The ‘Orman-Ramsey Vise’ Has Left Many Canadians Without Life Insurance

September 16th, 2011 | Author: Mitch Reynolds

Orman & Ramsey’s Term Life vs Whole Life Advice Has Cost People Hundreds of Thousands

Financial Gurus have touted term life vs whole life, and baby boomers are left with no life insurance

I read a great article yesterday by Palema Yellen of the Huffington Post examining how the term life vs whole life debate has cost baby boomers thousands of dollars in lost premiums and nothing to show for it. The article, An Unexpected ‘Orman-Ramsey Vise’ No Squeezes Many Americans, outlines how the “buy term invest the difference” mantra of people like Suze Orman and Dave Ramsey has in reality been very bad advice to the majority of Canadians and Americans.

Celebrity financial advisors like Orman and Ramsey tend to gain an audience by being controversial and outspoken. Lucky for them they can dispense advice without any liability since they are not real financial advisors. A real financial advisor, someone who actually sells you the life insurance product or investment they are advising on, has a legal responsibility to act in their client’s best interests. If they don’t, and rip their clients off, they can be brought up on charges and lose their license to sell insurance and investments. Even negligence or ignorance can be cause for legal action against a financial advisor, since it is their duty to be knowledgeable in the industry.

The Term Life vs Whole Life Insurance Debate

The term life vs whole life debate has gone on for many years now. The rallying cry of the term life advocates is “buy term invest the difference” might make financial sense on paper, just like communism seemed like the ideal social structure on paper. In reality this strategy seldom works for Canadians. The truth is most people buy term life and spend the difference. Many research studies have shown that Canadian baby boomers do not have enough money in their RRSPs to retire. You have all heard it before: “Aging Canadians need to delay their retirement”; “RRSP savings are down across Canada”; “Canadians need to save more for their retirement”.

If the average person could really heed the advice of buy term life insurance and invest the difference, then this advice might make sense. Orman and Ramsey might say that it isn’t their fault people didn’t save the difference, but spent it. They didn’t really follow the advice. Well, let’s assume that hardly anyone will follow this advice, and will continue spending, and if that is a realistic assumption proven out by the current state of retirement savings in Canada, then we all need to start giving new advice.

There is a better way. But first we have to understand what damage term life vs whole life debate has already been done.

Buy Term Insurance and Invest the Difference

As we have seen this is usually buy term insurance and spend the difference. There isn’t much saving going on. So what happens to the term life insurance people have bought over time? Let me explain how term life insurance works.

Term life insurance is a low cost rental product where you pay the minimal cost for pure risk protection. This can be a very cheap policy in the early years, when you are young and healthy. You can even lock in these cheap rates for 20 or even 30 years. After the end of the term, say after 20 years, you have a choice. Either you can keep the policy for a very expensive renewal rate, or you can cancel your life insurance.

Here is an example. A woman, age 35, buys $500,000 of life insurance on a Term 20 policy. It costs her $28.31 per month today. At the end of 20 years, age 55, the renewal price for that term life insurance is now $349.92 per month. If she was willing to pay this high price and the policy continued to age 75, she could still keep the policy for 5 more years to age 80 but the premiums would be $2,354.40 per month*.

So, what does this mean for baby boomers who bought term life insurance at around 35 – 40 years old? It is now 20 years later and they are facing a steep life insurance renewal. Unfortunately, the term life insurance does not have any equity inside the plan, so the cheap premiums you have been paying all those years are gone, just like paying rent. If you still need life insurance you might be stuck paying the high renewal costs to keep you policy inforce.

When you get older your health might change, and you may no longer qualify for new life insurance. This means your only option would be to keep the expensive term life insurance policy vs. going shopping for a new and hopefully cheaper policy.

Here’s the Nasty Reality

People who bought term life insurance in their 30s and 40s are now in their 50s and 60s and they are faced with a financial crisis on all sides.

Their term life insurance is going up in price to some staggering new premium

Their investment portfolio has not performed well over the years and might even be underwater at present

Their young adult children might be struggling financially and have had to move home or ask for financial assistance because it is hard for them to find a job

Their aging parents are still alive but need financial support for elder care or to pay for a long term care facility

This might seem like the perfect storm, but it is very common for today’s Sandwich Generation (those Canadian’s sandwiched between financially dependent children and increasingly dependent aging parents). Is this the time to cancel your life insurance with so many people depending on you for financial support? Probably not.

The Cash Value Life Insurance Advantage

I know that term life insurance makes a lot of sense for many Canadians. When you are young, struggling with debt, still with lower incomes and having children, a low cost life insurance policy is very attractive. And, yes, term life probably is the best product for many Canadians in this situation. The really good news about term life insurance contracts in Canada (except those sold by Primerica) is that they can be converted into a permanent cash value life insurance contract later on. This guaranteed right of conversion means the person who is insured can get their own whole life or universal life insurance plan without providing medical evidence to qualify for the coverage.

So, the low cost term insurance that meets your needs today can be converted into something more valuable tomorrow. Great news! The important thing is to reopen a discussion with your advisor every few years to see when would be the right time to convert the policy to permanent coverage. And it isn’t an all or nothing deal. You can convert a smaller amount of the term life insurance into permanent insurance and keep the remaining term coverage inforce.

A permanent life insurance policy, like universal or whole life insurance, offers excellent long term rates of return. Here is how a whole life and universal life policy will grow over time:

Whole life insurance receives a dividend based on the performance of the insurance company and the age of your policy. The dividend, which grows every year, can be used to buy additional chunks of life insurance annually so your policy grows.
Universal life insurance has a tax sheltered, self directed investment account inside the policy, very much like a mutual fund. You have the risk of market performance, but if your investments grow over time the death benefit PLUS the accumulated cash values are both paid out tax free.

Anyone who owns a permanent life insurance policy will have the cash value as another asset in their pool. The cash value can be accessed, usually in the form of a loan from the insurance company. This is very efficient as there is no taxation on borrowed funds in Canada, and the entire cash value inside your policy is intact allowing it to grow. Then, upon death, the life insurance company repays the loan and all interest accrued, and the remaining death benefit is paid out to the beneficiaries.

Just be careful to do your borrowing with the advice of your insurance agent or broker. You don’t want to borrow so much money out of the policy that the loan plus the interest accumulating will ever exceed the total death benefit. This would put your life insurance policy offside.

Compare Term Life vs Whole Life with Life Guard Insurance

If you own a term life insurance policy and haven’t looked at it for years, maybe now is the time to pull it out. At Life Guard Insurance we can help give you advice about converting all or part of your term life policy into a permanent life insurance contract like whole life or universal life insurance. Please contact us for a free, no obligation review of term life vs whole life insurance.

* RBC Insurance, Term 20 standard rates for a 35 year old female, $500,000 coverage. Quote generated on 16 Sept 2011.

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