For years now Cash Value Life Insurance, made for TV experts and infomercial wizards have been dispensing financial advice to millions of eager Americans. Celebrity advisors such as Suzie Orman and Dave Ramsey for example, utilize the television media, to provide consumers advice on everything from credit issues and home mortgages to stock market investing and life insurance. As a result, many of these advisors have amassed thousands of devoted followers of their brand of financial wisdom while making income from the sale of books, CD’s, newsletters, etc.
There is nothing wrong with utilizing the media to build your “brand” and increase your visibility. In fact, this is an accepted and highly successful technique for building a financial services business. However, the information provided by many of these “experts” often reflects a certain philosophical bias that can be short-sighted, self-serving and not reflective of individual financial circumstances.
The hallmark of good financial advice is that recommendations are always based on conducting a thorough investigation to determine an individual’s current financial situation and plans. Only with the knowledge of a client’s current assets and resources, investment risk tolerance and priorities for the future can a financial advisor be sure that their recommendations are right for any individual. Without this knowledge, all financial advice is generic and thus may not be right for everyone.
Nowhere is this type of one size fits all advice more prevalent than in the belief that when it comes to buying life insurance, term coverage is always best. Suzie Orman, Dave Ramsey and others, have expressed the opinion that consumers, in all cases would be better off buying low-cost term life insurance versus the more expensive cash value permanent life policies.
What Type Of Life Insurance Is Best- How Does Life Insurance Work
They routinely advise listeners to purchase less expensive term insurance and utilize the money saved on costlier permanent life insurance to invest in the stock market mutual funds, IRA’s or other market-driven products. In the insurance industry, this is referred to as (BTID) “Buy Term and Invest the Difference”.
Proponents of the “BTID” philosophy argue that cash value policies are not sound long term investments because life insurance companies invest too conservatively to generate the returns guaranteed to cash value policyholders. The “Buy Term and Invest the Difference” crowd advocate a more aggressive investment approach for premium dollars beyond what life insurance companies can expect from the conservative markets.
They also argue that you will only need life insurance for a short period of time anyway, just until you have accumulated enough through debt consolidation, savings and investments to live comfortably.
Clearly eliminating personal debt and investing wisely are worthwhile and important financial goals for everyone and should be given the highest priority in any financial recommendations. On the other hand, if you are unable to achieve a debt-free lifestyle or realize substantial market returns, you run the risk of losing your insurance protection due to premium increases or becoming ineligible to qualify for coverage when it is needed most.
The “Buy Tem and Invest the Difference” concept makes sense until you examine it’s it closely and compare it with the real-world experiences of life insurance buyers. Looking at the experiences, of many policyholders who buy term life protection with the intent to invest their premium savings, we see why this strategy may not be practical for the average consumer.
Most consumers are neither experienced nor consistent market investors nor do they have the time and discipline necessary to become successful market players. The results are that most consumers eventually buy term insurance and never invest the difference. Or in other words “Buy Term and Spend the Difference”.
A 2003 Harris Interactive study found that 77% of more than 1,000 Americans surveyed had bought term insurance as a way to save for long-term financial goals. But only a third of them could identify those goals, and just 14% invested all the money they saved by buying the term policy. By contrast, 17% spent it all.
According to the 2007 Dalbar Report
investor results over a twenty-year period (1987-2006), showed that the average investor only earned 4.3% during a period where the S&P 500 yielded 11.8%, And, this was during one of the best bull markets on record. And, it doesn’t include the 2008 stock market downturn nor does it consider investor fees or expenses paid.
Clearly many people are being misled when it comes to actual returns experienced by the average investor. The average investor never realizes higher interest gains on their premium savings and as a result of ” BTID” generally find themselves without life insurance coverage because they can no longer afford the higher term premiums or no longer qualify for coverage.
Another reason to question the “BTID” philosophy is that even where consumers are successful in achieving higher investment returns from mutual funds earning, all such returns are subject to capital gains taxes.
Insurance buyers must factor in taxes when comparing the guaranteed returns from cash value life insurance versus mutual funds shares. The interest returns on mutual funds gains are subject to as much as, 25-38% in taxes, depending on one’s income tax bracket. Besides, mutual fund gains must also be adjusted to account for the investment fees these fund providers charge shareholders for the opportunity to invest. These fees will further erode any positive market gains achieved. The question is what is the true rate of return on mutual fund shares compared to guaranteed returns found in most cash value policies?
The BTID concept presupposes you will have no further use for life insurance. Because you will have generated sufficient market returns through this more aggressive investment strategy. which will outpace any potential cash values generated through conservative returns on the whole life. However, we know the stock market can be a tricky thing. To predict especially for investors who depend on market returns to provide retirement income and create legacy assets.
Whether it is 401K shares or individual mutual funds, all investors are subject to market risk and timing near the end of their working careers which can still blow their savings and future retirement plans.
Will you need Life Insurance?
What Suzie Orman, Dave Ramsey and others are missing is that the arguments. About the rate of return, you can get from cash value insurance are completely secondary. The main reason to own cash-value life insurance is the permanent nature of the coverage. We face greater financial risks during our retirement years than at any other point in our lifetime. Even if you can afford to self insure, many of these financial risks. It can be managed most effectively by owning life insurance. By shifting the risk to an insurance carrier rather than assuming all the risk yourself. The disadvantages of not having life insurance at retirement are far greater than any potential benefit gained by self-insuring.
Since life insurance is cheaper and easier to purchase when you are young and healthy. It makes more sense to lock in fixed insurance premium rates. And provide lifelong financial protection for your loved ones. Besides, life insurance can not only protect one from the risks of premature death. But can also provide protection from the risks of outliving your retirement savings. Help pay estate taxes and replace lost pension income. With more and more people living into their 80s, 90s and beyond. The real fact is that life insurance coverage cannot practically or affordably be maintained with term insurance.
Price versus Value
Many people are familiar with the concepts of homeownership. In general, most Americans accept the financial principal of homeownership without question. The principal that owning is always better than renting is part of the American cultural legacy. Why because it is about the value and not the price. Well, this same principle can be applied relatively easily to owning a cash value policy. The example below shows you how closely buying and owning cash value life insurance resembles buying and owning a home:
Advantages of Cash Value Life Insurance versus Term Insurance
Benefits of Ownership Cash Value Life Term Life
Premiums that never increase over time Yes No
Your cash values accumulate tax-deferred. Yes No
The cash accumulated in your policy can provide you with a
tax-free income in retirement. Yes No
Creates a liquid ‘Emergency Fund’ Yes No
Considered asset when applying for bank loans Yes No
Guarantees – Only Life Insurance and Annuities guarantee your
investment principle Yes No
Cash values can be accessed income tax-free and penalty-free prior
to age 59½. Yes No
Cash-value life insurance is not attachable by creditors. Yes No
Cash-value life insurance doesn’t count as an asset when you apply
for college financial aid. Yes No
The success of people like Dave Ramsey and others in shaping. The debates over term versus permanent insurance are largely based on unrealistic. Assumptions and misconceptions about the benefits of cash value life insurance. Their advice while otherwise sound, when it comes to buying life insurance does not reflect. The realities of the experiences and habits of the American consumer. A larger question is why are so many people touting the benefits of “BTID”. Including insurance carriers like Primerica, Inc., (Division of Citigroup). Which bases its entire marketing strategy on the BTID philosophy.
In my opinion, the answer is two-fold. One, the insurance industry has done a poor job of educating the public regarding their options. Two, term insurance is a highly profitable and less risky product for all life insurance carriers. Think about it! They are only on the hook for a short period of time-minimum of one year and a maximum of 30 years. There are no additional cash values obligations or potential dividend payouts to be accounted for.
Additionally, according to industry statistics
only 1-2% of all term policies actually pay out a death claim to the policyholder. This suggests that the majority of policyholders either lapse their term contracts before. The ends of the policy period and thus receive nothing. For the years of premium payments made or retain any of the insurance protection from. the policy. Besides, companies like Primerica, also earn additional fees and commissions from the sale of their mutual funds to policyholders.
This makes “BTID” a good marketing strategy for certain insurance companies but not necessarily good for consumers. Consumers should consider the total amount of insurance coverage. They will need to protect their families. And for how long they will realistically need the coverage, before purchasing any life insurance. The most important life insurance buying strategy is to make sure. Your family has the right amount of coverage. Whether that becomes term, permanent or a combination of both.
However, in my opinion, owning a cash value life insurance. The policy is a better value than buying term insurance as long as you can afford it. If you need life insurance and can get comparable returns to the market without the risks. More guarantees, tax-free income, plus other benefits. Then why not buy cash value life insurance? Such as “buy term and invest the difference” just because it comes from someone with a TV show.