If you listen long enough to so-called experts like, Dave Ramsey or Suze Orman, and the legion of followers at Primerica, you will walk away with the feeling that they just don’t want you to buy cash value life insurance.
During the Great Depression, life insurers and permanent, cash value, policies were one of the few ways that people found financial security. Even today, banks routinely fail during times of recession while life insurers are able to weather the storm.
Markets fluctuate, and while there is nothing wrong with investing in the stock market, mutual funds and stocks don’t provide any safety from financial loss. Of course none of this is new information.
The arguments against cash value insurance consist largely of denying facts of reality and context dropping. It is then a matter of rationalization and denial when confronted with the truth. In a previous article, I discussed many of the misconceptions about cash value life insurance.
Does Anyone Really Follow Their Advice?
Of course they do. But it is usually middle class America. Businesses (big and small), banks, and CEOs of large corporations all place massive amounts of money into cash value insurance. Why? Because it is safe. Because of its tax advantages. Because it is a long-term, conservative strategy that obviously makes sense and is profitable. If it wasn’t profitable, they wouldn’t keep their money there.
But…does it make sense for individuals to buy cash value insurance? Of course it does! Cash value life insurance pays internal rates of return that are comparable to fixed rates offered by banks, and in fact, the rates are usually higher. If you would place your money in bank CDs and feel good about it over the long-term, you should feel just as good or better about the long-term value of cash value life insurance.
If the argument by the anti-cash value crowd is that bank CDs are a bad place to keep your “safe money”, then you have to wonder where you are supposed to keep “safe” money or if you are even supposed to have “safe money”.
These “experts” sometimes recommend money market funds or bonds. Yet, the conservative nature of these investments can easily be eaten away by taxes and inflation. Additionally, individuals don’t usually buy bonds directly for a variety of reasons, one of which is that they are not necessarily liquid (which can be unattractive for “safe money”), and long-term bonds are extremely risky for individuals due to the uncertainty of inflation.
Bond mutual funds offer variable rates of return, and while money markets can be attractive, they too are not guaranteed and are subject to taxation.
So, Why Are They Considered Experts?
They have an appealing personality. They also appeal to the ideology of scarcity – an ideology that developed from the Great Depression in America – which is popular in this day and age. Unfortunately, the advice that was born from that time was emotionally-based, somewhat unprofessional, and irrationally weighted towards eliminating debt for debt elimination’s sake.
In some ways, this has led to the mis-allocation of millions of dollars and led individuals into a false sense of security. It has helped to fuel an increase in money being allocated to the stock market – specifically to mutual funds – but not to safe money alternatives (i.e. fixed cash value life insurance, fixed annuities, and some bank CDs).
Sometimes, these experts are a bit out of touch with the clients they serve, and give advice that they themselves don’t follow. Suze Orman, for example, hasn’t seen a client in over 10 years and invests much of her own personal money in:
…municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100 percent safe and sound.
Yet, the advice she offers to people on her call-in show on CNBC is radically different. She offers advice that she herself doesn’t follow.
Other “experts” like Ramsey and the Primerica crowd base their theory of life insurance on the Theory Of Decreasing Responsibility but ignore other reasons one might want to own life insurance (simplified estate planning, providing money for funeral costs, gifting money to charity, etc.). Their theory of investing is based on the flawed idea that mutual funds are ideal investments.
The question is: Should a financial adviser work to provide rational and practical advice? Or should an adviser be giving advice that he or she doesn’t really believe in or follow (Orman) or be spreading [factually] incorrect ideas (Ramsey)?
There are many more “experts” in the world of finance, and to analyze two popular radio and T.V. personalities doesn’t mean that every expert is wrong. Any adviser who promotes irrational and inconsistent ideas will not be successful in using their own strategies (despite what they tell others). In short, they will not be giving their clients good advice. However, any adviser can also offer good advice by adhering to rational principles.
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This entry was posted on December 30th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Insurance & Savings, Philosophy In Financial Planning