“Buy term and invest the difference” – if advisors had a buck for every time they’ve said that to a client, they’d be rich. So why aren’t their clients rich?
One of the most highly touted catchphrases in wealth management is the expression “buy term and invest the difference.” It’s a big deal. Unfortunately, a new report suggests it doesn’t work.
“Buy Term and Invest the Difference Revisited,” a report written by finance professors David Babbel and Oliver Hahl, suggests clients are often better purchasing whole life rather than term insurance.
Why?
Whole life policies possess several attributes that term policies don’t, including being able to borrow against your cash value, providing tax-free distributions and ensuring permanent insurability, to name a few.
“Generations of Wall Street professionals have been trained by their firms to trash cash value life insurance so the investment firms could maintain those dollars under management,” said Chris Blunt, executive vice president at New York Life and president of the firm's investments group. “Finally, a new academic study, using rigorous economic modeling, has debunked Wall Street's heavily marketed but largely erroneous path to financial security.”
That’s strike one against BTID.
Strike two is the fact most people don’t actually “invest the difference”, preferring to spend it instead.
“People don’t buy term and invest the difference,” said Babbel. “They most likely rent the term, lapse it and spend the difference.”
Lastly, when clients do actually follow through on the second part of BTID, they tend to make a mess of it.
“Even those who do invest the difference are prone to real-world emotional investing and tend to buy high and sell low, perennially underperforming market indices,” said Babbel. ““Our study sheds light on Wall Street guidance that has been taken as an article of faith, but that clearly underperforms for many who follow it.”
That’s strike three.
“Buy Term and Invest the Difference Revisited,” a report written by finance professors David Babbel and Oliver Hahl, suggests clients are often better purchasing whole life rather than term insurance.
Why?
Whole life policies possess several attributes that term policies don’t, including being able to borrow against your cash value, providing tax-free distributions and ensuring permanent insurability, to name a few.
“Generations of Wall Street professionals have been trained by their firms to trash cash value life insurance so the investment firms could maintain those dollars under management,” said Chris Blunt, executive vice president at New York Life and president of the firm's investments group. “Finally, a new academic study, using rigorous economic modeling, has debunked Wall Street's heavily marketed but largely erroneous path to financial security.”
That’s strike one against BTID.
Strike two is the fact most people don’t actually “invest the difference”, preferring to spend it instead.
“People don’t buy term and invest the difference,” said Babbel. “They most likely rent the term, lapse it and spend the difference.”
Lastly, when clients do actually follow through on the second part of BTID, they tend to make a mess of it.
“Even those who do invest the difference are prone to real-world emotional investing and tend to buy high and sell low, perennially underperforming market indices,” said Babbel. ““Our study sheds light on Wall Street guidance that has been taken as an article of faith, but that clearly underperforms for many who follow it.”
That’s strike three.
