Life insurance is frequently oversold, overbought, or misused. In his award-winning book, What’s Wrong with Your Life Insurance, author Norman F. Dacey espoused the simple philosophy: purchase term life insurance and invest the surplus. This philosophy maximizes the proper use of life insurance for its key purpose—protection—while investing savings more productively in wealth-building strategies.
On this page, we will discuss how term life insurance is the basis of a secure financial plan through protecting your wealth and income, your financial foundation, and other necessary pieces of financial planning that will assist you in securing long-term security.
Why Term Life Insurance?
Term life is easy and inexpensive. In comparison with whole life or universal life policies, which include death benefits together with a savings account (i.e., fund values), term is protection pure and simple for an exact number of years (10, 20, 30 or more). The reason it is the foundation of the intelligent financial plan:
- Affordability: Term policies are less expensive, allowing funds for other priorities.
- Dependent protection: In the event of death during the term, your beneficiaries will be provided with a death benefit for replacement of income lost, payment of debts, or maintenance of living expenses.
- Temporary Need: Most people need life insurance during their working years when dependents rely on their income. Term policies align with this timeline.
- No Investment Strings: Unlike cash-value policies, term insurance doesn’t hold your money in low-return investment accounts, allowing you to put your money elsewhere for better returns.
Dacey’s philosophy opposes using life insurance as a savings vehicle. Instead, he stresses buying term for protection and investing the difference in mutual funds, equities, or retirement accounts.
It’s not just Dacey! Consumer advocates like Suze Orman also promote the “Buy Term and Invest the Difference” strategy.
How Much Coverage Do You Need?
To calculate the proper amount of term life insurance, take into account:
- Income Replacement: Aim for 10–15 times your yearly income to support your family’s lifestyle.
- Debts and Costs: Include mortgage, loans, and future obligations like college costs.
- Current Assets: Subtract savings and investments that could be used.
Example: You earn $60,000/year, owe $200,000 on a mortgage, and want to fund $50,000 for education. You may need a $750,000–$1,000,000 policy. Use a financial advisor or online tools to fine-tune your amount.
Life Insurance in the Overall Financial Plan
Term life insurance is one part of a full financial plan. Below are key components to support long-term stability and growth.
Create an Emergency Fund
A fund for medical bills or job loss protects your investments. Aim for 3–6 months of living expenses in a liquid account like a high-yield savings account.
Action Step: Start with $1,000 and build over time with automatic transfers.
Eliminate and Manage Debt
High-interest debt undermines your plan. Use strategies like:
- Debt Snowball: Pay smallest balances first for momentum.
- Debt Avalanche: Pay highest-interest balances first to save money.
Action Step: List all debts, interest rates, and minimums. Prioritize the most expensive debt.
Invest the Difference
Money saved from skipping cash-value policies should be invested in:
- Retirement Accounts: 401(k), IRA—especially with employer matches.
- Index Funds or ETFs: Low-fee, diversified investments.
- Real Estate or Other Assets: For diversification if you’re experienced.
Example: Investing $500/month at 8% return for 40 years could exceed $1.2 million.
Step: Meet with a fee-only advisor to align investments with your goals.
Plan for Retirement
Maintain your lifestyle after retirement with planning around:
- Social Security: Consider delaying until age 70 for higher benefits.
- Pension Plans: Understand your employer’s offerings.
- Medical Expenses: Budget for long-term care and Medicare gaps.
Action Step: Use a retirement calculator and adjust savings accordingly.
Safeguard Other Assets
Beyond life insurance, protect your financial life with:
- Disability Insurance: Income protection if you can’t work.
- Homeowners/Renters Insurance: Protection for your property.
- Estate Planning: Wills, beneficiaries, and trusts ease transfer of assets.
Action Step: Review policies annually and consult an estate attorney as needed.
Periodically Review and Refine
Update your plan with life events: marriage, kids, job changes, etc.
Action Step: Schedule an annual financial review and update your beneficiaries and investments as needed.
Common Mistakes to Shun
- Overbuying Cash-Value Policies: These often benefit agents more than you due to high fees and commissions.
- Overlooking Term Length: Choose coverage that matches your needs (e.g., until kids are independent).
- Ignoring Other Priorities: Don’t buy too much insurance at the expense of savings or debt repayment.
Conclusion: An Easy, Effective Solution
By protecting your income with term life insurance, you create a secure foundation and free up funds to invest intelligently. Dacey’s philosophy—“buy term and invest the difference”—helps you control your financial future with confidence. Combined with debt reduction, emergency savings, investing, and retirement planning, you’ll build a resilient, long-lasting financial plan.
Use our tools or consult a licensed advisor to personalize your strategy. Start today—your future self will thank you.
Disclaimer: This content is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before making any decisions.