Well, this one tends to fuel a lot of hoopla these days. Financial advisor gurus, Dave Ramsey and Suze Orman say you should only buy guaranteed level term insurance.
They have purported that permanent insurance policies like whole life insurance are a bad investment. Buy term life insurance they say. Whole life insurance has even been called a ripoff!!
Are they right?
Suze Orman Life Insurance – Term Life Insurance, The One Trick Pony
Take a look at the example video posted below. The Suze Orman life insurance recommendation seems a little over confident with the little information gathered from the policy owner.
The big problem is, they assume everyone subscribes to their same ideologies or will invest the money in the first place. Also assumed it seems, is that the market won’t crash like it did in the mid 2000’s.
So should I just buy whole life or term insurance than? Honestly, there is not one answer to that question, period.
In short I will say, it depends.
Some people are just not comfortable picking and/or monitoring investments and as such are risk adverse. If you are risk adverse should you invest the money anyway? After all, the guru’s say this is what everyone should be doing, right?
The reality is, plenty of people will continue to be uncomfortable with investments they don’t understand. It is not reasonable to expect them to start investing. These opinions are based on their personal knowledge and fear of the market and its risks.
I don’t have a problem with anyone expressing their opinions about smart money, just be sure that you have written a lot of life insurance coverage for all ages, worked for the carriers or have something other than hearsay or horror stories before before claiming to be an expert on life insurance. Don’t confuse the public with drama. I can tell you about plenty of people who had their term life insurance expire at the wrong time as well as plenty who lost their shirt in the stock market as well.
The Real Intent of Whole Life Insurance and Other Permanent Life Insurance
The difference between investments and life insurance, Whole Life Insurance is a guaranteed financial vehicle, not an investment. There is no risk or loss element there as long as you pay the appropriate premiums. Benefits never go down and the cash value accumulates…regardless of what goes on in world. There are guaranteed rates of return built in the policy. These policies are not meant to compete with mutual funds or the like.
Though I do personally invest, I do not advocate it for everyone. It takes a certain level of nerve to withstand tough times…especially are when the market is really down. Investing should be kept separate from Life Insurance from our perspective here at Special Risk Life.
When I first became a licensed agent almost 20 years ago, Michigan law prohibited any licensed life insurance agent from even claiming life insurance was an investment. Wonder why? The state did not consider that to be a fair statement and a misrepresentation to the consumer. Whole life insurance is not exposing you to inherent risk as your typical investments do. Cash value of a whole life insurance policy is a benefit. There are guarantees built into it. Some people may chose to borrow funds from their policy and use it elsewhere and repay the policy loan later. Comparing this to a mutual fund or a stock just seems kind of ridiculous. Life insurance is just part of a financial strategy.
Some people deploy a cash value, whole life insurance policy, and some don’t.
As an independent life insurance agent and not a Certified Financial Planner (CFP), it is simply not my place to talk investments.
Life Insurance is financial protection folks. The level of protection needed costs a certain amount of premium. It is insuring the inherent financial value of the insured person’s life to a beneficiary(s). It isn’t really an investment.
The term “investment” implies financial gain and risk in most cases. Traditional life insurance has limited “risk” if the policy is properly paid up, whether we are talking about Whole Life or Term Life Insurance.
Incidentally…Having both permanent coverage plus cash accumulation… of course it is going to cost a lot more. After all, Whole Life Insurance will be paying out a large sum of money to your beneficiary assuming the policies are kept in force. Term Life insurance may expire long before the insureds death. Hence, a much lower risk of a claim being filed with the insurer and lower costs to the paying party.
Even 10 times as much!!
So, if you indeed kept your permanent life insurance coverage, the policy is going to be paying out a lot of money to your loved ones at some point, right? Term Life insurance stacks the odds in the insurance companies favor and why it is much cheaper. It’s simply temporary coverage for the insured individual and no cash value accumulation. The odds of payout are greatly reduced, especially if you or another insured are in ideal health.
It wasn’t that long ago the most investments bottomed out. While it has certainly turned around a lot of people lost big money. How many years did that market recovery take? The general public who had invested their savings money came into the reality that investing for years does not guarantee anything. You could be up over many years and down all of it in short order if market conditions go south.
Yes, our market did recover, but investor recoup did not occur quickly did it? The recovery required you either held your course thru it all or bought new investments at the bottom to offset all the losses.
Pretty easy to put a million in your pocket after 30 years of investing, right? Yea, no problem.
Sorry, I am being sarcastic here.
Again, investments and life insurance should not be commingled. Investments do not inherently protect your loved ones. The intent is to grow your money but assumes you understand there is a degree of risk in doing that. People buy life insurance to transfer risk, not assume risk.
Here is the rest of reality when it comes to Term Life versus Whole Life… With age, risk to the insurer goes up. Someone age 25 taking a policy out for 20 years is pretty likely to survive right? We all know exceptions to that rule, don’t we?
Anyway, as we get into our midlife and senior years, risk to the life insurance company goes up exponentially.
What Are the Alternatives To Whole Life or Term Life Insurance?
At Special Risk Life, we do not advocate Whole Life Insurance or Universal Life Insurance as any kind of investment. Keep your investing over on one side and life insurance on the other. Life insurance (term or permanent life insurance) is not a one size fits all. None of these products is the best choice for everyone, period. Some policies will have additional benefits and will cost more…maybe a lot more depending on your wants and needs.
Permanent Insurance (Whole Life Insurance or Universal Life Insurance) is typically used for certain applications: First and foremost are those who are just risk adverse and just want permanent, life long protection for their beneficiary(s), those individuals “leveraging” a large sum of money, estate planning, funding a life insurance trust, charitable giving, pension maximization, final expenses, burial or funeral expense insurance.
Don’t get sucked into a one product fits all mentality. If your a 25 year old with a new mortgage and just starting a family and striving to get financial protection in place, consider a 30 year term policy on each of you. Protect your family by getting something very, very affordable. That is just a typical recommendation if your means are limited and just not sure about the need for permanent coverage. Sometimes we advise a smaller 30 year and a shorter 10 year guaranteed level term to lower premium costs instead. As your wealth increases and kids move on you may not have the need for the extra life insurance any longer. Just depends on your specific situation.
I do believe that whole life insurance seems to be getting less purposeful than it was years ago. The “ripoff” drama of Whole Life Insurance depends on how you plan on using it. There are newer universal life insurance products that are more cost effective and provide permanent coverage at a considerably lower rate than Whole Life Insurance and have additional benefits over Term Life Insurance. Guaranteed Universal Life can be very affordable and useful in traditional cases. It tends to be a go to product for estate preservation cases, charitable giving, pension maximization planning etc.
If permanent coverage and/or cash value is important to you, let us know. That takes term life insurance off the table completely as it is not permanent life insurance coverage. That is one major drawback and why we do not suggest it for estate planning or a charitable trust. Knowing your goals helps us zero in on the right products and company(s) for you.
The takeaway here –
Never, never mix life insurance with investments!! Life insurance is financial protection. Investments are to grow your money, not protect it.
How long do you actually need coverage? Is it temporary or permanent or a little of both?
Hopefully you have a better understanding of why certain permanent products do cost a lot more for the same amount of coverage. Maybe those who do not want or need permanent coverage consider it a ripoff. Again, it is about values first and foremost.
As stated previously, I do believe there are newer permanent products that are starting to make Whole Life outdated, but there are still benefits in a good participating whole life policy that are worthwhile to the right person. The key to a permanent policy and its value…you must die while the policy is in force. You do not take out permanent coverage and cancel it ten years later. Bad move. You are paying to ensure the protection is there when it is needed.
People who cancel their permanent life insurance policies have lost out on the guaranteed death benefits the policy will be paying the beneficiary. Never take out a policy you cannot afford to keep for the coverage period, either term or permanent. It does not do any good if you cancel it and then pass away if a considerably cheaper policy was available you could afford upfront.
Having the right coverage for your situation comes down to finding a seasoned, independent insurance agent/broker that makes recommendations based on your specific needs, not pushing their own agenda. Financial entertainers may not share your ideology, values or risk tolerances. Remember that.
It takes a good needs analysis and a your input on what you are trying to achieve before application time. Maybe you’re better off with a simple 20 year term policy, or maybe a term policy combined with a whole life policy etc. No Lapse, Guaranteed Universal Life Policies are becoming more popular and may provide and excellent permanent alternative to the more traditional whole life insurance. The do not have any cash value, but have much lower rates.
Don’t get sucked into the one size fits all, cheap term life mentality. Term life insurance versus whole life insurance coverage, well that is apples versus oranges. There is a reason the companies and reputable independent agents market all these types of coverage. People need and want professionals to deliver personal, financial peace of mind specific for them. You do not need to have approval of those who do not know your personal situation and values. Enough said there.
On paper, Suze Orman as well as Dave Ramsey’s life insurance opinions have a good point, really. I respect those. There are some just big holes in there, but for an “investor,” there is some real sense there.
Realistically, they do not have a crystal ball and cannot guarantee any returns to you. While I have respect for their thoughts and values, as it makes sense, they do not seem to understand that consumers situations are not black and white. Futhermore, many people don’t subscribe to investing… beyond a bank CD.
Remember, these gurus don’t know you either and there is more than one way to skin a cat, right?
In the life insurance world, an agent or broker could end up with a errors and omissions (malpractice type) claim against them for handing out blanket advice like this. Wonder why??
In my business, we have to help people assess what is best for them. The object is not to push people into something that they are not comfortable with. Clients will not keep it or stick to a protection strategy otherwise. That is why I do not agree with their ideology.
If you would like to discuss your situation with us, I will be here to help you sort it out. Many people just do not need permanent coverage, just depends on where you are in life and what your personal goals are. With us, honest answers are what you get, not just canned ideology. Give us a call for the fastest service, 269-230-3464. An email is always welcome if you are more comfortable along that route.
Oh, and feel free to leave comments below.
Michael is a veteran independent life and health insurance agent who specializes in guiding people with even high risk health conditions thru the insurance process. He is passionate about helping individuals and families get their unique financial protection needs met, providing his experienced based advise and delivering affordable, dependable coverage you can count on.
