This podcast episode elucidates the complexities surrounding the concept of "buy term and invest the difference," a philosophy that has gained traction over the years, yet is often fraught with inherent pitfalls. The discussion reveals that while this approach may appear straightforward, the reality is that it often fails to yield the promised financial benefits for the average individual.

Exploring the intricacies of life insurance, Joe and Jason's conversation centers on the often-overlooked implications of the buy term and invest the difference strategy. This approach, while popularized by certain financial advisors, is scrutinized for its practicality and effectiveness. The speakers contend that this methodology fails to account for the behavioral realities of individuals, who, upon saving money from lower premiums, may not consistently invest those funds as intended. Instead, there is a tendency to increase personal expenditures, undermining the very premise of the strategy. This discussion leads to a broader examination of financial stewardship, with the speakers promoting the idea of taking ownership of one’s financial decisions through education and informed choices.

Reach out to Joe or Jason and see what your plan can look like today. Visit www.alphaomegawealth.com/podcast

Foreign.

Welcome to make youe Wealth Work.

I'm Jason K. Powers here with Joe Pantozzi.

And around here we help you think like an owner, putting profit first, building systems and keeping your cash flowing on purpose.

So today we're going to tackle this topic you've probably heard of or this quote you've probably heard of by term invest.

The difference.

Where it came from, why, why it seems simple and why we take a different approach and with being your own banker.

So let's jump in.

How you doing today, Joe?

I'm doing well.

I'm glad you brought that up.

It's kind of a decades old fallacy.

You know, it's somebody's philosophy.

Somebody came up with this idea of buying in term and investing the difference.

And I think the reason they did is because that company became a billion dollar company by selling policies and alternative investments related to the policies.

They tried to package it and they created a multi level system and they made money on the multi level marketing, not on the products themselves, number one.

Number two, the clients didn't become wealthy, the company became wealthy.

So yep, yeah, it's, it's, it's.

That term has actually been around a rather long time, I think since the 70s if I'm not mistaken.

And it was just, it was popularized, let's say even more so by a few people in the public eye giving financial advice in this day and age.

Trying to refrain, Talking head.

Trying to refrain.

I'm trying to refrain the financial entertainers.

But yeah, the financial entertainers.

So I think that's an important discussion to have is where do we hear it?

Because I've certainly sat down with numerous people just in the past couple of months even and heard people say that, you know, people will say that, well, I'm just going to.

Or it's implied, you know, I'm going to buy term, invest the difference.

I'm going to just buy the term.

I'm going to put my other money elsewhere.

And I know where the sentiment is coming from.

You know, I, I get it.

Obviously in this space we want to be mindful of our money and, and I understand where a lot of people are coming from.

So let's define the term.

Okay, yeah, if that helps.

Because some people won't even understand.

Maybe they're not familiar with the term buy term and invest the difference.

We're talking about you have a need for life insurance or you perceive that you have a need for life insurance.

And some Kool Aid drinker like myself who has used whole life, permanent whole life insurance Cash value insurance for my entire career.

And I know that it works.

It works in my own life, it works in my clients lives.

I've got clients who are still with me 30, 40, 45 years together, and they've got these policies that have built up massive amounts of cash value inside these permanent cash value whole life policies.

And the, the naysayers are saying, no, you should own whole life, it's a terrible investment.

You should own term insurance.

Term insurance is a packaged policy that could be 10, 20, 30 years.

And what you're saying to the insurance company, you insure me in case I die during that period.

Okay?

I always laugh at that in case I die, because we're all going to die.

It's a matter of am I going to die while the policy's in force?

Right.

So the point is buy term and invest.

The difference is buying a term policy for this period of time that I want coverage and then I'm going to marry that with their mutual fund, buy term and invest the difference presumably in some kind of a commercially available market investment like a mutual fund.

And the presumption, the theory is by the time you get out to retirement age, let's say 65 years old, 70 years old, you're going to have so much money in that mutual fund account that they set up for you that you're never going to need the life insurance.

And so by term, it's going to carry you out to that period.

And then your mutual fund investment, or whatever the market investment is, is going to carry the day through the end of your life.

It'll cover all your needs for retirement income and also cover any final expenses you may have or any bequests you may want to have to family or heirs or charities.

It'll cover everything.

That's the philosophy.

And so the first thing I do before I take a breath and let you take in is, does it work?

Have you ever met a person who's actually employed buy term and invest the difference and carried it through for the last 50 years?

I personally don't know one.

If there was one, that person would be on the front page of Life magazine or something.

Yeah, yeah.

Well, I think, I think, though it's important to, you know, for the listener, we want to acknowledge, like, for those of you who have heard it and are trying to apply that, you know, you're doing it obviously trying to be a good steward of your money.

You know, you're doing it because that's the advice you're given and you trust that advice.

And again, you want to be a good steward of your money, so you do the best you do.

You don't know what you don't know.

We don't know what we don't know.

And I was that way for a long time.

And I thought, well, term insurance, as I understood it, was cheap, and I could take my money and buy some cheap insurance that I need and then put the rest of it elsewhere into some major growth vehicle or something.

And that is good in thought.

It's well intended.

And I think what happens, I mean, myself included, we have this behavior gap, if you will, that kicks in.

Joe, you and I would start bringing in the topic of Parkinson's law.

We have this behavior gap that is okay.

Now we're not spending this money.

We have all this extra money we should be putting into this growth vehicle.

But how many of us actually do put money?

We saved the money because we bought cheap term insurance, and then we turned around and actually put that money into growth vehicles.

Or did we go, I have extra money in my pocket.

I can go to extra dinner a month.

We can go out.

What do we do with that extra money, really?

So I think that's one problem people run into is going, well, we don't actually invest the difference.

We increase our lifestyle or we miss months.

We stop contributing to what we were contributing.

And then all of a sudden, we wake up one day and we didn't actually do it.

Just like you said, we haven't actually employed it.

Right.

It's one thing to make a case for it and kind of pose it as a hypothetical.

Yeah, what if I did that?

What If I paid $100 a month for term insurance and I put $1,000 a month into a market account?

Wouldn't that work?

Absolutely, it would work if you did it.

But there's the human problem.

You're not going to do it.

And I'm not saying that it's a wrong philosophy in and of itself.

It's that life gets in the way.

You know, I needed to replace the tires in my truck.

Happened to me six months ago.

So it's still fresh in my mind.

And they needed to get twelve hundred dollars.

So why?

Where am I going to get it?

Well, I could take some of the money out of the mutual fund, or I could just go use a credit card and pay the credit card back over time.

What happens with credit card balances?

They tend to go up rather than down.

And so the human problem is it requires such discipline that no one is actually going to do it because it doesn't operate in a vacuum.

See, there's an important point.

It doesn't operate in a vacuum.

You have current load living expenses that you need to meet in the meantime.

And where are you going to get the money for those expenses?

Well, credit card companies charging 29% on average nowadays.

It's a terrible alternative to having cash on hand invading the mutual fund that they just told me to set up.

That's for retirement only.

It's a terrible idea.

It's again, silo thinking, as I like to describe, because that money's only allocated for the future there, I can't touch it.

My credit card is allocated only for the present, so I better use it.

Yeah, but it's costing me 29%.

If I'm not earning 29% someplace else, I'm falling behind.

So even before all that, I'm getting some advisor who's probably not doing it, him or herself.

There's a danger right there.

They don't eat their own cooking.

Right.

They're selling it.

They don't own it.

And number two, they want us to take our advice.

They want us to take our word from the notion that this may work out.

It might work out, it should work out, depending on what the market does with our market account.

There's a lot of ifs there, and we're giving up control of our financial future to someone else's opinion.

Whereas for us, what we pride ourselves on, in a sense, is making sure that our clients take ownership for the education, take ownership for the financial literacy so that you can improve in your own life in dollars and cents and real math and practicality and that, that this methodology works.

Becoming your own banker means managing the store, managing the input, managing the outflows, managing the accounts, whatever they are, if it's one policy or 10 policies, managing all that and getting to become an entrepreneur and an owner and a business owner so that you understand that you're continuing to build an asset that is able to support your lifestyle, your investments, your business expansion.

Yeah, there's a, you know, which I think we're going to touch on about what else can we do?

But before we kind of get to that, I think it's understanding the different components to it.

Why might this not always be the best thing for you?

And we've talked about the behavior gap we talked about, and I think there's.

From a practical life insurance coverage standpoint, you have this potential coverage gap coming down the line.

I'm going to buy term, invest the difference.

But when that term is up, Then what If you need life insurance, what happens?

So I've been a poster child for term insurance.

I love, I should make that past tense.

I loved owning term insurance and I bought millions of dollars of term insurance over my career and I qualified for it at the best rate you can marathon run a rate.

And then when I got diagnosed with prostate cancer 16, 17 years ago, I was so thankful that I had multiple millions of term life insurance in effect that was guaranteed to be converted to whole life, which I did convert to whole life in packages of a million.

And every single million dollar whole life policy I bought had to be issued current age but had to be issued at preferred basis best rates.

So yeah, term insurance serves a wonderful purpose.

Number one, it covers you if you're one of the thousand, one out of a thousand that dies in an odd way and you get in a car accident or something, but it's covering you just in case.

But more importantly, it guarantees the option to buy whole life.

So when I took advantage of those options, now I've added to my portfolio of policies right now it's also important.

To note is that term product you have convertible, right?

So it's also important to know if the term product you have is actually convertible.

Yeah, yeah.

And I've had this conversation with people over the years and they tell me, well, I'm just going to buy a cheap term policy because that's what I need right now.

Well, let me show you the difference between buying a cheap term product online, right, or buying a mildly more costly term product from me.

Now by the way, you're going to pay somebody a commission when you buy that policy online.

You're going to pay some stranger commission.

You'll never meet them, you'll never know them, they'll never help you again, but you paid a commission that was built in.

When you buy a term policy from me, I'm going to make sure that policy is with a strong mutual dividend paying whole life company and that term policy will be convertible to any of their selection of whole life products.

So you have access to the best whole life products on the planet.

Now.

I think acknowledging, we're kind of saying, oh, you know, buy term, invest the difference might not be the best strategy.

But we're not saying don't buy term, period.

Exactly, it's not what we're saying.

I think a lot of people out there misunderstand that sentiment, if you will, and go, wait, wait, wait, wait, wait, wait.

So I can't buy term insurance.

And then, and then there's this big right behind the scenes arguments, if you will, debate going, they're telling me not to buy term and term is bad.

We're not saying term is bad.

I'm saying that particular strategy might be bad.

Cause it's limited, invest the difference.

Cause it's limited.

And using me as the guinea pig or the poster child, I've had clients buy policies years and years and years ago.

And they get now to the ages where were no longer cancel the old term policy and buy a new term policy because they realized, wow, I'm 60 years old and the invest the difference part didn't really work out so well.

So I better buy more term insurance because, you know, I am older, but I had a daughter or a son who got married, had kids, their marriage didn't work out, they had to move back in with me or I'm continuing to support them financially.

And I want to make sure I could take care of my family if something happens to me.

So therefore I better buy another term policy and I'm 65 years old.

Well, maybe they could qualify for the term policy and we'll put it in place if that's what they need or that's what they want.

Or they might say, they might get examined.

We put them through underwriting and we come back and say, I'm sorry, we can't get you a policy, we have some funny stuff going on with your blood and you're not going to get a policy, period.

And so now what we're left with is the conversion options.

And most of those people are happy to find out that term policy is now convertible with no medical and they can convert all or some of it if they can only manage a certain budget, which is fine.

They'd rather have some, let's say they had a million dollar term policy, but if they could only convert a quarter million, well, quarter million is a lot more than zero.

And we'll figure out a way to fund it so they find out when they hit that wall of insurability, it would be nice to have an option.

Now the other thing that I find interesting is that nobody is interested in finding out whether rich people actually do this.

If this was such a good strategy, why wouldn't people with money do it?

Well, if you read Robert Kiyosaki's book Second Chance, he says, you know, rich people don't do things differently than poor people.

They do things exactly the opposite.

So there's another hint about rethinking your thinking.

It's not mildly different.

It's not a Mildly different strategy.

It's no, no.

If I'm a high net worth individual, I'm not buying anything that doesn't represent equity or value.

I'm not renting a term policy for 20 or 30 years and have the possibility of it going away.

And I didn't make anything on it.

Yeah, I protected in case I died, but I get nothing out of that policy.

Isn't there some kind of a policy that I could protect my life and also get my money back?

Yeah, absolutely there is.

High net worth individuals use permanent cash value life insurance, number one.

And number two, if your investments do so well that by the time you're 60 or 65 or 70, you've got a basket full of money, you're still going to need life insurance to protect the final expenses and the incidentals and making gifts and supporting charities and paying maybe some taxes depending on the state you live in.

So there's always going to be a reason why you're going to want to leave more than a limited term policy represents, especially after it cuts off.

So I heard it from you the first time years ago about, you've alluded to it just now, the renting versus owning.

Give us the short version of that and what, that, what do you mean by that?

Because you've alluded to just now renting with term insurance.

And I love that, I love that kind of visual, especially those, you know, I was in real estate investing and stuff for a long time and I loved that analogy.

I was like, I never thought about it that way.

So the analogy that I was taught and that still works, it just makes logical sense to people is this.

If you move into an apartment.

You'Re.

Going to stay in that apartment for a number of months or years.

And a lot of people who move into apartments say this is temporary and they intend to buy something, they want a permanent home and they want to call it their home and they want to control and they also like the idea, the possibility that they'll build up equity at some point in the future.

But they understand that when you rent an apartment, you're paying rent and none of that rent goes into an account for you.

You're paying rent that goes rightfully to the owner of that building.

That apartment owner built the apartment so that they could create rents which are income to them.

And you're going to pay rent, it's going to provide you with a roof over your head, and then one of these days you're going to move out and you're never going to look back and Ask for some of your money back.

You're renting, you have no equity.

And so a term life insurance policy is a product where you're renting life insurance coverage.

And by the way, the insurance company is, let's say, putting their million dollars against your $100 a month bet for whatever the number is that you're going to live through the period past the period you're buying the policy for, and you're betting that you're going to die.

Now think about this.

You're making a bet against one of the smartest casinos in the solar system because they know, based on your age and health, they know how long you're going to live.

They know that they're taking a fool's bet, the fool being us.

We're betting $100 against the million.

Oh, man, if I die, I win.

Great, right?

Well, when you put it that way.

And then on the opposite side, if I buy a permanent whole life policy, I am owning, I'm buying a home, buying a property that costs more.

Absolutely.

I'm still going to have a roof over my head.

I'm going to have the protection.

And down the road, I'm going to get every dollar back and then some that I put into the policy, no matter how long I have it.

So it's a guaranteed return.

In that sense, you're going to get your premiums and your death benefit.

So when there are these talking heads out there saying, you know, it's a fool's errand, it's a bad investment, it's stupid, and absolutely is not an investment.

Whole life policy is a financial account.

It is as close to a bond as I could think of as a comparison, but it is not an investment.

It shouldn't be looked at as an investment.

You're not going to get these huge rates return, but you are going to get your money back.

You're not going to lose your money.

It's going to get better every year that you have it and there's nothing you could do about it.

It's always going to get better.

So renting versus owning is an important distinct distinction to understand.

Yep.

Yeah, that's kind of this, you know, we, we talk about, like we've said this, this renting a term policy and then taking the difference and investing it may not be the best approach because are you really getting ahead that way?

Now, some are going to own the risk, some might get ahead, but the overwhelming majority, it's not really the case.

When we look at the history of markets, I'm not Going to sit here and get into whether certain investments do this, that or the other.

Right.

But what if, which you've talked about already, Joe, like what?

What should the average person be looking to do instead?

If buy term, invest, the difference might not be the best approach.

What's the best approach or what's a seriously good approach to be looking at and considering?

Okay, so what we just described in the last few minutes were two extreme alternatives.

One is all term insurance.

It's all going to crash and burn.

All whole life insurance.

It might be too much premium for me to afford.

Right.

Right now.

Well, what if we started out with a hybrid with a combination plan so that you can be protected for your family, Your family would have the benefit of that windfall of life insurance should something happen to you in the foreseeable future.

Right.

So what if we looked at a combination and said why don't we buy some whole life insurance and the majority of the coverage as term insurance and then periodically over time.

This is a very conservative approach, but it will work.

We slowly convert some of the term insurance every few years.

Let's say depending on your situation, on your financial profile, on your path.

Maybe you'll convert more of it sooner, maybe you'll leave more of it as term in the short term.

But you set up a whole life policy, that's a smaller amount, maybe it's 20% of the total insurance that you need.

You pick a number, you pick a budget.

This is the amount I can afford.

I'm not talking about looking at your finances right now and having us tell you what you should afford, because I'll really never do that.

You're always going to decide for yourself what, what you should afford, can afford and want to afford.

Our job is to put products and services in front of you that make sense for you for the next 50 years.

So look at a hybrid, look at a middle ground, part whole life, part term insurance and we can model that for you easily and you choose what makes sense to you and then you'll have the comfort of knowing that you're protected fully.

So let's, since we've got, you know, this is I believe, episode 55.

So there are 54 episodes that people can go back and review, but just to give new listeners a first time bullet point understanding of where we're coming from.

So let's just talk for a quick two minutes before we wrap about why Whole Life.

Why are we even making a suggestion to get 20% of what you can in coverage in Whole Life?

It's Not, I mean, it's beyond just the death benefit.

We're talking coverage, but it's beyond just the death benefit.

There are so many more features to this vehicle and what you can do with it.

I'll kick it off because I think what many people don't understand is something very basic.

We talk about this all day, every day, Joe.

And sometimes I forget that some people are hearing it for the very first time and they're like you said this term cash value.

What is cash value?

And I'm going, oh, I just, you know what I mean?

I forget because term, you pay a premium, you get a death benefit.

Whole life, you pay a premium, you get a death benefit.

But along the way you have a growing amount of what's called cash value that's accessible.

And you could borrow against that cash value.

Yes.

And use that money on whatever you will, make it money or save you money.

Now we like to teach people how to use it to be your own banker, how to replace the need for the outside bank.

Right.

Over time.

And so you could borrow against that cash value and utilize it.

Make you money, save you money.

I think it's a good summary, but what are some of the features?

Like why would you even do that?

So you touched on a really important point.

You used the two words over time.

And you want to have a long term view of your finances.

It may have taken you a while to get into the debt that you're in.

It's going to take you a while to get out of that debt.

And we can help you do that with a systematic approach.

We'll create spreadsheets, we'll create a pay down schedule, the whole nine yards.

But whole life is a financial vehicle that has worked.

Right.

Very simply, it works.

It's proven over time.

The people that say it's terrible are the people that have something else to sell.

And that something else typically does put a commission in their pocket and they're advertising that you'll get a better rate of return.

Again, they're trying to argue that their investment is better than this whole life policy, but they're arguing that an investment is better than something that's not an investment.

So I wish they would pick a fight with their peers, their equals, because a life insurance policy is an amazing savings account that will run rings around any other financial program.

And rich people have proven that it's true.

Big corporations are proven that it's true because they put it on all their executives.

And banks are proven that is true because they buy it by their billions.

And so it's a old line, traditional conservative contract with an insurance company.

All of our insurance companies have a track record of 120, 140, 150 years old.

They don't lose the money.

They don't go out of business.

They don't put money on Wall Street.

They actually have assets to up their liabilities, which very few financial institutions have these days.

So it does all these things.

It protects you, but it also gives you access on demand.

How about having access to all, to a loan using the cash in your policy?

Right.

The savings element, the equity, however you want to call it, having access to a loan based on a 4% interest only, meaning the insurance company is only going to charge you 4% interest and they're only going to send you a bill for that interest once a year.

You're responsible for deciding if and when you pay the principal back.

That gives you a tremendous amount of leeway, flexibility and control.

But I think I've already gone into too much detail about it.

I think the bottom line for me in a very short conversation here is whole life policy is worth understanding because it is, it forms the foundation of the protection for a family and for many, many businesses.

So it's absolutely worth investigation, getting more information about and learning about it.

So you can control the information and control the components of it in your own financial system and not take somebody else's word.

Because what we say is based on everything that we can put in front of you from a factual, economic, scientific, actuarial perspective.

Everything that we say is backed up by math, science and history.

And I think that's what I love about it most, is just the fact that we don't have to qualify every strategy, every number, because we know pretty much what it's going to do.

We don't have to say if, if, then.

So that's it?

That's it.

Well, I know we can go on for another two, three, four hours on this kind of stuff.

Listen.

If you're listening today, there are a couple of videos on the Alpha Omega Wealth YouTube channel.

You can dive in.

Joe gives some great examples on the numbers we talked about at the beginning, kind of investing the difference, what that might actually look like and why that may not pan out how you think.

So so that's on YouTube.

You can go check it out.

But appreciate you guys being here and listening.

On the make youe Wealth Work podcast, your next step is simple.

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I said your next simple step.

That was.

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All right, guys, we'll see you next time on make your wealth work.

Thanks, Jason.

See you next time.