Another Suze Orman blunder?

On Sat. Sept 21 Suze Orman once again complained  about Whole Life Insurance. She tends to  mistakenly refer to all cash value life insurance  as whole life. In Fact there are several types of cash value insurance. They meet different client needs and perform quite differently. We will discuss them later.

She was complaining about the fact that  a caller had an  insurance policy that had two different projections of the cash value performance. One was the current performance and the second was the lower but Guaranteed minimum performance.  The Guaranteed performance table showed the absolute minimum performance for the cash value within a life insurance policy.  Depending on the policy  and the company the guarantee may range from about 1-5%. these numbers vary from low to  reasonably competitive.  Compare that to the  guaranteed performance of a market linked product including but not limited to Stocks, bonds, mutual funds, etc. Do they guarantee your principal? NO. Do they guarantee the dividends in future periods? NO.  Do they guarantee the interest rate earned under all circumstance? NO. Even Bonds with a guaranteed rate are dependent on the bond issuer not going into default! So this guarantee is based on a conditional assumption. I am not suggesting that you should not own these products.  Far from it. I own some myself.  What I am saying is that you need to  understand that these are all risk assets!  Risk assets by their design go up and can  go  down in value. What I am saying is that you need some assets that are NOT RISK Assets. Insurance and Annuity products are often logical choices for Safe Money. 

The Current rate table in an insurance policy shows the rate currently being earned on the policy cash value. The company also does some historical look back and  determines a reasonable rate based on that review. It may be a 3, 5, 7 or even 10 year look back. That is the rate of return that shows up in the Current table.  Some policies even include a third table called a midpoint table somewhere in between the two.  The Guaranteed table is just that, the current table is a projected but reasonable number looking forward. You might do better you might not do quite as well. Three more things that your market money cant or does not do.  If  you  die before you expect to die the Death Benefit is a multiple of the cash paid in premium. Second if the policy is properly selected, designed and funded the cash is available to you while you are still alive, or your beneficiaries Income Tax Free. Third, if you wish to borrow cash value you can even  make money on the money you  have loaned to  yourself!  Last year clients earned as much as 8% on their loan value and as much as 12% on their cash value. Try to  find that  with a mutual fund!

Google   bond default, read the newspaper about municipality and even state default. Read the paper about our federal government and the possibility of a federal default if the incompetent elected officials can't pass a spending bill!!!! Suze often  talks about making 8% in the market. I ask where are the quarantees to back that up? How many investors can honestly say that they have made an 8% compounded rate of return over the past 9 years or the past 15 years.  If you  had then $100,000 would now be worth over $200,000 (9 yr) or $300,000 (15 yr) and we would all be rich! Unfortunately that is not Quaranteed. Even though  the markets are at all time highs many investors are not even even with  what they  had!  I mention this only so you can look realistically at her comments.  Nationally the average investor has been lucky to make 3-3.5%. Even with that, the gains and even a substantial percentage of principal are at risk during the next market downturn.

Buy Tem and Invest the Difference! Is this sound advice?

Many  readers listen or watch Suze Orman or Dave Ramsey in their  finance shows.  Don't  get me wrong.  I  like  them  both. However  there is one  area where they always  give  bad  advice!  That is  when  they  tell  clients  to only buy Term Insurance and  Invest  the  savings.   I  do  sell Term  insurance  but I generally use it as a supplement  to  a Cash Value Life Insurance policy that will always be there  when the client or their  family needs it.  There  are  several problems  with Dave and Suze's logic.
 First,
what  happens  if  you  need  to provide insurance  for  several years past the original term?  One of  several  things happens, your policy  expires with you  receiving  no benefit whatsoever, or if the policy permits you  to  keep paying, the premium jumps as much as 10-15 fold for  each additional year with an insurance need, or the policy  expires worthless and due to your then current age  and  health you  have become Medically Uninsurable.
 Second,
The problem  relates  to  the  actual  math involved. A recent  article in a professional  publication  demonstrated that the math often does not work out the way they suggest it should. I wont include  the  publication  here but  would gladly  share  the information and the  math with  readers individually. The  real  world  numbers indicate that especially in a low interest rate environment (does this sound at all like  like 2009- 2015) you are potentilly well ahead  by buying  a Cash value Life insurance product. The  author  illustrated  a Whole life  product  but there are some other products that can perform even better.
Third,
This problem  deals  with  the  rate of  return that they project  when they do  their projections. Both of them  talk about  making 7-8% per year on their portfolio.  How  many  readers can  honestly say that they  have  seen a 7-8% rate of return on their market risk assets in the  past 10 years?  Im willing  to  bet its no more thn one in a hundred who have  seen that ten year  return.  IF  you  have then  your 2003  $100,000  would now be worth  $216,000 in 2013.  This assums that  you  added no more money to the  account in that 10 yr period.  If  the average investor did not turn 100K into 216K  then the performance numbers quoted  by Dave and Suze  dont work out!!! You  can  make  that  in a good  year but they fail to  deal  with  the MASSIVE impact of the  down years.  Unfortunately real world investors  suffer in the down  years unless  they  are  using some SAFE MONEY assets in the financial plan.
Fourth,
Its very hard to beat the potential Tax advantages of a properly designed  and properly funded Cash Value  Life Insurance policy. Nothing Beats Tax Free Income!! 

I suggest that often a fiscally  smarter way to  go is  to  combine  several insurance products. At least  they  should consider  a Term  and a Cash Vale policy to minimize premium expense and maximize protection for  their premium dollars.  Of course everyones situation is different and  thats why they  should  consult  with  a licensed insurance professional  to help analyse their  specific needs.