Insurance Tip #8: Buying term insurance and investing the difference may be a dumb move

This post is part of a series where personal finance expert Dan Solin provides 10 insurance tips no one else will tell you. See all 10, plus one bonus tip!

I agree with the traditional advice that term insurance is appropriate for most people. It is relatively inexpensive if purchased at a young age. It's simple to understand and it makes it easy for most people to obtain enough coverage to protect their families in the event the primary breadwinner dies prematurely.

Insurance that builds cash value (often called "permanent" insurance) comes in a dizzying array of options. There is whole life insurance, adjustable life, universal life and variants of each of those policies.

So why not just "buy term and invest the difference" in the cost between term and the higher cost of cash value insurance?

The primary reason is that few people have the discipline to invest the difference. Most likely, this money will be spent just staying afloat.

Even if you do "invest the difference," how will you do it? The data indicates that Americans are terrible investors. The projections that are so casually tossed around usually assume that your investments will achieve at least market returns. The reality is that the average stock investor earns around one-third of market returns. When you consider inflation and taxes, these investors lose money! This is one of the big secrets of the securities industry. Market returns are yours for the taking, but they don't want you to know how easy it is to do it. Hint: It does not involve using their services.

If you are in it for the long haul, buying term and investing the difference can be a dumb move for many reasons.