For example, a 30-year term life policy for a 33-year-old man may cost $939 in annual premiums, compare that to $11,290 for a whole-life policy.  So instead of choosing the whole-life, he invests the $10,351 annual difference in a portfolio with a net after-tax return of 5.19%.  In 30 years, the invested money grows to $746,997.  However, if you still need coverage after the term-life expires, the annual premium might be something like $29,589.

Professionals disagree on which option is better.  Some argue that “buy term insurance and invest the difference” does not work so well when the market craters, like last year; but I think that really depends on how you are investing that money.  The way to think about it is what does the insurance company do with my money when I buy the whole-life?  They go and invest it in conservative instruments to match their long-term liabilities, not in a 80% equity portfolio.  We can do the same.

In fact, to make things simple, buy term (ladder them if expect expense needs to change over time) and invest the difference in a target date fund with the same date as when the term-life policy expires.  Hopefully you will be smiling happily to know 10, 20, or 30 years from now that you’ve pocked the compounded difference instead of your friendly insurance company.