It wasn't supposed to work out this way.
Millions of Americans, who have religiously paid their term life insurance premiums for decades, are confronting a no-win decision: Drop their insurance now, exposing their loved ones to potential financial disaster in the event of their death; or continue to shovel larger and larger barrels-full of scarce cash into their policies which each year actually become worth less.
I've dubbed this the Orman-Ramsey Vise -- named after two of the more prominent media money prophets, Suze Orman and Dave Ramsey -- who led so many of their flock into the jaws of this financial dilemma.
The villain here is the routinely touted "buy term insurance and invest the difference" mantra. In their books, broadcasts, live courses and on their websites, Orman, Ramsey and many other financial gurus have always sung the praises of term insurance. They still do.
The problem is that their theory of how term life would carry young Americans to their old age, allowing them to safeguard their loved ones and to build a large independent retirement portfolio along the way, often differs quite markedly from the reality.
To understand the conundrum, first let's review the theory promoted by Orman, Ramsey and others who so strongly favor the term life path.
When policyholders are young and healthy, term life costs relatively little to acquire and keep in force. I liken it to renting a home right after marriage rather than buying one -- an analogy I will return to again in this article.
With term life, young and healthy policyholders can purchase hundreds of thousands of dollars of death benefits for less than $50 a month. This appears a wise and easy choice for young adults, who often are early in their careers, may be starting a family and may still have student loans to pay off.
Indeed, for young adults, low-cost term life policies purchase as much if not more death benefit for a lot less than the alternative, often referred to as permanent or cash value life insurance.
Orman and Ramsey hate all cash value life insurance products and rarely miss an opportunity to say so.
They advise their followers to always buy term life and invest the savings (versus more expensive permanent life) in the stock market, where it can grow unfettered for decades. Ramsey tells his believers they "can expect to make 12%" annually on their investments.
Does anyone ever actually buy term insurance and invest the difference?
As an interesting aside, I've never met anyone who actually bought a term policy, checked around to get the cost of a permanent policy with the same death benefit, and then invested the difference in a mutual fund every month.
For most people, "buy term and invest the difference" translates into buy term and spend the difference. But let's get back to the conventional wisdom about this...
In theory, by the time term policyholders reach their 50s and 60s, they'll no longer need their policies because their investment portfolios will have ballooned to such a massive size that they will be wealthy enough to self-insure in the event of their death. In other words, they won't need life insurance because their estate will be rich enough without it.
The term life theory is further bolstered by the expectation that by the time policyholders are nearing or in retirement, they will be empty-nesters, no longer having to look after the financial well being of their children, much less their elderly parents.
But brace yourself for the reality...
For millions of our friends, neighbors and family members, the world hasn't turned out as Orman and Ramsey forecast.
(Be a fly on the wall and watch Suze Orman and Dave Ramsey caught on video discussing Bank On Yourself, the subject of my best-selling book.)
So many people who bought term life policies in their 20s and 30s are now in their 50s and 60s and -- surprise! -- their stock market portfolio never did grow at the annual 12% rate that Ramsey touts. In fact, many of these Orman-Ramsey devotees have yet to regain the dramatic losses they suffered during the 2008 market crash, and even the 2000 crash before that.
Their kids, generally, did move out to attend college and even enter the job market. But many of those adult children have moved back in with mom and dad, unable to support themselves and the high cost of living. And -- bless them -- grandma, granddad or both are often still alive and also need financial assistance.
Perhaps that's one reason that a survey released in July 2011, conducted by Harris Interactive, found that Americans age 55 and older now intend to delay retirement by five years. And data from the Federal Reserve's Survey of Consumer Finances indicates the typical pre-retiree has saved enough in their 401(k) to be able to withdraw only $260 a month!
They can't afford to retire yet. And they certainly can't afford to die...
For these aging baby boomers, the financial consequences should they perish haven't changed much: If they were to drop dead today without insurance in place, many of them would leave their loved ones in the poor house.
"Oh, that's okay," you may be thinking, because they've been steadily paying term life premiums all these years -- probably many tens of thousands of dollars worth -- so they're covered. Right?
Here is where the Orman-Ramsey theory gets another permanent divorce from the reality.
To explain, let's return to my analogy above that buying term life insurance is akin to renting a home. No matter how many years or decades you've rented your home, you receive no credit for time-served if you can't pay this month's rent.
Rather than showing you the Road to Wealth, as Orman promises in her 2010 book, your landlord will show you the expressway to eviction.
It's the very same concept with term life insurance. Stop paying your premium this month or this quarter and the term insurance company will cancel your coverage in 31 days. All those thousands of dollars you paid in over the years will buy you zero mercy.
Lest you think that this, too, is easily solved by just having term life holders continue to pay the $50-or-so a month required to maintain their policies, better think again.
The low monthly rates for term insurance applied only when policyholders were young and healthy. As they aged, their rates (rent) rose and ultimately became astronomical.
Moreover, because many of these term life policyholders are nearing or in retirement, they are no longer good candidates for fresh insurance of any variety. Some have developed health problems that preclude them from obtaining additional or replacement death benefits.
So for many of these responsible adults -- men and women who year-in and year-out followed the advice they received -- the choice now boils down to dropping their life insurance altogether, or paying a king's ransom to renew the term insurance they have.
What stings even more is the fact that when measuring in inflation-adjusted dollars, the term-life policies that they purchased decades ago are worth far less today. In fact, if inflation averages just 4% a year, a 20-year term policy will effectively lose more than half of its value.
In essence, aging term-life policyholders often pay way, way more than they used to for what may in effect be less than half the prospective death benefit coverage they originally sought.
Is there a better way?
For most people, the alternative insurance product that Orman and Ramsey so belittle actually proves to be a lot safer and smarter.
Be forewarned: Not all cash value life insurance policies are equal and some of them are to be avoided at all cost. So never jump from the term-life frying pan into the fire. You must always do your due diligence.
But the kind of dividend paying whole life insurance policies that I describe in my bestselling book, Bank on Yourself, would have spared millions of Americans from the unpleasant consequences of the Orman-Ramsey Vise.
These policies have little-known options added on to them that grow your cash value up to 40 times faster than the policies Orman and Ramsey describe, while slashing the agent's commission by up to 70%.
Bank on Yourself-compliant whole life policies are akin to homeownership -- not rent. Yes, in their early years, they require more out-of-pocket cash than do term-life policies. Purchasing a home does cost more early on than simply renting it.
But flash forward a decade or two and an entirely different scenario presents itself.
Now these whole life policyholders have a great deal to show for their patience over the years. Because they own their policies, not just rent them, their rates don't ratchet forward -- ever.
In fact, inflation works on behalf of whole life policyholders. Typically, the payments on these policies are made at a single fixed rate for the life of the policy, meaning that as policyholders age, they pay the exact same amount, only in inflation-diminished dollars.
While the out-of-pocket costs of term policyholders soar, the out-of-pocket costs for whole life policyholders effectively shrink with age.
Most whole life policyholders eventually reach the point where they no longer need to contribute any further premiums out of pocket to keep their insurance in force to age 100 or greater. The policy values can be used to cover them, or the policy can be converted into one that is fully "paid up," with no more premiums due.
The death benefits offered by Bank on Yourself-style whole life policies actually grow at an ever-increasing rate and surpass those of fixed term-life policies over time.
Most importantly, though, the money that whole life insurance holders have paid in over the years generates a cash value and is typically supplemented by annual dividends.
By the time holders of these turbo-charged policies near or reach retirement, many of them have built an impressive nest egg, which they can draw upon as needed. It's their money! And they most certainly don't need to die to enjoy a healthy, secure return on their money.
That's wealth creation with none of the volatility and risk associated with the stock market
Suze Orman, Dave Ramsey and others who share their term life recommendations are certainly popular and often entertaining. But on this subject, they are also dead wrong.
It's a lesson that too many of those who followed their advice now know all too well.
New York Times bestselling author Pamela Yellen is the founder of www.BankOnYourselfNation.com, a website dedicated to helping people achieve lifetime financial security and self-reliance. As president of www.BankOnYourself.com, she's helped hundreds of thousands grow their wealth safely and predictably.