“Buy term and invest the difference.”

This is a common recommendation for buying life insurance. But what does it mean? And why do so many financial professionals recommend this strategy?

The goal of this article is to give you clarity.

• To help you understand the difference between term life insurance and whole life insurance.
• What it really means to “buy term and invest the difference.”
• Plus how and when someone might decide to use this strategy.

There are two major types of life insurance: Whole Life and Term Life.

This is the first major distinction to understand.

Term Life is pretty simple. You’re buying insurance coverage for a set number of years — your “term.” You pay a regular premium (usually monthly) throughout that term. If you die during that term, your beneficiary (usually your family) is paid a predetermined benefit amount.

So, for example, someone might buy a 30-year term policy with a $500,000 death benefit. That means if they die within those 30 years, the $500,000 goes to the person of their choosing.

If they live longer than 30 years though, the policy expires and there’s no longer any death benefit available.

Whole Life — a form of permanent life insurance — is a bit more complex.

The biggest difference is that a whole life policy lasts for your whole life. As long as you pay your premiums, there will be a death benefit — no matter how long you live.

How much will your death benefit be?

A whole life policy typically includes a guaranteed minimum death benefit. This is the minimum your beneficiaries would receive.

But whole life also typically includes a cash value amount that accrues as you pay into the policy. Over time, most policies are designed so the cash value will grow to more than the minimum payout. After that, your beneficiaries receive the cash value instead of the guaranteed minimum.

There are many variations of permanent life insurance. But they all typically have these three elements: the coverage lasts as long as you pay premiums, there’s a death benefit, and your policy accumulates cash value.

At first glance, this may seem like the obvious choice, because you’re getting more. But the additional coverage and benefits come at a cost. You typically pay quite a bit more for the additional coverage of whole life insurance.

How much more does whole life cost vs. term life insurance?

Generally the monthly premiums for a whole life policy are much higher than for a term life policy, for the same death benefit.

Here’s what we found in one comparison.

To get $500,000 coverage, a 30-year-old male would pay about $34 per month for a 30-year term life policy, or $472 per month for whole life.

For that same $500,000 coverage, a 30-year-old female would pay about $29 per month for a 30-year term life policy, or $408 for whole life.

In both cases, the whole life policy costs more than 10X per month!

Exact prices paid are specific to the carrier and individual. And can vary significantly with age and health. But it’s very normal for a whole life policy to cost many times as much as a term policy for the same death benefit.

Why is whole life insurance so much more expensive?

The difference in price comes down to one major distinction:

• For term life, insurance companies will only pay death benefits on a small fraction of the total policies issued.
• For whole life, insurance companies expect to pay on every policy they issue.

This is a bit simplified. But it goes a long way to describing why whole life insurance is so much more expensive.

For term life policies, the insurance companies assume that most of us will outlive our term. If we outlive our term, we’ve paid our monthly premiums throughout the term, but they don’t make a payout on our policy.

It’s not that they’re unwilling to make the payout. But typically, the term life policy will expire within our expected lifespan. Most policyholders will outlive the term. It’s a backup to protect our families from the financial burden our early death would cause. But only a small fraction of policies end with the death benefit. So the expense of those few is spread amongst the many policies issued.

For whole life policies, they are built to pay on every policy. It’s by design. The early death risk is still spread out amongst all policyholders. But ultimately the insurance companies want you to live long enough that your premiums more than cover your death benefit. Because they know that it will need to be paid eventually.

This makes whole life essentially a savings vehicle on top of a term life policy. (The same is true for other similar permanent life insurance products.)

And yes, technically you are accruing that cash value. So whole life premiums don’t qualify as an expense in the same way other expenses might. However, you are handing that money over to the insurance company. And you may only have access to that money within very specific terms set by the policy agreement.

What could happen if you buy term and invest the difference?

With whole life, you can think of it like paying the insurance company to be financially responsible for you. They guarantee certain terms, and certain returns. As long as you pay your premiums, that’s the benefit you can expect.

But that guarantee comes with a downside: performance. Historically the average return from a diversified stock portfolio has outperformed that same money held inside the cash value of a life insurance policy.

In other words, your money would’ve made more money invested in stocks than inside the insurance policy.

Of course, past performance is not a guarantee of future results. We don’t know what will happen going forward.

But this observation has caused many to wonder if the tradeoff is worth it. And really look at the alternative of “buy term and invest the difference.”

Let’s run the numbers on one of our examples above.

Let’s use the 30-year-old female above. Let’s call her Julie.

Let’s start with whole life.

For Julie’s $500,000 whole life policy in that example, she would pay $408 per month in premiums.

Over 30 years, that would cost Julie $146,880 out of pocket. Plus, she’d need to keep paying those monthly premiums as long as she wanted to keep the policy. How much cash value would she have? That’s hard to say. It would depend on policy terms. And it’s often the result of a complex calculation. But in many cases, the rate of return is below 5%.

How does term life compare?

For Julie’s $500,000 term life policy, her monthly premiums are just $29 — $379 per month or $4,548 per year less than whole life.

If she outlives the policy, that means the insurance company just gets to keep the $10,440 she paid in across 30 years. But that’s not necessarily a bad thing. By choosing the term life alternative, Julie pays $136,440 less in premiums over those 30 years.

What if Julie had the discipline and dedication to invest that annually and enjoyed 30 years of compound growth?

If you look at the last 100 or so years — from 1926 to 2025 — the stock market has averaged an annual return of over 10%. Let’s use a little smaller number than that though — let’s calculate at an 8% annual return.

That $4,548 per year, compounded at 8% annually, is worth $556,429 after 30 years.

Sure, the insurance company got $10,440. But she now has a portfolio (before taxes and fees) of over half a million dollars.

Again, this is all hypothetical. Life never matches these simple calculations and clean models exactly.

And whole life proponents will point out that “invest the difference” does require 30 years of consistently dedicated and disciplined investing behavior.

But at the end of the day, “buy term and invest the difference” gave Julie that same $500,000 death benefit for 30 years, and a portfolio of over half a million. At which point the death benefit may not be nearly as important.

Want help with life insurance?

This is ultimately a very personal decision. While Asset Strategies financial advisors typically prefer this “buy term and invest the difference” approach, we know it’s not right for everyone.

We encourage you to have this conversation with your financial advisor. They can work with you to research and compare your options. To determine how different life insurance approaches may fit within your total financial picture. And to make an informed decision about what insurance coverage would be right for you and your family.

We also partner with Asset Strategies Insurance, an independent insurance agency. As an independent insurance agency, they comparison shop with leading insurance carriers on your behalf. Often finding a handful of different policy options for you to decide between. So you can decide which coverage will fit your needs.

To connect with Asset Strategies Insurance, email [email protected] or call (402) 506-9076.