The 30 Year Fallout of the “Buy Term Life Insurance and Invest the Difference” Methodology
- Posted on Thursday, July 9, 2015
The year was 1985. I was 11 years old and it would be another 11 years before I would graduate college and begin my career as an insurance agent. A wave of new thinking had spread across my hometown with a new strategy for financial planning that promised success. It was the first time I heard of “Buy Term and Invest the Difference”. I had relatives that liked the idea, so did most folks that were between the ages of 25 and 50. It’s been 30 years now and let’s examine what were the results.
First, it appears that most folks bought Term Life and “Enjoyed the Difference”! The average 50 year old today has less than $25,000 in retirement assets accumulated. Others may have invested part or all of the difference but lets look at the Market over the last 30 years. In 1987, I still remember “BLACK Monday” and how that market correction chased droves of folks away from ever investing in the market again. The 1990’s admittedly went well, but the “Dot Com Bubble and 9/11” period between 2000-2002 dealt heavy losses to Investors. Things went well from 2003-2007 but then the “Financial Crisis and Real Estate Bubble” hit in 2008 and delivered devastating losses.
So, here we are 30 years later and current retirees have been asked what are their greatest fears. 45% of retirees responded that they are worried about outliving their money. Funny, the insurance companies have known how to fix this problem for decades. An annuity can be purchased that can provide lifetime income that the contract owner can NOT outlive. You see, the Buy Term and Invest the Difference culture appears to have been harsh on their opinion of insurance companies. Folks thought they could pay as little as possible for insurance, and their investments would be so large that they could ride into their golden years in high style.
Now, back to our survey of current retirees. Current retirees polled also stated that 49% of them are concerned about the rising cost of healthcare expenses. The greatest risk appears to be how to pay for extended periods of mental and or physical declining health. The solution to this problem again is solved by insurance. Long Term Care insurance can reimburse the insured for actual costs paid for Home Care, Assisted Living Care, Adult Daycare, and Nursing Home Care. The Buy Term and Invest the Difference Culture again thought their investments would make them so rich that they could self insure for these costs. Finally, since the Term Life insurance owned by this culture only covers you for 10, 15, 20, or 30 years, these folks are having to self insure for their final expenses. Since the market kept handing them losses, their retirement assets didn’t grow enough to easily pay for the funeral. Is it any wonder why Cremation is so popular these days?
What if, we could rewind back to 1985? What would you do different if you are now retiring? If you had bought a whole life policy, how good would you be feeling today knowing that any final expenses are fully covered? What if you had bought Long Term Care insurance 30 years ago when the premiums were so affordable because the policies were fairly new and the insurance companies had no idea how expensive extended health care would be? How would you be feeling today knowing that you had hundreds of thousands of tax free dollars ready to be paid by your insurance company if you experience an extended physical or cognitive illness?
The Buy Term and Invest the Difference Culture is sadly alive and well today. There are still supposed experts stating that you can just invest for the long term and self insure about anything because you will be so rich! I personally would rather sleep well at night. SO, my wife and I personally own permanent life insurance in addition to term life as well as long term care insurance. I still save for retirement in the Market, but I can call on the insurance company to turn those retirement dollars into an income stream for me and receive guaranteed payments for life when I retire.
So I personally see the insurance company as a HUGE part of my retirement strategy. I do not subscribe to the mindset of the “Buy Term and Invest the Difference” Culture. I am in my 20th year serving as an insurance agent and the success rate of that philosophy in the clients I work with has been very small. I work with average America with middle class incomes. If you are reading this and you haven’t reached retirement, there may be still time to put in place some incredible safety nets that work surprisingly well with traditional retirement saving.
Trent C. Perry, Insurance Agent