefits beyond a death benefit, such as estate planning, wealth transfer, or charitable giving. These policies accumulate cash value over time, which can be used for various purposes during the insured person’s lifetime. If someone has specific estate planning goals or wishes to leave a legacy, a term policy may not be sufficient.
4. Cost-effectiveness in the long term: While term insurance premiums may be lower initially, the cost advantage diminishes as the insured person ages and the likelihood of renewal or obtaining new coverage at affordable rates decreases. Permanent life insurance policies, although more expensive initially, can provide coverage for the entire lifetime of the insured.
5. Tax considerations: Permanent life insurance policies offer certain tax advantages, such as tax-deferred growth of cash value and tax-free death benefits. Depending on an individual’s financial circumstances and goals, these tax benefits may outweigh the potential returns from alternative investments.

Which brings us to this question: “Which type of permanent life insurance policy should my clients consider?”

Do you think one of your clients may be interested in seeing a comparison of a Buy Term and Invest the Difference Strategy to an IUL policy? Input your information below and we will send you a sample proposal from our software explaining this scenario, which you may share with your client(s).

Indexed Universal Life Insurance

Indexed Universal Life (IUL) insurance can provide more than just protection as opposed to term life insurance. It can serve as a valuable planning tool as it accumulates tax-deferred providing income options to supplement retirement, or other needs and objectives such as legacy planning. Furthermore, it provides the opportunity to increase the accumulation value within a policy without exposing your client’s cash accumulation to downside risk.

Technically Speaking…

An IUL policy offers multiple one-year Indexed Point-to-point strategies to determine the interest to be credited to your client’s policy as well as a Fixed Account Option. Indexed strategies use the performance of a market, between specific time frames, to determine the interest rate applied to the policy. The interest rate applied may be subject to limitations, such as a cap or specified rate. A fixed account will earn interest at a rate periodically determined by the company. Interest is calculated using a compound method assuming a 365-day year and is credited at an annual effective interest rate. Any surrenders will reduce the amount of interest credit to your client’s policy.

Hypothetically Speaking…

An Indexed Universal Life policy provides peace of mind during volatile markets. Your client can choose between several methods of having interest credited to their policy. Because indexed strategies are based upon the movement of an index, there may be concern about what happens in a year when the index decreases. Not to worry! Within the IUL no indexed strategy will be credited at a negative interest rate. This allows your client to take advantage of the potential increases in the index while maintaining a level of protection in the event the index drops below 0%¹.

Do you think one of your clients may be interested in seeing a comparison of a Buy Term and Invest the Difference Strategy to an IUL policy? Input your information below and we will send you a sample proposal from our software explaining this scenario, which you may share with your client(s).

*Indexed Universal Life Insurance policy is not a registered security or stock market investment and does not directly participate in any stock or equity investment or index. When an individual purchases the policy, the individual is not buying an ownership interest in any stock or index.

We do not make any recommendations regarding the selection of indexed strategies. We do not guarantee the performance of any indexed strategies.

¹You will never be credited a negative interest rate related to a change in the index. However, due to monthly deductions to your policy, your accumulation value has the potential to decrease regardless of the interest rate credited.