At I&E, we promote ideas that are outside of the mainstream consensus that you should park all your money with Wall St in the form of stocks, bonds or mutual funds. Rather, we advocate that you regain control of your money through personal stewardship and responsibility. That is why we write these articles on financial pundits such as Suze Orman and Dave Ramsey. If we can expose people to an alternative point of view, then it is worth the effort to write these articles.
As you read this article on Suze Orman’s view on Life Insurance, please take a moment to click on the links provided. The links are resources to help you understand a more nuanced take on life insurance and how it can be a huge benefit to your overall financial future.
Suze Orman’s Current Views on Term vs Whole Life Insurance
Suze Orman’s views on life insurance have evolved over the course of her career in the financial industry. From selling whole life insurance policies as a financial advisor she has changed her tune and instead advises individuals to buy term and invest the difference rather than purchase permanent life insurance products such as whole life.
Suze believes that permanent life insurances such as whole life or indexed universal life (IUL) are bad investments, much like other financial entertainers such as Dave Ramsey. In her opinion, she feels you would be better off investing the money you save by buying cheaper term life, than by investing in life insurance.
Even if you don’t invest the entire difference, her claim is that you are would do better to spend it elsewhere to avoid what she sees as the high fees of whole life. While there is no doubt that there are situations where an individual is better served by purchasing term life vs whole life or other types of cash value insurance, there are a number of benefits to be gained from buying these products that Suze doesn’t address.
As a result, her position in this regard has been criticized by some insurance experts as too simplistic. Her advice to investors to fire their advisors if they recommend whole life insurance, or other types of permanent coverage, also seems extreme.
And while we agree with Suze Orman that life insurance isn’t meant to be an investment this overlooks the fact that permanent insurance in the form of cash value life insurance has a number of features which makes them an excellent alternative savings vehicle in many situations.
Why Do Suze Orman and Dave Ramsey Recommend Term Life Insurance?
There are a handful of reasons these financial pundits focus on term life vs whole life insurance.
- Term Life is Cheaper than Whole Life
- It is More Profitable for Ramsey and Orman
- Obvious Bias to the Benefits of Whole Life
Term Life is Cheaper than Whole Life
Granted, the initial cost of setting up term vs whole life would favor term life insurance, but over a lifetime, whole life insurance costs much less than term life. The historic internal rate of return of a properly designed whole life policy can typically be between 4-6%. That is your money growing over your lifetime, that can be accessed tax free via policy loans.
It is More Profitable for Ramsey and Orman
Both Dave Ramsey and Suze Orman have a vested interest in pushing term life vs whole life. For Dave, that is demonstrated through his relationship with Zander Insurance. For Suze, her relationship with SelectQuote, an online term life insurance agency, makes it advantageous for her to continue to push term life.
Obvious Bias to the Benefits of Whole Life
Agree with them or not, all you have to do is listen to them speak out against whole life insurance to hear the obvious bias both Ramsey and Orman have towards whole life. They unequivocally state that they hate whole life and anyone who recommends it is not looking out for your best interest. And they never once mention any of the many benefits of whole life insurance.
And what do they recommend you do instead? Why give all your money to Wall St of course, so stockbrokers and mutual fund managers can use your money to enrich themselves, why you defer using your money to some magical day over the rainbow in a land called retirement.
Suze Orman Life Insurance In the Past
Orman has explained how when she was working as a financial advisor she did well for her clients by selling them single premium whole life (SPWL) insurance. She recommended this product at retirement seminars she gave and found it to be very helpful in building up her practice. In an interview with Success.com she said, in regard to SPWL: “I loved it! It was one of the greatest investments around.” She touted the product’s low risk and high return and favorable tax treatment.(1)
What explains the dramatic turnabout in Suze’s views on life insurance? It could have to do with the audience she now targets. Given that many of her listeners are likely unsophisticated when it comes to financial matters, Orman may feel that she won’t be able to fully explain the complexities of cash value life insurance to them. Thus, even if there are certain circumstances where purchasing permanent life insurance is advantageous, delivering this type of nuanced message is not Orman’s style.
Given her past embrace of whole life, however, it makes sense to be skeptical about her blanketed pronouncement against whole life. While in her role as a financial guru for the masses she decries whole life, the fact that she was a proponent of the insurance product when she worked with investors on a face-to-face basis bolsters the case for taking her current advice to stay away from cash value life insurance with a grain of salt.
The Case for Whole life and Other Types of Cash Value Life Insurance
While buying term life and investing the difference may work for some investors, for others the benefits associated with purchasing whole life and other permanent life policies make buying such policies well worth considering.
Foremost among these benefits is the ability to use a cash value policy such as participating whole life to act as your own banker by taking a policy loan from your account while still earning interest on your remaining balance.
Other benefits of cash value insurance include:
- Tax-favored growth: Interest paid on your principle held in the cash value account of a permanent life insurance policy grow free of taxes, allowing you to achieve true compound interest growth. All else equal, this enables such funds to grow more rapidly than if they were in a taxable account.
- Flexible premiums: Universal life insurance, a form of cash value insurance, enables you to adjust the amount of premium you pay if conditions change.
- The ability to access the cash account via partial withdrawals or policy loans: Whether you choose to take a partial withdrawal from the cash account or a life insurance policy loan, you can access your funds tax-free up to the amount you contributed to the account.
- Tax-free distributions to beneficiaries: If you purchase term life and let it expire after a certain period of time, any assets you leave to your beneficiaries will typically be subject to potential taxation, whereas life insurance proceeds are tax-free to recipients.
- Stock-market linked growth potential: Both IUL insurance (indexed universal life) and VUL insurance (variable universal life) offer the chance to earn interest based on the performance of various stock market indexes. In the case of IUL, the amount your account is credited is typically limited by cap and participation rates, while VUL subaccounts invest directly in equity securities, so there is no such limitation. However, IUL usually offers a floor rate which serves as the minimum an account can earn in any one year (typically no lower than 0%). Because floor rates generally don’t apply to VUL subaccounts they can lose money over any period in which the stock market declines, making these subaccounts a riskier option than IUL.
When using cash value life insurance as a savings or investment vehicle every effort should be taken to avoid having the policy classified as a MEC (modified endowment contract), which would make any withdrawals taken from the policy taxable. Most such policies are designed to avoid this, nevertheless it is still a good idea to check and ensure that this is the case with any cash value policy you are considering.
While Suze Orman has a point when she says that an individual who only wants to carry life insurance for a set amount of time, for instance while paying off a mortgage, or while raising kids, may be better off just buying term life instead of whole life, what she doesn’t mention is that for individuals with more complex financial situations, such as real estate professionals and entrepreneurs, the benefits mentioned above make cash value life insurance an attractive option.
For example, if you have reached the limits of what you can contribute to a tax-deferred retirement plan such as a 401k or SEP-IRA, cash value life insurance can serve as a means of setting aside further funds for retirement.
Another situation in cash value life insurance offers advantages over buying term life is the added degree of predictability it offers. If you buy term and invest the difference your investment performance certainly may be better than you would have achieved in a whole life or IUL policy, but it could also be worse. Dividend paying whole life has historically offered highly competitive interest crediting rates when compared with other higher risk cash-equivalent investments.
Investors who want to the chance to participate to at least some extent in the upside potential of the stock market can purchase IUL. While IUL offers less certainty in regards to the likely growth of a policy’s cash account, the greater upside of equity market-linked subaccounts can be attractive to policyholders looking for the opportunity to achieve stock market-linked gains without downside risk if the market loses money.
While Suze Orman’s advice to buy term life and invest the difference rather than buying cash value life insurance may be correct in some cases and for some individuals, generally speaking her blanket dismissal of whole life and other permanent life insurance policies is overly simplistic. Individuals with complex financial situations, or those looking to take advantage of equity-linked upside within an insurance format offer just two examples where cash value life insurance can offer benefits that term life can’t.
Additionally, the greater predictability of cash value buildup in a dividend paying whole life insurance policy offers another case where purchasing cash value insurance may be preferred over buying term life. Given the long track record of building cash value such policies have, in some cases more than a hundred years, not to mention Suze Orman’s past praise of a variant of whole life (SPWL) insurance as an excellent investment, it may be prudent to pay greater attention to what she has done – sell whole life insurance – than what she says when it comes to considering the merits of purchasing cash value insurance.