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It is often recommended that people buy term insurance for a lower premium cost, and invest the rest of the money. It is said that the returns from your own investment are higher than the ones from the insurance companies.

This sounds attractive and may work well for people coming from a finance background.

As easy as it might sound, the risks are there. For the non-finance people and beginners out there, how should we go ahead with such plans and know what to invest so that we will not end up worse than what we could have had from insurance companies (the surrender value) if we hadn't signed up for term insurance, ie, signed up whole life, limited premium, ILP policies instead?

Simply, how to "invest the rest" like what they said?

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Buy term and invest the rest is in fact the easiest plan.

Just buy the term insurance based on your current and expected needs. Review those needs every few years, or after a life event (marriage, divorce, kids, buying a house...)

For the invest the rest part: invest in your 401K, IRA or the equivalent. There are index funds, or age based funds that can help the inexperienced. Those index funds have low costs; the age based funds change as you get older.

The biggest issue with the whole life type products is that what your care about for the term insurance doesn't mean that the company has a good investment program. You also want to have the ability to decide to change insurance companies or investment companies without impacting the other.

  • Absolutely start with a 401k or IRA to get the tax advantage and, for 401k, possible employer matching funfs (free money! ). If you have a choice of investment within those the simplest option is to put the money in a Target Date Fund, which will handle all the diversifying and rebalancing for you. If you want more control look at low-fee mutual funds, especially index funds, which give you diversification within a category, in a mix which suits you risk tolerance -- there are many tools/resources which can help you pick that distribution. Remember to rebalance periodically. – keshlam Jan 16 '15 at 16:40
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The simplest way is to invest in a few ETFs, depending on your tolerance for risk; assuming you're very short-term risk tolerant you can invest almost all in a stock ETF like VOO or VTI. Stock market ETFs return close to 10% (unadjusted) over long periods of time, which will out-earn almost any other option and are very easy for a non-finance person to invest in (You don't trade actively - you leave the money there for years). If you want to hedge some of your risk, you can also invest in Bond funds, which tend to move up in stock market downturns - but if you're looking for the long term, you don't need to put much there.

Otherwise, try to make sure you take advantage of tax breaks when you can - IRAs, 401Ks, etc.; most of those will have ETFs (whether Vanguard or similar) available to invest in. Look for funds that have low expense ratios and are fairly diversified (ie, don't just invest in one small sector of the economy); as long as the economy continues to grow, the ETFs will grow.

  • Since these investments like ETFs are often considered as long term investments, that's to say I have to leave them there for a long period of time, over how many years usually will I start to see returns breaking even with insurance companies' claimed 3.25%-5% returns? – xenon Jan 17 '15 at 5:59

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