About the Buy Term and Invest the Difference Calculator
This buy term and invest the difference (BTID) calculator compares two ways to spend the same yearly budget on life insurance. Option one is a whole life policy whose premium builds cash value. Option two is a cheaper term policy for the same death benefit, with the premium you save invested every year. At the end of the period you see the after-tax investment portfolio next to the whole life cash value.
It is meant for anyone reviewing a whole life or universal life illustration, or weighing an agent’s pitch against the classic BTID advice. Enter the two premium quotes, the return you expect from your investments and the net growth rate of the policy’s cash value. The calculator also solves for the break-even cash value growth rate — the rate the policy would need to credit to match the BTID strategy.
Premiums are assumed to be paid at the start of each year and the difference is invested the same day. Cash value is modelled as the whole life premium compounding at a net rate after insurance charges, which is a simplification of a real illustration; check the guaranteed and non-guaranteed columns of your own illustration and use a net rate that reproduces them.
With the default inputs, the btid advantage at the end is $160,006.58. Change any value above to recalculate instantly.
How to use the buy term and invest the difference calculator
- 1Enter the death benefit and get quotes for a whole life and a term policy of that size.
- 2Set the comparison period — usually the length of the term policy.
- 3Enter the investment return you expect on the money you would invest instead.
- 4Enter a net cash value growth rate that matches your policy illustration.
- 5Set the tax rate on gains (0% if you would invest in a Roth IRA) and compare the results.
Formula and method
Both strategies spend the same amount each year. D is the whole life premium minus the term premium, invested at the start of every year and compounded at the investment return r. The whole life premium W is treated the same way but compounds at c, the net cash value growth rate after the insurer deducts the cost of insurance, commissions and fees. Both are annuity-due future values over n years.
Gains in a taxable brokerage account are taxed once at the end at rate t on the portfolio minus the money you put in. Cash value growth is treated as tax-deferred and is not taxed here, which favours whole life slightly; if you surrender a policy, gains above the premiums paid are generally taxable as ordinary income. The break-even rate is found by bisection: the value of c at which the cash value equals the after-tax portfolio.
- D
- Yearly premium difference invested (W − term premium)
- W
- Yearly whole life premium
- r
- Annual investment return
- c
- Net annual cash value growth rate
- n
- Number of years compared
- t
- Tax rate on investment gains
Worked examples
$500k cover, $5,500 whole life vs $480 term for 30 years
Investing the $5,020 yearly difference at 7% grows to about $507,387; after 15% tax on the $356,787 of gains it is worth about $453,869. The whole life premiums growing at a net 3.5% reach about $293,862 of cash value, so BTID finishes roughly $160,007 ahead. The policy would need to credit about 5.92% net to break even.
Conservative investor, 20-year horizon in a Roth IRA
Investing $3,700 a year at 5% for 20 years gives $128,461 with no tax in a Roth. A $4,000 premium compounding at 4% net builds $123,877 of cash value. With a low return and a strong policy, the BTID lead shrinks to about $4,584.
Whole life wins when returns are low
If investments earn only 4% — the same as the policy’s net growth — the smaller invested amount cannot catch the full premium compounding inside the policy, and tax on gains widens the gap. Whole life finishes about $56,439 ahead (the policy only needs about 2.89% net to match), though the BTID saver still had the term death benefit for 30 years.
Frequently asked questions
What does “buy term and invest the difference” mean?+
It is the strategy of buying cheaper term life insurance instead of permanent (whole life) insurance and investing the premium savings yourself, usually in low-cost index funds. The idea is that your own investments will outgrow the cash value inside a whole life policy.
Why is cash value growth lower than the dividend rate on my illustration?+
Whole life dividends are credited only on the cash value, and early premiums go largely to commissions and the cost of insurance. The net growth of everything you have paid in is therefore well below the headline dividend rate, especially in the first 10–15 years.
What happens when the term policy expires?+
The death benefit ends, so BTID only works if your investments have grown large enough to replace the need for insurance by then. If you still need cover — for estate planning or a lifelong dependant — permanent insurance may make sense.
Does the calculator include taxes on whole life cash value?+
No. Cash value grows tax-deferred and policy loans are generally not taxable, so the calculator treats it as tax-free. If you surrender the policy, gains above your total premiums are usually taxed as ordinary income, which would improve the BTID result further.
What investment return should I assume?+
Use a long-run expected return for the mix you would actually hold, net of fund fees. Many planners use 5%–7% nominal for a stock-heavy portfolio; test a low return too, because BTID’s advantage depends heavily on this number and on actually investing every year.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.