Just wrote up an entry in my financial blog (marked private due to *ahem* company guidelines) that I would like to repost here.
FINALLY …… and very much belatedly a write-up that gives a much fairer and much more ‘real’ perspective on what really entails “Buy-Term-Invest-The-Rest” (BTITR).
It is not so much about Suize Orman and her detractors. I fully agree when the writer highlights that no two clients are alike, and no set of circumstances is the same. In my view, as well meaning as one can be, in actual fact it is downright negligent and irresponsible to tell people general statements along the lines of “Buy REITs, sure to double your money” …. “Buy Term Insurance only” …… “Property is sure to go up”. No two people are the same and one ought to be discerning! I blame this phenomenon on social media and the availability of information out there on the internet.
Back to BTITR – my main issues with blindly following this approach is indeed as what is highlighted in the article itself:
1. Propensity To Spend, Rather Than Invest The Rest
When life and temptations get in the way of budgeting and investing the rest in a disciplined manner (example: surpgling on branded goods, getting a luxury car out of their means, going on multiple holidays), it becomes double-whammy. Insuffcient coverage and insecurity about retirement funds in old age.
2. Insurability Risk
This is actually the biggest risk. Many people choose BTITR approach on the basis that they think they can do better than the life insurance company in generating cash value. With reference to point 1 – life does get in the way at times.
The most important reason why people buy insurance is for risk transfer. Overly focusing on absolute dollar of premiums and cash values/investment values blindsides one to forget about insurability risk. Insurance needs need to be reviewed from time to time based on a person’s life cycle and there is no absolute amount one can say its sufficient. For a young family with children – this is when parents need to increase their coverage to cater for dependent support should they pass away/become disabled/become seriously ill. More often than not, from actual experience, these people under-insure (to save premium). When topping coverage at a later stage of their lives, insurability may become a issue as new health conditions may develop which affect the insurability/terms of underwriting and the coverage may not be on standard terms.
End of the day, buy when you are young and healthy, and not wait.
3. Investment Risk
Refer to point 1. For the investment component of BTITR to work as intended, a disciplined approach is of utmost importance. When it comes to actual investment, herd mentality very often gets in the way.
With ups and downs in investments/stock markets, there is a possibility that one may need to cash out in a down market in order to use the money for medical/illness in old age. In this respect, if there was a life insurance in place – the money (via the sum assured) would have been already there without affecting the portfolio. Another point to note is that, while stocks and unit trusts are relatively liquid, it may not be the case for physical property investment. Thus it is even more important to have the necessary coverage to hedge against potential market and liquidity risks as well.
After re-reading this again on a lazy Saturday afternoon, yes indeed it is a welcome reminder for me to ask questions – rather than get frustrated and dismiss the client/prospect should I be presented with a similar comment/objection. As this article is not about the merits of limited payment whole life in a financial plan – will leave this for next time.
Don’t listen to Suze Orman’s “buy term and invest the difference”
To most of us who understand the insurance world and the real choices available for our clients, the advice that Suze Orman gives is, at best, irritating and, at worse, negligent. It is virtually impossible for one piece of advice to be the answer for millions of people all at the same time.
In our world of financial decisions, each client is like a snowflake: No two are alike, and no set of circumstances is the same. In Suze’s world, everyone is the same and should just do what she says — black or white, no gray.
Recently while driving in my car, I was listening to a financial talk show. The caller said, “But Suze Orman says I should just buy term and invest the difference.” To his credit, the host asked the caller several questions to see if that strategy made sense for that individual. The whole exchange got me thinking: Why do so many people like Suze think that buying term and investing the difference is a good idea? And more importantly, why do they not understand the power of permanent life insurance the way we do?
In my experience, people who say they will “buy term and invest the difference” (BTID) rarely actually do so. Instead, they buy term and spend the difference. The truth is, people don’t always understand the savings element of the BTID idea. Initially, they may have had the thought of investing the difference, but typically, life gets in the way. This is where the BTID idea usually fails, leaving the client with no insurance and no investments.
But, for the sake of this article, let’s assume that our client does invest the difference and does stay true to the BTID idea. There are still several problems with the concept that Suze and her pals tend to brush over or minimize. Perhaps the biggest risk, other than the actual investment that the client might choose, is the insurability risk. We often say that people are never more healthy than they are right now. This is true in a lot of cases, but what it points out is a possible risk that can happen in the BTID strategy. Insurability may be lost in between terms; in other words, a client must “re-qualify” for the new term policy each time the term period runs out. If they can’t qualify or if the new policy might be rated, then costs for the term can be significantly higher, or worse, the insurance could be lost.
Another problem that is often overlooked by the proponents of BTID is the investment risk. And within the investment risk, there is also another risk: the risk of the tax implications. One of the myths of the BTID strategy is that somehow, the investment will always grow and magically be there when you need it. Unfortunately — and recent history shows this — investments can be volatile and inconsistent, and there are no guarantees that the funds will be available and at their peak when you need them most. In addition, the tax implications of the investment are not often factored in when making the decision. With cash-rich life insurance, the tax advantages are simple. The cash value is tax-deferred (no taxes due on money as it grows), and the funds in a policy can often be accessed tax-free via policy loans.
The BTID idea needs to be flushed out for each individual and compared side-by-side to a permanent life solution to determine if it is a good idea for our clients. There are several software programs that do this well, and they can provide you with a valid comparison that can help your client make a good, informed decision. I wonder if Suze and her friends have ever done this type of analysis?
We are firm believers in the power of cash-rich life insurance as part of a long-term plan. But, and this is an important distinction, we would never say that it is right for everyone. Term insurance does have a place and can solve a specific need. But to simply eliminate the idea of permanent coverage as an option discounts the true value of a permanent plan. Financial gurus like Suze Orman who make blanket statements with no regard for the individual set of circumstances are short-sighted and irresponsible. So, stop! Don’t take Suze’s word for it. Investigate the permanent options on your next case. You may be surprised what you find out.