"Buy term and invest the difference."

You may have heard of this phrase being tossed about in the insurance industry, particularly when discussing about "term insurance".

But what does it mean?

To understand that, we have a backtrack a little and talk about term insurance, and how it differs from the regular "whole life" insurance.

Putting it very simply, term insurance is a kind of insurance policy that provides you with pure insurance coverage for a certain period of time. Unlike whole life insurance, you will not get any money back once the policy matures at the end of the insured period.

Because of this, for the same amount of insurance coverage, you'll find that the premiums for a term insurance policy is a lot lower than that of the corresponding whole life policy.

And this is where the phrase "buy term and invest the difference" comes in. In essence, it refers to the strategy of buying term insurance, and using the money you save from the lower premiums to invest yourself in another investment vehicle to derive potentially higher returns compared to the regular whole life policy.

But why would you want to do that?

Well, what you may not know is that when you buy a whole life policy, you are essentially paying for 2 different objectives -- (1) insurance, and (2) investment.

A part of your premiums go towards paying for the "insurance" part of the policy so that you get the insurance coverage, and the remainder goes towards paying for the "investment" part of the policy so that you can get some positive returns at the end of the policy.

In other words, the insurance company is using your premiums to accomplish 2 different things on your behalf.

That's why you should consider the "buy term and invest the difference" strategy. Instead of giving all the money to 1 company to try to do 2 different things, you should consider buying term insurance to give you the insurance coverage, and then use the rest of the money to invest in some other investment vehicle yourself.

When you invest the rest of the money yourself, you can choose whatever investment vehicle you like, and you can also choose to use the best fund manager around if you want to. And should you ever want switch investment vehicles, you can rest assured that your insurance coverage will not be affected at all.

In short, you'll have more choices, more control, undisturbed insurance coverage, and hopefully more returns at the end of the day.

Copyright 2006 Ethan Lewis