Financial Independence, Insurance, Roth IRA
January 05, 2020
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In this podcast, Suze revisits whole life and variable life insurance and shares the story of a Women & Money listener who received bad financial advice.
Welcome to the Women and Money podcast as well as the men smart enough to be listening. It's so difficult. It's difficult because there are so many things that I want to talk to you about, so I'm going to just start to ramble. I'm going to ramble because here's my problem. I don't know when you have tuned in to the Women and Money podcast, so listen to me closely. Are you listening from today on? Did you tune in for just Season Two? Did you listen to any of Season One? I don't know where you're joining me within this podcast and what concerns me, and I would like actually you all to go back to the very first one and go all the way through until today's and then in the future so that I know that you're getting everything that you need to be getting. But what concerns me is that you kind of just popped in, you pop out and you don't get the information that you need and therefore you're making mistakes. So then I think, well, I already did a podcast on that, should I repeat it? And the reason that this concerns me is I am getting way too many emails from way too many women talking to me about their life insurance policies, their whole life insurance policies that they have purchased and why it's such a good deal. Not just from one, not just from two, but from tens of women. And when I start getting one email from more than 10 women, I start to get concerned that you are making a really big mistake and you don't even know it. So then I think I've done a podcast on whole life, on universal, on variable life insurance and why I hate them, and obviously, you haven't listened to it. So I'm going to talk about this again now.I will restate, life insurance was never meant to be there for your whole life. It was meant to be there during your younger years when if you didn't have enough time to have made enough money and somebody else was financially dependent upon you, and if something happened to you, you died, what would the people who are financially dependent on you do? So, that's during your younger years but as you get older, hopefully, you've been responsible and you're out of debt. And now not only are you out of debt, but you're also saving money, you're paying down the mortgage on your home, and all these things are happening. Later on, you don't have people who are financially dependent on you, your children have grown up, they now have jobs and their own. Your parents possibly have passed away or they're OK now on their own as well, who knows? But normally, as you get older, you don't need life insurance anymore, or that, supposedly, is the plan.But no, no. So many of you are being sold, in my opinion, such a bill of goods it's not even funny. You are being told by some insurance agent that you can have your cake and eat it, too. You cannot. You can never have your cake and eat it, too. It is physically impossible to have your cake and eat it, too. And you are being sold this concept that you could provide for your loved ones as you are making money and you're making a lot of money on your yearly premiums. So, you can have investments, cash value, access to your money tax-free, as well as life insurance.And then you tell me the numbers and you tell me things that your life insurance agent has told you and you believe them and you tell me about it. And then what happens is I ask you, can you just send me an illustration? Now when I say I ask you, there have been women who have written me and they're saying, what should I do? What do you think Suze? And I'm like, are you kidding me? This is the worst investment out there, and I go through all of this time and I personally answer them, and I show them with numbers why it's a bad deal. And then I convince them how they should get their cash value as long as they are healthy. If they need insurance, then they can get a term insurance policy and explain that in a second to you, and they are far better off taking that money and investing it in a Roth IRA over the years and getting growth, and so I want them to cash it out.Then they write me back and they say, you know, Suze, I talked to my insurance agent and this one woman said, and he's really wordy, and this is what he has said to me. And he then in this email to this woman, is explaining to her, are you sure you want to cash this out? Do you know that your dividend... And goes on and on with this entire explanation and I said, OK, can you just send me an Illustration that demonstrates what he, this insurance agent, is talking about. So she sends me this illustration and on this illustration, I'm like, I don't understand this. Everywhere at the bottom of it, it says, this is not guaranteed. The projections are not likely to happen over the course of this insurance policy. It could be more or less. Nowhere do I see a cash value, I don't see anything that makes any sense to me on any level. And I write back and I said to this woman, do you understand this? Do you get it because I have to tell you, I don't. And now I'm getting concerned because she's putting $2500 a year, $213 a month exactly, for eight years now. She's put in $20,000 in this policy, and all I'm asking is if you put $20,000 into this policy and now, she's only 35, now you want to get it out, how much will you get out? And she writes me back and she says $29,000. And now I'm thinking, I've really lost my mind because if you could put in $2500 a year over eight years, a total of $20,000 and eight years later get $29,000 back, that's almost a 9% return on your money. And I'm thinking, what company is this? What have I missed?And then I look up all the information on this company. It's a mutual insurance company that pays dividends, and every year over the past eight years, their dividends have decreased. They've only paid like 5.5% over the past three years, there is no way that it could have been $29,000. So, I write her back as well, and I say, can you just show me somewhere this $29,000, where it says it's guaranteed? Because I don't see that there's a cash value of $29,000 here right now. And I said, and can you just tell me why you bought this again? Why in the world at the age of 25, which is how old she was approximately when she bought it. And I said, why in the world would you at this age buy a whole life insurance policy, why would you do that? And so I sent this to her and she sends back and she goes, OK, I get it, I never should have bought it, I still shouldn't be in it, so I'm just going to cash it out and do whatever, and she goes on to thank me. And I'm reading this. Now, the chances of me going back and forth and back and forth with somebody I don't even know, what are the chances of that? Well, the chances are pretty good when I see that you are making a mistake with your money. When you are 25 or 35 years of age, the investments that you should be putting your money in are a Roth IRA if you qualify, a Roth 401k, whatever it may be so that your money can accumulate and accumulate and accumulate, and you can take it out absolutely tax-free later on in life.Why would any of you want a whole life insurance policy that the only way you can take out your money tax-free is through a loan? A loan. Now, I get that that loan might not cost you any money and that the way insurance policies get you around paying taxes on that money is by taking a loan because loans aren't considered taxable income. But why would you want to do that? If you can't afford to continue to pay your premiums or you need to cancel the policy, whatever it is, and your policy is no longer in effect, guess what? Everything you took out is taxable to you as ordinary income. Why would you even want to think about doing that? So, I'm going a little crazy here because I want you only to make investments that you understand.So the theme of this podcast: It is better to do nothing than something you do not understand. And I get that I've done a podcast on this before, but I obviously need to do it again. Because you are looking at illustrations that make no sense, and just because somebody's telling you this is such a good deal, your dividends are going to be making 13%. It's nuts, you're being told things that make absolutely no sense, so let's start thinking about things logically. Right now, interest rates, if you are lucky, are at 2%. I will repeat that. Interest rates, if you are lucky, are 2%. When somebody starts telling you that you're going to absolutely get an 8% or 13% return on your money, things like that, just know they cannot promise you that, it is impossible. There's no way to guarantee you that you can get money like that. Just because the stock market may have gone up 20 some odd percent last year does not mean that the stock market is going to go up 20% again this year. So, when you get an insurance policy presented to you and you get enticed to maybe buy it because somebody is saying to you, listen, you can have your cake and eat it too. I want you to demand that you see guaranteed illustrations, not projections. Anybody can project anything they want so that the numbers congrats and grow and you go, oh, my God, that's fabulous. I don't care about projections, I care about the guaranteed worst-case scenario. What is your money going to make for you in this insurance policy, this whole life policy, universal life policy, or variable life insurance policy that you are thinking about buying?You know, I'll never forget when I first started as a financial advisor and these policies were very lucrative not only I thought to the clients, but to myself as well, because, you know, when you sell a whole life insurance policy to somebody, it is possible that you could get 80%, 90% in commissions of the first year premium. Meaning, if the premium was $5000 a year, I could put $4500 in my pocket. That is one of the largest commissions out there. And I was being presented with why I should be selling this to my clients. I thought, oh, my God, I'm gonna make a lot of money on this, and they're gonna do really great as well, cause look at these projections. And this is when interest rates were at 18%, 16% back in 1980 interest rates were through the roof, everybody. And then I turned the page, and I looked at the guaranteed projections. What would happen if interest rates started to go down? And I was thinking, oh, my God, this policy expires at the age of 74, oh my God, they can't do this, this is a horrific thing if this happens. And then I thought to myself, what are the chances that interest rates are more likely to go down, then go up from where we are? And I decided, nope, I'm not going to sell one. And I've never sold one to this date, ever. Not your regular whole life insurance policy, where you pay premiums every single month, no way. Or, a variable or universal that does it that way.And then people were arguing with me about dividends and these mutual insurance companies that paid dividends and how great it is.Listen, I don't care, I just want you to know what's guaranteed. And any insurance company that pays dividends has the right to stop dividends at any time, to change things at any time, and I just want you to know what is the worst-case scenario? Because we are entering the year 2020 and I want you to walk into 2020 being knowledgeable about every move that you make financially speaking because the next years are not going to be, in my opinion, like the past 10 years. The past 10 years were a gift, a total gift to us, where these markets everything went up, up, up where interest rates went down, down, down. And because interest rates went down, down, down your bond portfolios or your bond mutual funds went up, up, up. Real estate went up, up, up because interest rates on mortgages went down, down, down. Now, I do not think that interest rates are going to be going up here any time soon. But do I think that the stock market is going to go up, up, up?I told you I thought this year was going to be a crazy year, I have said to you that this scares me. I said to you last year you can find the podcast that around February, I don't know, I don't know. I just, I don't know, I don't have a feeling. And that doesn't mean I want you to sell everything and get out, I just want you to pay attention. But I've also said to you that most likely by November of this year, things can start to go really sour, financially speaking. I don't know if that's gonna happen or that's not, but this is not the time to make investments that you don't understand. This is not the time for you to just go, oh, you know, Suze, the markets have been so good, I'm going to take my emergency fund and just put it all in the stock market because making one or 2% on my emergency fund isn't enough. That's what you write to me, and I want to go through the roof with that. I want to go through the roof because an emergency fund is not money that belongs in the stock market, it belongs where? It belongs in a money market account, any place, a high yielding savings account, in a credit union, wherever you can get the highest interest rate, but that you can access the money any time you want.So back to insurance. There may be some of you, there may be a lot of you out there that currently own whole life insurance policies, variable life insurance policies, and universal life insurance policies. Maybe they're good, maybe they're bad, but do you know? So here's what I want you to do. I want you to get out your illustrations and if you don't have one, I want you to contact your insurance agent, and I want them to send you an illustration out to the age of 100. Not to the age of 74 like this woman's illustration went to, not even projected to die then. I want you to see what is it going to look like, guaranteed speaking, all the way out to 100 years of age. Is there a time that if interest rates go down or if the dividends aren't paid, that this policy lapses? Can you just look at it and see if that's true? I don't want you to look again at the projected side, I want you to see a guaranteed illustration. If you look at that guaranteed illustration and you still love it, great, no problem. But if you look at it and you don't understand it then I want you to think twice about continuing with it.Again, you are never to cancel a whole life, universal, or variable life insurance policy if you need insurance until you have gotten a term life insurance policy in place. What is term life? Term is good for a specific period of time. A term. It could be one year, five years, 10 years, 20 years, 30 years. And if you get, let's say, a 20-year level term policy, that simply means for 20 years, your premiums are going to be level and they can not change. Why do I like a term policy? Because I only want you, in most cases, to have insurance until nobody is financially dependent upon you. Again, so if you have a 10-year-old kid, a 15-year-old kid, and you get a 20-year level term policy, they may be 30 and 35 years of age by the time that term is up, and then you don't need insurance anymore because they can take care of themselves. So I only want you to pay for insurance for the time that you need insurance. One thing.Number two. Why would you spend like this woman did, $213 a month at the age of 25 for a $400,000 death benefit? Do you know that $200 a month of an insurance policy for a 20-year level term at the age of 25 would buy you a few $1,000,000 of life insurance? Do you know that? So term insurance, because you're not expected to die with it during your younger years, the term premium is so cheap, it's not even funny. Maybe it cost you $25 or $50 a month. So the goal is to buy term and invest the difference. So with this woman, she could have bought a term policy for maybe $50 a month or $63, whatever it may be, then she could have invested $100 or $200 a month, or $1200 a year, for the past eight years into a Roth IRA and man, she would have made a whole lot of money on it.So it's really important, and I know I've talked about this before, but obviously, there are too many of you out there that are still making mistakes when it comes to insurance. So that's something that I wanted to talk to all of you about. It is better to do nothing than to do something you do not understand. And insurance is expensive, got that everybody? So, OK, I think I've gotten my frustration out, but I think you understand the point. It is better to do nothing than something you do not understand. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/.
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