The reason why this is one of the most prevalent myths when it comes to buying life insurance policies, is because it does hold true for some people. Hang on a minute – this does not mean it will definitely be true for you.
There are three main weaknesses to this line of thought. Firstly, it assumes you will invest the “rest”, rather than end up spending it. Secondly, it assumes that you know how to invest the “rest” and lastly, it also assumes you will successfully invest the “rest”.
For starters, many may procrastinate or are daunted to start their investment journey. This means they will never end up investing the “rest” of the money even after buying term insurance.
For those who do start investing, they will need to faithfully re-invest any returns as well as a portion of their future salaries over the next 20 to 30 years. This takes decades of discipline and vigilance, as the repercussions of neglecting investing will only be felt in retirement rather than instantaneously.
Even for those have the discipline to invest over the long-term, there’s a chance that they let their emotions negate their efforts. This is because markets are volatile, and rather than take a long-term stance, many could end up buying or selling investments impulsively.
Another downfall of the “buy-term-invest-the-rest” mantra is that if an unforeseen circumstance occurs early on in your life, you may not have had the time to accumulate enough for your loved ones’ futures. Similarly, even if you had been conscientiously investing over several decades, if an unforeseen circumstance befalls you during a deep recession, your loved ones may not have the expertise or financial muscle to allow your investments to ride out market volatility.
Everyone’s needs and abilities are different. Just because this argument holds true for some people does not mean everyone should subscribe to it.