| For years now, made for TV experts and infomercial | | | | especially for investors who depend on market returns |
| wizards have been dispensing financial advice to | | | | to provide retirement income, and create legacy |
| millions of eager Americans. Celebrity advisors such as | | | | assets. The stock market in 2008-2009 provides a |
| Suzie Orman and Dave Ramsey for example, utilize | | | | recent example of how difficult it is to create returns |
| the television media, to provide consumers advice on | | | | when they are needed the most. "In the 12 months |
| everything from credit issues and home mortgages to | | | | following the stock market's peak in October 2007, |
| stock market investing and life insurance. As a result, | | | | more than $1 trillion worth of stock value held in 401(k)s |
| many of these advisors have amassed thousands of | | | | and other "defined-contribution" plans was wiped out, |
| devoted followers of their brand of financial wisdom | | | | according to the Boston College research center. |
| while making income from the sale of books, CD's, | | | | Whether it is 401K shares or individual mutual funds, all |
| newsletters, etc. There is nothing wrong with utilizing | | | | investors are subject to market risk and timing near |
| the media to build your "brand" and increase your | | | | the end of their working careers which can still blow |
| visibility. In fact, this is an accepted and highly | | | | their savings and future retirement plans. |
| successful technique for building a financial services | | | | Will you need Life Insurance? |
| business. However, the information provided by many | | | | What Suzie Orman, Dave Ramsey and others are |
| of these "experts" often reflects a certain philosophical | | | | missing is that the arguments about the rate of return |
| bias that can be short sighted, self serving and not | | | | you can get from cash value insurance are completely |
| reflective of individual financial circumstances. The | | | | secondary. The main reason to own cash-value life |
| hallmark of good financial advice is that | | | | insurance is the permanent nature of the coverage. |
| recommendations are always based on conducting a | | | | We face greater financial risks during our retirement |
| thorough investigation to determine an individual's | | | | years than at any other point in our lifetime. Even if |
| current financial situation and future plans. Only with the | | | | you can afford to self insure, many of these financial |
| knowledge of a client's current assets and resources, | | | | risks can be managed most effectively through |
| investment risk tolerance and priorities for the future | | | | owning life insurance and by shifting the risk to an |
| can a financial advisor be sure that their | | | | insurance carrier rather than assuming all the risk |
| recommendations are right for any individual. Without | | | | yourself. The disadvantages of not having life |
| this knowledge, all financial advice is generic and thus | | | | insurance at retirement are far greater than any |
| may not be right for everyone. | | | | potential benefit gained by self insuring. Since life |
| No where is this type of one size fits all advice more | | | | insurance is cheaper and easier to purchase when you |
| prevalent then in the belief that when it comes to | | | | are young and healthy it makes more sense to lock in |
| buying life insurance, term coverage is always best. | | | | fixed insurance premium rates and provide lifelong |
| Suzie Orman, Dave Ramsey and others, have | | | | financial protection for your loved ones. In addition, life |
| expressed the opinion that consumers, in all cases | | | | insurance can not only protect one from the risks of |
| would be better off buying low cost term life insurance | | | | premature death, but can also provide protection from |
| versus the more expensive cash value permanent life | | | | the risks of outliving your retirement savings, help pay |
| policies. They routinely advice listeners to purchase | | | | estate taxes, and replace lost pension income. With |
| less expensive term insurance and utilize the money | | | | more and more people living into their 80s, 90s and |
| saved on costlier permanent life insurance to invest in | | | | beyond, the real fact is that lifetime insurance |
| the stock market mutual funds, IRA's or other market | | | | coverage cannot practically or affordably be |
| driven products. In the insurance industry, this is | | | | maintained with term insurance. |
| referred to as (BTID) "Buy Term and Invest the | | | | Price versus Value |
| Difference". Proponents of the "BTID" philosophy argue | | | | Many people are familiar with the concepts of |
| that cash value policies are not sound long term | | | | homeownership. In general, most Americans accept |
| investments because life insurance companies invest | | | | the financial principal of homeownership without |
| too conservatively in order to generate the returns | | | | question. The principal that owning is always better |
| guaranteed to cash value policy holders. The "Buy | | | | than renting is part of the American cultural legacy. |
| Term and Invest the Difference" crowd advocate a | | | | Why because it is about value and not the price. Well |
| more aggressive investment approach for premium | | | | this same principal can be applied relatively easily to |
| dollars beyond what life insurance companies can | | | | owning a cash value policy. The example below |
| expect from the conservative markets. They also | | | | shows you how closely buying and owning cash value |
| argue that you will only need life insurance for a short | | | | life insurance resembles buying and owning a home:o |
| period of time anyway, just until you have accumulated | | | | You pay more up front to purchase a house and to |
| enough through debt consolidation, savings and | | | | buy Cash Value Life Insurance.o They both build equity |
| investments to live comfortably. Orman on her website | | | | over time and free of income taxes.o After a number |
| explains, "If you are smart with the money you have | | | | of years owners usually can get all their money back |
| today and you get rid of your mortgages, car loans | | | | with a reasonable interest return.o You can access |
| and credit card debt and put money into retirement | | | | your home equity and policy equity only buy selling or |
| plans you don't need insurance 30 years from now to | | | | by taking out a loan against themo If you take a loan |
| protect your family when you die". | | | | against them, you can use that money tax-free.o You |
| Clearly eliminating personal debt and investing wisely | | | | don't pay income taxes on the value of the house or |
| are worthwhile and important financial goals for | | | | the CV Life Insurance until you sell them.o Both a |
| everyone and should be given the highest priority in | | | | home and cash value life insurance are considered |
| any financial recommendations. On the other hand, if | | | | financial assets. |
| you are unable to achieve a debt free lifestyle or | | | | Advantages of Cash Value Life Insurance versus |
| realize substantial market returns, you run the risk of | | | | Term Insurance |
| losing your insurance protection due to premium | | | | Benefits of Ownership Cash Value Life Term Life |
| increases or becoming ineligible to qualify for coverage | | | | Premiums that never increase over time Yes No |
| when it is needed most. | | | | Your cash values accumulate tax deferred. Yes No |
| Real World Experience | | | | The cash accumulated in your policy can provide you |
| The "Buy Tem and Invest the Difference" concept | | | | with atax-free income in retirement. Yes No |
| makes sense until you examine it's it closely and | | | | Creates a liquid 'Emergency Fund' Yes No |
| compare it with the real world experiences of life | | | | Considered asset when applying for bank loans Yes |
| insurance buyers. Looking at the experiences, of many | | | | No |
| policy holders who buy term life protection with the | | | | Guarantees - Only Life Insurance and Annuities |
| intent to invest their premium savings, we see why this | | | | guarantee yourinvestment principle Yes No |
| strategy may not be practical for the average | | | | Cash values can be accessed income tax-free and |
| consumer. Most consumers are neither experienced | | | | penalty free priorto age 59½. Yes No |
| nor consistent market investors nor do they have the | | | | Cash value life insurance is not attachable by creditors. |
| time and discipline necessary to become successful | | | | Yes No |
| market players. The results are that most consumers | | | | Cash value life insurance doesn't count as an asset |
| eventually buy term insurance and never invest the | | | | when you applyfor college financial aide. Yes No |
| difference. Or in other words "Buy Term and Spend | | | | Conclusion |
| the Difference". | | | | The success of people like Dave Ramsey and others |
| A 2003 Harris Interactive study found that 77% of | | | | in shaping the debate over term versus permanent |
| more than 1,000 Americans surveyed had bought term | | | | insurance is largely based on unrealistic assumptions |
| insurance as a way to save for long-term financial | | | | and misconceptions about the benefits of cash value |
| goals. But only a third of them could identify those | | | | life insurance. Their advice while otherwise sound, |
| goals, and just 14% invested all the money they saved | | | | when it comes to buying life insurance does not reflect |
| by buying the term policy. By contrast, 17% spent it all. | | | | the realities of the experiences and habits of the |
| According to 2007 Dalbar Report', investor results | | | | American consumer. A larger question is why are so |
| over a twenty-year period (1987-2006), showed that | | | | many people touting the benefits of "BTID", including |
| the average investor only earned 4.3% during a period | | | | insurance carriers like, Primerica, Inc., (Division of |
| where the S&P 500 yielded 11.8%, And, this was | | | | Citigroup), which bases it's entire marketing strategy on |
| during one of the best bull markets on record. And, it | | | | the BTID philosophy. In my opinion, the answer is two |
| doesn't include the 2008 stock market downturn nor | | | | fold. One, the insurance industry has done a poor job |
| does it consider investor fees or expenses paid. | | | | of educating the public regarding their options. Two, |
| Clearly many people are being misled when it comes | | | | term insurance is a highly profitable and less risky |
| to actual returns experienced by the average investor. | | | | product for all life insurance carriers. Think about it! |
| The average investor never realizes higher interest | | | | They are only on the hook for a short period of |
| gains on their premium savings and as a result of " | | | | time-minimum of one year and a maximum of 30 |
| BTID" generally find themselves without life insurance | | | | years. There are no additional cash values obligations |
| coverage because they can no longer afford the | | | | or potential dividend payouts to be accounted for. |
| higher term premiums or no longer qualify for | | | | Additionally, according to industry statistics, only 1-2% |
| coverage. | | | | of all term policies actually pay out a death claim to the |
| IRS Taxes: | | | | policyholder. This suggests that the majority of policy |
| Another reason to question the "BTID" philosophy is | | | | holders either lapse their term contracts before the |
| that even where consumers are successful in | | | | end of the policy period and thus receive nothing for |
| achieving higher investment returns from mutual funds | | | | the years of premium payments made nor retain any |
| earning, all such returns are subject to capital gains | | | | of the insurance protection from the policy. In addition, |
| taxes. | | | | companies like Primerica, also earn additional fees and |
| Insurance buyers must factor in taxes when | | | | commissions from the sale of their mutual funds to |
| comparing the guaranteed returns from cash value life | | | | policy holders. This makes "BTID" a good marketing |
| insurance versus mutual funds shares. The interest | | | | strategy for the certain insurance companies but not |
| returns on mutual funds gains are subject to as much | | | | necessarily good for consumers. Consumers should |
| as, 25-38% in taxes, depending on one's income tax | | | | consider the total amount of insurance coverage they |
| bracket. In addition, mutual fund gains must also be | | | | will need to protect their families, and for how long they |
| adjusted to account for the investment fees these | | | | will realistically need the coverage, before purchasing |
| fund providers charge share holders for the | | | | any life insurance. The most important life insurance |
| opportunity to invest. These fees will further erode any | | | | buying strategy is to make sure your family has the |
| positive market gains achieved. The question is what is | | | | right amount of coverage, whether that becomes |
| the true rate of return on mutual fund shares | | | | term, permanent or a combination of both. However, in |
| compared to guaranteed returns found in most cash | | | | my opinion, owning a cash value life insurance policy is |
| value policies? | | | | a better value than buying term insurance as long as |
| Market Volatility: | | | | you can afford it. If you need life insurance and can |
| The BTID concept presupposes you will have no | | | | get comparable returns to the market without the risks, |
| further use for life insurance because you will have | | | | more guarantees, tax free income, plus other benefits, |
| generated sufficient market returns through this more | | | | then why not buy cash value life insurance? |
| aggressive investment strategy which will out pace | | | | Consumers should not be fooled into accepting |
| any potential cash values generated through | | | | simplistic advice such as "buy term and invest the |
| conservative returns on whole life. However, we know | | | | difference" just because it comes from someone with |
| the stock market can be a tricky thing to predict | | | | a TV show. |