Buy term and invest the difference (BTID) is a popular mantra of virtually everyone in the investment world, personal finance blogs, life insurance agents and YouTube comments section. But if you are like me, when everyone is saying the same thing I have to question the validity of the thing.
So, in the following article we will touch on the origins of BTID and address some of the objections raised by its passionate advocates. I will also share my personal journey of how I broke free from the group-think and took back control of my financial life.
The Origins of Buy Term and Invest the Difference, AKA BTID
Buy term and invest the difference was first coined by Primerica Financial Services founder and longtime CEO Arthur L. Williams. Mr. Williams believed that life insurance was only for protecting the primary breadwinner and so he launched a crusade to convince policyholders of cash value life insurance to trade in their existing, more expensive whole life and universal life policies, and replace it with a cheaper term life insurance policy.(1)
His reasoning was that middle-income families would be better served by buying cheaper term life, since whole life insurance rates are often 10-20 times higher than term life with a similar death benefit.
So, his idea was for these middle-income families to buy term and invest the difference in mutual funds and other retirement funds, such as the miserable 401k plan and IRAs.
”Our business is the replacement business. With the new [20-year term] policy, I told our agents we might have to change the name of our company from Massachusetts Indemnity to Cannibal Life. Our competition won’t be able to match it in price. We’re fixin’ to knock their butts off like you wouldn’t believe.”(2)
And knock their butts off he did, to the tune of billions of dollars in revenue for his Company. Mr. Williams himself is said to have had a net worth around $1.4 billion in 2008.(3)
Enter Dave Ramsey and Suze Orman
Many financial pundits, such as Dave Ramsey and Suze Orman, agree with Mr. Williams and use the slogan buy term and invest the difference whenever they are confronted with a caller who asks which policy is better, whole life insurance vs term?
Dave Ramsey’s main axe to grind with whole life is that he believes it is too expensive. And the truth about life insurance is that a term life insurance policy is cheaper than a whole life policy with the same death benefit, at least initially. (But more on this later).
Suze Orman is in the same camp (virtually everyone is in the BTID camp) as Dave Ramsey and talks often about whole life insurance is to much money. For example, here is a video where the caller tells Suze she bought a 30-year term instead of permanent life insurance. The caller asks Suze what happens when the term life policy expires. Suze proceeds to give her the script. (Please note: We do NOT agree with Suze, particularly her blanket advice with very little information gathering. This is the usual MO of these call-in financial “advice” programs.)
For Dave Ramsey and Suze Orman, their advice is one size fits all. It is the rich vs the poor and middle class, and the poor and middle class should play by different rules according to them. I don’t agree. I follow the rules of the rich and you should probably to.
The Investment World and Financial Planners Love BTID
Buy term and invest the difference is a big neon sign erected by the investment community that screams, “Give us all your money!” Recommending everyone but the uber-wealthy practice BTID simply reinforces the programming hoisted on the American public that our money should be handed over to Wall Street.
And when you hand your money over to Wall Street and Financial Planners, you hand over responsibility and stewardship of your money and put it in the hands of people and entities that make money and fees off of your money, even if you don’t make a penny.
Life Insurance Agents Jump Onto the BTID Bandwagon
Most life insurance agents parrot the same idea, having fallen victim to the lie that buy term and invest the difference is the right decision for everyone who is not rich. In fact, you would be hard pressed to find anyone in favor of cash value life insurance online.
And to be fair, it is what I believed when I first started out as well. After all, whole life insurance is so 1970. This is the year 2018, it is time to “buy term and ditch the perm”, or something like that.
From life insurance websites, to personal finance blogs, everyone has the same message: buy term and invest the difference. It is mass hypnosis.
And what happens when someone questions this herd mentality? Typically, you will get the canned response that the only person who recommends whole life is the people who are selling it.
Well, no kidding.
Maybe that is because the only people who dare go against the status quo are those who don’t swallow the same tired garbage of 90% of the investment world. It is these rebels who try and bring awareness to the advantages of life insurance that are marginalized.
And yet, there are countless life insurance agents who act like selling term life is rebelling against the system. Just do a search for “the whole life insurance rebellion”. When you have 99% of the sheep all running the same direction it is hard to call that a rebellion.
Most Agents Don’t Get It
Most life insurance agents, particularly the ones who focus exclusively on term life insurance, don’t get max funded life insurance, particularly a properly designed whole life policy. They don’t understand the benefits of the product or how it fits into a comprehensive wealth building plan.
These same life insurance agents don’t know that whole life can include a term rider, so that the policy is actually a combination whole life AND term life insurance policy.
Start a 2nd Job
For all the aspiring entrepreneurs out there, this is for you. And if you have yet to take the plunge into the frightening, but highly rewarding life of the entrepreneur, you can begin by taking back control of your money through max funded life insurance.
When you purchase a properly designed whole life insurance policy or universal life policy that focuses on high cash value growth over death benefit protection you should look at it as a second job that creates freedom and high-income potential.
Basically, this second job has the potential to be more profitable , one that has the potential to be more profitable in supplementing or even replacing your current source of income.
You see, when you are implementing a self-banking strategy using the infinite banking concept as your foundation you are becoming your own banker©, as coined by Nelson Nash. There is a mindset shift that takes place. It changes the way you see money and the way you view your life.
When I first heard about infinite banking, I wrestled with the idea for many months, examining the various pros and cons of infinite banking to try and make sense of it all.
I finally took the plunge and bought what I consider a small starter max funded insurance contract to try and test what it was all about. I am a very hands on person, so you can show me what a book says, charts and graphs, but until I actually do something it is all just babbling.
So, I bought a max funded life insurance contract and began using life insurance as my own personal bank.
And then it happened.
It was like a switch went off in my brain. I had the “Aha moment” where what was once dark is changed to light. The gears began to turn and I realized how profound this paradigm shifting choice was.
It was my life insurance red pill moment.
I have since increased my whole life insurance coverage dramatically higher, as my goal is to get as much of this tax favored product as I can, to build wealth throughout my life and leave a legacy at my death.
The Infinite Banking Strategy
If you are not familiar with infinite banking, we have many articles on the subject. Also, the classic book by Nelson Nash is a great introduction. The basic premise is that through the use of max funded dividend paying whole life insurance from a mutual insurance company you take control of your finances and become a responsible steward of your money.
The whole life policy is used as a wealth building account, that allows you to move money in and out, while earning interest and dividends on your principle cash value, which never goes down.
You pump your savings into these maximum funded insurance contracts which act as a conductor for all your investments, but the whole life policy remains a stable, safe compound interest account providing you with dividends in excess of 6% from the top infinite banking companies.
But you do not want your money to just sit there and grow stagnant. Rather, you use the policy to practice the velocity of money.
Harnessing the Velocity of Money
Velocity of money has to do with the movement of money. When money moves, it tends to increase. Keep your money moving and your returns grow and grow.
Ideally, you take your cash value life insurance asset and invest in other income producing assets that create cash flow.
Creating Cash Flow
One of the best real estate wealth building strategies is to use infinite banking in conjunction with the purchase of real estate investment properties. You borrow from the insurance company or a local bank using your life insurance cash value as collateral. Then you finance the rest with a typical 30 year mortgage.
So, you have zero skin in the game, investing in real estate entirely with other people’s money (OPM). You buy your cash flowing real estate property. You then use the cash flow from the property to repay your life insurance loan.
Once you build your cash value back up you can repeat the process. The policy acts as a safe bucket, offering all the advantages of cash value life insurance provided under the Internal Revenue Code, such as income tax free loans, income tax free death benefit, tax deferred cash value accumulation and income tax free dividends.
Bonus – Creditor Protection
Your life insurance cash value is protected from creditors. Different states provide different levels of protection, so check with your specific state.
Ideally, you would want to put your real estate investments into an LLC but your cash value would also be protected from creditors. This additional layer of protection adds to the cash value life insurance policy’s value and utility.
Risk Mitigation Safe Bucket vs Give your money to Wall Street
Most real estate investors, and anyone that practices financial discipline, will try and keep 6-12 months of income in a liquid account. The whole life insurance policy is a great place to store your money, so that it can earn interest at a much higher savings rate than is offered by any bank’s savings account.
Plus, when your money is earning interest is a safe bucket, apart from Wall Street, you don’t fret over each dip or rise in the market. Whole life is a non-correlated asset. If the market crashes, your money is safe. You can then use it to buy some stocks you have been eye balling while everyone else is running for the exits.
Whole Life Is More Expensive Than Term Life
This objection is misleading because you cannot compare term life vs whole life insurance regarding price because the two products are used for different objectives. If your goal is to get as much death benefit protection for the lowest price possible, then choose a 30-year term life insurance policy or a guaranteed universal life insurance policy.
The 30-year term life insurance policy for a 42-year-old at the top rate class looking for a $2,5000,000 death benefit would pay around $4,000 annually for his insurance premium. Mind you, you are paying for insurance coverage to age 72, at which time the term insurance premium skyrockets each year, pricing you out of the policy.
A guaranteed universal life insurance policy that lasts to age 121 would cost a 42-year-old male in the top rate class roughly $18,000 a year for the same $2,500,000 death benefit. But the policy would be optimized for death benefit and not cash value accumulation, which makes it a good policy for estate planning but not for creating your own wealth storehouse.
Compare Whole Life vs Term Life Insurance Quotes
Increasing Cash Value and Death Benefit
Alternatively, you can choose a whole life insurance policy that has you pay into it until age 100. However, limited pay whole life insurance plans allow you to make shorter commitments, such as 7-Pay, 10-Pay, 15-Pay and 20-Pay policies. Once you make your insurance premiums for the pay period, the policy is now paid-up life insurance. You never have to make another payment.
Dave Ramsey, always ready to give “horrible whole life insurance” a good smack, says that term life is 1/20 the cost of whole life insurance. And you know what, he is correct.
Once again, a 42-year-old at the top rate class looking for a $2,5000,000 death benefit 30-year term life policy would pay around $4,000 annually for his insurance premium.
In contrast, that same 42-year-old male looking for $2,500,000 in whole life insurance coverage would pay close to $80,000 in insurance premiums a year on a 7-pay whole life policy.
But wait, there’s more.
The whole life insurance policy’s death benefit increases every year. It starts at $2,500,000 but in 5 years’ time the death benefit has grown to $3.3 million. And in 10 years the death benefit has grown even larger, with it now up to $4 million. And by the time this 42-year-old reaches his life expectancy age of 82, the death benefit is now up to $7.6 million.
But take note of this. The paid-up additions rider on the whole life policy dropped off after year 7, so the insurance premium on the limited pay whole life policy dropped down to $18,000 a year, (the same annual premium as the GUL policy above with the $2.5 million death benefit). This is the power of overfunding your life insurance for high cash value accumulation and growing death benefit.
And the whole life insurance dividend is now greater than the annual insurance premium due on the policy, so you can either keep paying into the policy or let the dividend pay your premium. Your choice.
The term policy’s insurance premium is still $4,000 a year. So now the difference in price between term life vs whole life is more like 1/4, rather than the original 1/20. But the death benefit and cash value in the whole life insurance policy keeps growing and growing, so it is no longer a true comparison between death benefits, since the term life death benefit remains at $2.5 million.
You see, the death benefit stays the same and term life insurance has no cash value. If you don’t die in the 30-year term period, you have forfeited $120,000 to the insurance company with nothing to show for it.
And estimates are that 99% of term policies expire worthless. That is a loss of 100%, without even taking into consideration the opportunity cost of that $4,000 a year you spent on a term policy that could have been used elsewhere (such as building up cash value in a whole life policy).
And what about the cash value in the whole life insurance policy? Well, it has grown substantially.
In year 7, the final year of overfunding your life insurance, the cash value has grown to $678,000, which is a pittance in returns since you have pumped $616,000 into the policy.
But wait, there’s more.
Remember, the premium on this whole life insurance policy drops down from $88K to $18K in year 8. But watch how the cash value continues to grow.
In year 10, the cash value has grown to $868,000.
In year 15, the cash value has grown to $1,260,000.
In year 20, the cash value has grown to $1,785,000.
In year 30, the cash value has grown to $3,365,000.
In year 40, the cash value has grown to $6,000,000.
And this cash value growth is not considering utilizing the policy and maximizing its growth through strategic self-banking practices. Remember, the policy is simply the best tool to use when implementing the strategies of infinite banking.
You are not letting your money sit stagnant, so you have been buying cash flow assets and repaying your policy over the same 30 years. Your policy has $3.3 million in cash value but you may also have millions in cash flow assets.
How much, you ask? Who can say. It really comes down to you and the investments you have chosen. However, the point is, you have complete control. Not some Wall Street Banker or Financial Planner.
Agent Commissions vs Financial Planner Fees
First, when comparing fees or commissions, what it does not consider is value creation. Should agents earn a commission, and should financial planners earn fees? I believe so. I am grateful for the value a good agent or financial planner provides me with and I am happy to pay for that value. It is the same thing with CPA fees or Attorney fees. If you provide a valuable service, then I am fine exchanging that value you bring with my dollars.
Now, if you buy a $10,000 whole life policy that is designed for maximum early cash value growth the first-year commission paid to the agent will be about $2,500 to $4,000. That is because most of the payment goes into paid-up additions and not towards base premium payments, limiting the agent’s commission. If you add in renewals over the policy’s lifetime then the total lifetime commission of the agent will range from 75% to 90% or $7,500 to $9,000 in total commissions stretched out over time.
Alternatively, financial planners typical charge fees ranging from 1% to 2% on the total managed account balance. Some of the best financial planners I know have hundreds of millions of dollars in assets under management and routinely charge their clients 1.5% in fees year in and year out. (4)
Now to reiterate, I don’t mind. If the financial planner is creating value, who cares. But here is the rub. Who typically calls out agents for making “too much money” on commissions? It is those in the investment community. A community that makes money off various fees charged to its clients.
The truth is the financial community wants your money—all of your money. They do not want you to stick large amounts of your money into whole life. And they will not recommend it because they don’t make annual fees on that money because it is now in a whole life policy. And further, they are also afraid that once you get a taste of the freedom of controlling your own money, you may never give them another cent.
If you prefer to give the responsibility of your money over to another, then buy term and invest the difference may be the right strategy for you. For me, my independent streak and my desire to always be learning has led me down a different path. If you are like me, and you want to regain control of your money and practice stewardship, take some time and follow the links in this article to learn more. And as always, feel free to reach out to us for a complimentary strategy session.