Why “Buy Term and Invest the Difference” No Longer Holds Up

Gonzalo Garcia – For as long as I have been in this business, I’ve heard the same refrain from otherwise thoughtful financial planners: “Just buy term and invest the difference.”

It sounds clean, rational, and data-driven. Term insurance is inexpensive, markets are presumed to cooperate, and spreadsheets can be built to show very attractive results. On paper, “buy term and invest the difference” (BTID) seems almost unassailable.

But “on paper” is not where our clients live.

In that world, a pure investment-only or BTID approach is often fragile at precisely the time when clients need the most certainty.

That is why I paid very close attention to the recent Ernst Young (EY) / Finseca research on holistic retirement planning. It does something many of our industry debates do not: it runs the numbers objectively and then tests how integrated strategies behave in the real-world scenarios our clients actually face.

The short version? The BTID / investment-only mantra does not fare well.

In this article, I will walk through what the EY / Finseca work shows, why BTID fails the retirement reality test, and how you – as an advisor – can reposition permanent life insurance (PLI) as a core, intentional asset in your clients’ retirement plans, not a product to be defended or apologized for.

What Is BTID, Really?

Let’s define our terms.

“Buy term and invest the difference” is the idea that a client should:

• Purchase a relatively low-cost term policy to cover temporary protection needs; and
• Take the premium savings versus permanent life insurance and invest that “difference” in a diversified portfolio, capturing market returns and ultimately self-insuring.

Conceptually, this is not crazy. Term insurance is a powerful tool when budgets are tight and liabilities are clearly time-limited. The problem is not that BTID is always wrong. The problem is that BTID has been elevated to near-religion in some corners of the planning world, especially by those who see permanent life insurance as “too expensive” or “just a bad investment.”

The EY / Finseca research is a needed corrective to that narrative.

What EY & Finseca Analyzed

Their conclusion was clear: when you blend permanent life insurance and deferred income annuities with increasing income potential into a plan, those integrated strategies can outperform investment-only approaches across key measures of success.

The more recent EY / Finseca study updates and extends that work. It looks at multiple household types, different ages, and a range of contribution patterns and retirement ages. It stress-tests retirement outcomes not just under rosy market conditions, but also under scenarios where Social Security benefits are reduced and market returns are less generous than historical averages.

A few themes emerge from the research:

• Integrated, “holistic” plans win. Across scenarios, strategies that combine investments with permanent life insurance and deferred income annuities tend to deliver better results than pure investment-only portfolios, especially when the client wants a combination of income and legacy.
• You don’t need to “over-insure.” In many of the modeled cases, allocating roughly 30 cents of each dollar of retirement savings to PLI and annuities – and 70 cents to traditional investments – produced superior outcomes versus putting the full dollar into an investment-only strategy.
• It’s not just about returns. The integrated strategies generally provided more stable income, better downside protection, and more reliable legacy values – particularly when markets underperformed or when Social Security benefits were cut in the stress tests.

In other words, this is not a “whole life vs S&P 500” cartoon. EY is looking at full household outcomes: after-tax income, sustainability of withdrawals, legacy values and resilience to adverse scenarios. And when you look at the whole picture, integrated planning that includes permanent life insurance and annuities tends to look objectively better for most households than an investment-only or BTID approach.

Why BTID Looks Good in Theory but Fails in the Real World

There are several reasons.

1. BTID assumes perfect behavior. BTID only works if clients actually “invest the difference” consistently, stay the course through volatility, and resist the temptation to spend the surplus or de-risk at exactly the wrong time. Many of us have seen the opposite:

• Contributions get skipped during market downturns or when budgets get tight.
• Clients shift to cash after a correction and miss the recovery.
• Lifestyle creep quietly absorbs the “difference” that was supposed to be invested.

Permanent life insurance, by design, forces a level of disciplined funding. Premiums are not optional. That “forced savings” quality is exactly what many households need if they are ever going to accumulate a side fund that can act as a tax-advantaged buffer in retirement.

2. BTID ignores sequence-of-return risk. BTID illustrations usually assume straight-line returns. Real portfolios do not cooperate. The order in which returns are earned – especially in the early years of retirement – has an enormous impact on sustainability.

When the only tools you have are volatile investments and maybe a term policy that expires, your client’s entire retirement income plan is exposed to market shocks. When you add permanent life insurance cash values and guaranteed lifetime income from annuities, you have levers to manage sequence risk:

• Clients can take tax-advantaged loans or withdrawals from life insurance cash values during down markets instead of selling equities at a loss.
• Deferred income annuities can provide a floor of guaranteed income that does not care what the S&P 500 did last year.

The EY research shows that these “shock absorbers” matter. Integrated strategies are simply more resilient when the sequence of returns is unfavorable than investment-only or BTID designs.

3. BTID focuses only on dying early, not living long or getting sick. BTID is implicitly a “die young and healthy” strategy. Term insurance is cheap and effective if a client dies during the level term period, while the portfolio is still growing. But what if they live a long life? What if they suffer a health shock that forces early retirement or long-term care expenses?

Permanent life insurance and annuities address multiple risks simultaneously:

• Mortality risk – provide liquidity whenever death occurs, not just during the cheap term window.
• Longevity risk – especially when combined with lifetime income annuities that hedge against outliving assets.
• Morbidity risk – when policies are designed with long-term care or chronic illness benefits, or when death benefits can be used to replenish assets spent on care.

BTID typically has only one lever: “hope the portfolio is big enough.” That is not a strategy; it is wishful thinking.

4. BTID underestimates the tax advantages of permanent life insurance.

The tax treatment of permanent life insurance is unique. Cash values grow on a tax-deferred basis, and when structured properly, withdrawals to basis and policy loans can provide access to cash values with very favorable tax treatment. Death benefits are generally received income-tax-free by beneficiaries and can be structured to mitigate estate and transfer taxes in larger cases.

Investment-only or BTID strategies create taxable friction almost everywhere: dividends and interest, capital gains when rebalancing, ordinary income taxation on qualified accounts, and potentially estate and income tax layers at death.

EY’s modeling incorporates these tax dynamics. Once you account for taxes over a full lifetime – not just during accumulation – integrated strategies have a structural advantage that a simplistic “term plus side fund” illustration often misses.

How to Reframe the Conversation with Clients – and Other Advisors

Following are a few practical reframing ideas you can use.

1. Talk about risks, not products. Instead of opening with “whole vs term” or “annuities vs investments,” start with the four big household risks we are supposed to help clients manage:

• The risk of dying too soon (mortality risk)
• The risk of living too long (longevity risk)
• The risk of getting sick along the way (morbidity and long-term care risk)
• The risk of paying too much in taxes (tax drag during life and at death)

Then ask: “Which of these risks does a pure investment-only or BTID strategy actually solve for? And which are left completely unhedged?”

That is where permanent life insurance and annuities start to feel less like “products” and more like risk-management tools built into the family balance sheet.

2. Position permanent life insurance as a retirement asset, not just a death benefit. The EY / Finseca work reinforces what many of us have seen in practice: permanent life insurance behaves like a multi-purpose asset in retirement:

• A source of tax-advantaged supplemental income
• A volatility buffer during market drawdowns
• A dedicated pool of tax-efficient legacy capital
• A funding source for Roth conversions or tax-accelerating strategies
• A way to backstop long-term care and health shocks

When the only story we tell is “life insurance is for when you die,” we make it very easy for a client (or their investment-only advisor) to say, “You don’t need that anymore – you’re retired.”

3. Use BTID as a phase, not a religion. There are absolutely times when term plus aggressive investing is appropriate. Young families with limited cash flow and big human capital may need maximum death benefit per premium dollar. I am not arguing that permanent life insurance must be the answer in every situation.

What I am arguing – and what the EY work supports – is that BTID should be seen as a phase in a client’s financial life, not an ideology that must be defended until death. At some point, clients transition from “maximum leverage per dollar” to “maximum certainty, flexibility and control.”

That is where intentional, well-designed permanent coverage – sized appropriately and integrated with the overall retirement and estate plan – begins to shine.

A Simple Advisor Checklist

1. Has this plan explicitly addressed mortality, longevity, morbidity and tax risk – or only investment risk?
2. If markets underperform in the first 5–10 years of retirement, where will income come from without permanently impairing the portfolio?
3. If Social Security benefits are reduced in the future, what levers exist to replace that income?
4. How will this client pay for long-term care or a significant health shock without cannibalizing their legacy goals?
5. What tax rate will the next generation pay on inherited IRAs, annuities and other tax-deferred assets – and do we have a plan to fund that liability?
6. If the answer to any of the above is “we hope the portfolio is big enough,” could permanent life insurance and annuities play a more intentional role?

The Bottom Line

The EY / Finseca research is not an insurance carrier brochure. It is independent, quantitative work that asks a fair question: “What happens when we integrate permanent life insurance and annuities into retirement planning compared to investment-only strategies?”

The answer, across a wide range of reasonable assumptions, is that holistic plans that combine investments, permanent life insurance and guaranteed income solutions tend to produce better outcomes for real households – more sustainable income, more reliable legacy, and more resilience when the world does not behave according to our Monte Carlo assumptions.

As advisors, our job is not to defend a slogan like “buy term and invest the difference.” Our job is to help clients navigate uncertainty – mortality, morbidity, longevity and taxes – with as much intentionality and evidence as possible.

BTID had its moment. The data – and our clients’ lived realities – are telling us it is time to move on.