Suze Orman Proves She’s Clueless about Cash Value Life
Before I get into this somewhat frustrating newsletter, I wanted to point out a few things.
1) If you want the PDF output for the example below, click on the following link:
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It’s hard to say which “national expert” I like least. Suze Orman or Dave Ramsey. I consider both clueless on most things financial. For this newsletter I wanted to pick on Suze. She recently posted a blog titled: Is Life Insurance a Good Investment?
In the piece she answered the following question posted on the blog by a “fan”:
Suze, I was told that this life insurance product was a better investment
than my 401(k)/403(b) or IRA. Is it?
Her answer: If you could only see how angry I am as I type my answer: No. No. No
It annoys me when ignorant pundits are clueless when it comes to the “proper use” of cash value life as a retirement tool.
Suze went on to say that “life insurance is an expensive way to invest. Anyone trying to sell you life insurance as an investment is not acting in your best interest.”
To see a hack like Suze put those comments in her blog makes my blood boil. But let’s get away from emotion and stick to the facts/math of the two questions that Suze has put on the table:
1) Is cash value life an expensive way to build wealth?
2) Is it better to fund an IRA or 401(k) plan in a tax-deductible manner or is it better to fund a “good” cash value life policy after-tax where the money will grow tax-free and come out tax-free in retirement?
“Good” meaning a properly designed Indexed Universal Life (IUL) policy (tax-free gain up to a cap of between 10 – 14.5% on most products that are locked in annually with no risk of loss).
The easiest way to answer the above two question is to go through an example.
OnPointe IUL Comparison Software-it just so happens that our OnPointe software suite consists of IUL software that runs the math to answer both of these two questions. So, let’s see how the numbers shake out.
Example-Tax-deferred 401(k) vs. funding an IUL
Assume the client is a 50-year old (in good health) who is going to fund $15,000 into a 401(k) plan tax-deferred from ages 50-65 and then withdraw in equal installments money from the 401(k) from ages 66-90 (the account value will be zero at age 91).
For the comparison the client will pay a $15,000 per year premium into a “properly designed” IUL policy from ages 50-65 and then he will borrow tax-free from the policy from ages 66-90.
Of course this isn’t a fair comparison because in order to pay a $15,000 premium into an IUL the client would have to pay taxes on that $15,000. Let’s assume the client is in the 25% tax bracket now and will be in the 25% tax bracket in retirement.
To make it an “apples to apples” comparison, I’ll assume every year from 50-65 the client placed $3,750 (income taxes on the $15,000 IUL premium) into a “side fund” (a taxable brokerage account) and will withdraw from that account in equal amounts from 66-90 (the account value will be zero at age 91).
In the 401(k) and “side fund” I’ll assume a 1.2% mutual fund expense, NO money management fee or wrap fee, and a 15% tax on the gains (only in the side fund). I’ll also assume a 6.9% gross rate of return each year in the 401(k), “side fund”, and IUL.
How do the numbers shake out?
$23,652 = the annual “net” after-tax withdrawals from the side fund and 401(k) from 66-90.
$39,046 = the annual tax-free loans from the IUL from 66-90.
The IUL generated $15,394 more after-tax cash flow EACH year.
$406,209 = the total expenses from the 401(k) and side fund accounts (fees and taxes).
$140,528 = the total policy expenses in the IUL.
The IUL had $265,681 less expenses over the life of the example.
So, let’s get back to why I get upset when ignorant pundits get on TV or radio and tell viewers/listeners incorrectly that cash value life is expensive and mathematically can’t compete with tax-deferring money into a 401(k) or IRA.
The facts are clear. An IUL when designed properly (minimum expenses) not only competes well with 401(k) plans, but it typically illustrates much better when using real world/reasonable assumptions.
Bad Advisors: How to Identify Them; How to Avoid Them
Suze is definitely a bad advisor as defined by my book. If you’ve not read the book, you can download it for FREE by clicking on the following link:
Roccy DeFrancesco, JD
Strategic Marketing Partners