Comparison Last reviewed: 2026-10-03 Part of Comparisons

Buy Term and Invest the Difference: When It Works and When It Doesn't

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

For most people: buy term and invest the difference works, if you actually invest the difference. That is the whole plan, and it is the step most people skip. If you max your 401(k) and Roth every year, term plus investing is hard to beat. If you know you will not, a permanent policy's set-and-forget premium can be the savings habit you would not build on your own. In Hans's opinion, that forced savings is the real benefit for many families.

The plan, stated fairly

"Buy term and invest the difference" (BTID) says: buy cheap term life for the years people depend on you, invest what you would have spent on permanent life, and by the time the term ends you are self-insured. It is the plan Dave Ramsey teaches publicly, and the math behind it is sound. Term costs a fraction of permanent coverage for the same death benefit, and a diversified portfolio held for decades has historically grown faster than a policy's cash value.

For a disciplined saver who already maxes the 401(k) match, the Roth IRA and the rest of the 401(k), BTID is often the right answer. The 2026 limits leave a lot of room: $24,500 in a 401(k) and $7,500 in an IRA (IRS). See IUL vs Roth for the order Hans recommends.

Where the plan breaks: the "invest" part

The plan assumes the difference gets invested, every month, for 20 or 30 years, and is not spent on a car, a kitchen or a bad year. Behavior is the weak link. No study tracks whether term buyers actually invest the difference, but the saving data points one way: the U.S. personal saving rate was 4.1% of disposable income in August 2026 (BEA, 9/30/2026), and in 401(k) plans, 94% of employees participate when they are enrolled automatically versus 64% when they must sign up (Vanguard How America Saves 2026). Defaults beat intentions. Otherwise the money sits in checking, then it is gone, and at 65 the term has ended with nothing to replace it.

A permanent policy flips the default. The premium is a bill. You pay it like the phone bill, and the cash value builds without a decision each month. That is not a better return. It is a better habit for people who know themselves.

Term or permanent

Will you really invest the difference?

Send your email and I'll send the honest checklist: when term plus investing wins, and when forced savings wins.

We’ll email it to you. Hans Goldstein · NPN 20602398.

Rather talk it through? Or book 15 minutes on Hans’s calendar.

Term lapses, and most term never pays

Term policies are often dropped, because there is nothing to lose by stopping: no cash value, no refund. LIMRA data cited by economists Gottlieb and Smetters show term lapsing at about 6.4% a year (Gottlieb and Smetters, American Economic Review, 2021), and when a 10-year level period ends and the premium jumps, about half of policies lapse (47.5% by count in 2015 to 2023; SOA/LIMRA term conversion study, 5/2026). Most term policies never pay a claim, mainly because they lapse or expire; even among policies bought at 65, 74% of term never pays a death claim (Gottlieb and Smetters, citing Milliman). Permanent policies lapse too, and early: 29% within 3 years and 57% within 10 (same study). Forced savings only works if you keep paying. That is not a flaw; it is how insurance against an early death is supposed to work, and why it is cheap. But it means that for many buyers, the money spent on term protected them and then disappeared.

Permanent life with cash value is one of the few ways to get money back from life insurance while keeping coverage (return-of-premium term and some riders also refund premium, at a higher price).

Term makes sense when...

You are a disciplined saver who really does invest the difference, every month, for decades.
The premium is small enough that you will not miss it (around $100 a month), so it will not lapse.
The need is temporary: a mortgage payoff, kids until they are independent, income replacement through your working years, a business loan or a key person for a set term.
You need a big death benefit on a tight budget right now, as with a young family.
You want to lock in your health now with convertible term and convert part of it to permanent later (how term conversion works).

Permanent makes sense when...

Forced savings helps you: a premium you pay like a bill builds cash value you would not have saved on your own.
You want coverage that lasts your whole life, not just 20 or 30 years.
There is an estate or ILIT purpose: liquidity for estate tax, equalizing heirs, or a trust (ILIT guide).
Cash value is a goal and you can fund it properly for 15+ years (max-funded IUL).
You are healthy and under about 55, so the cost of insurance has decades to stay low while cash value builds.

Side by side

Buy term and invest the difference vs permanent life

	Buy term, invest the difference	Permanent life (properly funded)
Death benefit cost	Lowest per dollar of coverage	Higher; part of the premium builds cash value
Coverage length	Ends with the level period	Lifelong if funded
Savings discipline	Up to you, every month	Built in: the premium is a bill
Growth	Market returns, with market losses	Interest credits with a floor; charges come out every month; illustrated values are not guaranteed
Access before 59½	Taxable account: anytime; retirement accounts: penalties apply	Loans and withdrawals, subject to policy rules
Taxes	Depends on the account	Policy loans and withdrawals up to your basis are generally not taxed if the policy is not a modified endowment contract (IRC §7702A) and stays in force; a lapse or surrender with a loan outstanding can create taxable income
Best for	Disciplined savers who max the 401(k) and Roth	People who want forced savings, lifelong coverage or an estate purpose

Hans's decision order

Take the full employer 401(k) match.
Fund a Roth IRA (or backdoor Roth) and use Roth conversions in low-income years.
Buy enough convertible term to protect the family now.
If you also want lifelong coverage, tax diversification and access before 59½, add a properly funded permanent policy (max-funded IUL). If you will really invest every month, keep investing instead.

Two cautions on the permanent side. Cash value takes 10 to 20 years to get meaningful, so do not buy it for a short horizon. And an underfunded permanent policy can lapse late in life; see IUL problems when you are older. For the whole life version of this debate, see is whole life worth it?.

What it costs

Ballpark ranges by age, sex, health class and face amount, with dates and sources: Ballpark life insurance costs →

Get your exact number in 15 minutes on a call with Hans.

Term, permanent, or both?

Send your age, budget and what you are protecting. Within one business day Hans lays out a term-only plan and a term-plus-permanent plan side by side, with the guaranteed numbers.

Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.

Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Does buy term and invest the difference work?

Yes, if you actually invest the difference every month for decades and leave it invested. It works best for disciplined savers who already max their 401(k) and Roth. It fails when the difference gets spent.

What does Dave Ramsey say about life insurance?

Dave Ramsey publicly recommends buying term life insurance and investing the money you would have spent on permanent coverage. The plan is sound when the investing really happens.

Why do most term policies never pay a claim?

Most people outlive the level period, and many drop term coverage early because there is no cash value to lose. About half of 10-year term policies lapse when the level period ends, according to Society of Actuaries data. That is why term is inexpensive.

When is permanent life better than buy term and invest the difference?

When forced savings helps you, when you want coverage for life, when there is an estate or trust purpose, or when you want cash value and can fund a policy properly for 15 or more years.

Should I max my Roth before buying an IUL?

For most people, yes. Take the 401(k) match, fund a Roth and use Roth conversions in the right years first. An IUL fits after that for people who also want lifelong coverage and tax diversification.

Sources

Hans Goldstein, CA Insurance License #4273294 · NPN 20602398 · Goldstein & Co. LLC dba Goldstein Insurance Services, CA License #6016830

Contact: hans@hansgoldstein.com · 213-414-2808

General education, not tax or legal advice. Tax treatment depends on your facts and on current law, which can change. Talk to your CPA or estate attorney. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Guarantees apply only to the contractual terms of the policy. Caps, participation rates, loan rates, charges and dividends are not guaranteed and can change. Hans is paid a commission by the insurer if you buy a policy through him. For life insurance, ask and he will tell you what he earns on your specific policy. Product and company names are trademarks of their owners. Goldstein Insurance Services is an independent agency, not affiliated with or endorsed by any insurer named here. Life insurance requires underwriting; not everyone qualifies. This page describes products in general terms; read the policy and the insurer's disclosures before you buy.