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Buy term invest the difference

Be careful -read this before you buy life insurance as a result of this sales strategy.

Buy term invest the difference is a strategy for people who have whole life insurance with cash surrender values. The basics behind the strategy is that you cancel the whole life insurance, take the resulting cash surrender value and invest it, then purchase a term life insurance.

The idea while possibly valid, has some criticisms that are always overlooked with this is pitched. Interest rates shown on the investments are often optimistic to aggressive. Then those investments are compared to a cash value of a whole life – but the cash value of a whole life can be either guaranteed, or at a minimum vested (can’t go negative). Why would you compare growth from one thing that is either guaranteed or vested, against an aggressive non-guaranteed external investment? Because you’re trying to sell term insurance is why :).

This sales strategy is also wildly outdated. In the 80’s when this first came to Canada from the US, the industry had a bad habit of selling whole life insurance, perhaps inappropriately. One particular company that only sold term insurance used/uses this sales strategy to sell their term life insurance.

There’s two reasons this is outdated. First, the industry has moved on – other than a few holdouts, term insurance is far and away the most common life insurance type in Canada. Secondly most companies have far better term life insurance policies (better features) than the companies that are known for pitching the buy term invest the difference.

Does that mean you should buy term and invest the difference? That would take an individual appraisal to determine. But what I can suggest is that if you’re getting pitched this strategy and are thinking of term insurance, that you should shop around. There’s likely to be better, cheaper term policies than what you’re seeing.