In a recent conversation on her podcast, Suze Orman addressed a question from a listener, Vanessa, who purchased a whole life insurance policy for her 10-year-old daughter in 2017. The policy had a $100,000 benefit and required 20 years of monthly payments at $75. Vanessa and her husband had already paid $6,750 over 7.5 years, but with the policy's current value at $3,353, they were unsure whether to continue or cash out and redirect the funds elsewhere.
Orman didn't mince words. "Why did you buy life insurance on a 10-year-old child?" she asked incredulously. "Who sold you that?" She clarified her belief that life insurance is primarily for those with financial dependents. The purpose, she explained, is to replace income in the event of a provider's death, not to insure a child who is not financially responsible for others.
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Orman stated that the policy didn't make much financial sense either. At the end of the 20-year term, Vanessa would have paid $18,000 in premiums for the $100,000 policy. Whole life insurance accrues cash over time, but Orman argued that the returns aren't great compared to other investment options they could pursue.
Instead, she suggested redirecting the money to a Roth IRA or an S&P 500 ETF could yield significantly better outcomes. For instance, if the family cashed out the current value of $3,353 and invested it, the growth potential could be exponential, especially over decades.
Using a hypothetical example, Orman illustrated the benefits of investing:
If the $3,353 was invested in a Roth IRA, earning an average annual return of 8% and $75 was added monthly for 12.5 years, the account could grow to approximately $27,000.
That investment might grow to $140,000 by age 50. By age 70, it could potentially reach $600,000 – all tax-free in a Roth IRA.
"That's money that she could use," Orman said, emphasizing the flexibility and long-term benefits of investing. "That $100,000 life insurance policy doesn’t help her at all, really, while she’s alive."
If life insurance is necessary, Orman suggested term life insurance as a more practical option. Term policies provide coverage for a set period, often at much lower premiums, allowing individuals to allocate more money toward savings and investments.
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Orman's recommendation to Vanessa was clear: stop the whole life policy. She advised investing the money in a brokerage account if the cash value can't be transferred directly into a Roth IRA. Over time, the compounding growth could create a financial cushion far more valuable than the whole life policy's benefit.
While Vanessa's intentions were likely well-meaning, Orman's analysis underscores the importance of aligning financial decisions with long-term goals. In this case, investing the funds could provide Vanessa's daughter with a more robust financial future.
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