Many people believe in the old adage that you buy term life insurance and invest the difference.  TV talk show hosts rave about it.  Theoretically, if permanent life insurance (whole life or universal life) were to be purchased, it would cost you “x” number of dollars.  If you bought term insurance for the same benefit, it would cost you a lost less.  If you took the difference in cost between the two, invested it, and looked at the numbers at the end of the period selected for the purchase of a term insurance policy (such as 20 or 30 years), you would have accumulated a lot of money with the principle plus interest earned.

That process, however, does not allow any margin for error.  Life also has a strange way of throwing a few curveballs that can drastically change your plans.  For example:

  • Many people just plain don’t “invest the difference”.  The money is available in the bank, so they spend it.  At the end of the term period selected, there is no “investment” available to provide the dollars originally intended.
  • Many people have other needs that pop up and have to be addressed – braces for the children, vacations, car repairs, college education, etc.  The money that was going to be set aside for “investment” has again been spent.
  • People get sick – heart attacks, cancer treatments, etc.  When you stop working, your income suffers.  If your income stops, you starting spending money from other resources, including the monies set aside for “investment”.
  • In today’s society, many people get divorced.  After running along with the term insurance program for a certain number of years, the money that was set aside while “investing the difference” is now with the former spouse or greatly reduced.
  • The “investment” side went completely south or didn’t perform as expected.  As we have seen over the past couple of years, many investments have suffered serious declines due to economic issues.  Even though much has been recovered in value recently, the reality is that these losses can happen again.

If you have lost value in your “investment” down the road, and you don’t have the dollars available as originally expected, how will your family survive?  You will be much older when you come to the realization that the money saved is gone, and you have far less time to replace what you thought you were going to have as a resource.  By that time, it may be too late to buy more life insurance.

The permanent insurance therefore serves as a safety net for family protection purposes.  The proceeds upon death remain income tax free.  If you happen to be more successful in your endeavors and hit the target accumulation of funds at retirement, you can always terminate the policy for whatever cash value might be available.  If you have missed your target, the safety net serves as a replacement of the savings you weren’t able to secure on your own.  The cost is minimal – the price you pay if you don’t have the safety net in place will be huge.

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